As I write this article, the price of fictitious – based purely on combined trust of users AKA the hunch of cryptocurrency exchanges - blockchain currency is sky rocketing. Bitcoin has topped £8,000 mark and continues to soar. Ethereum is sitting comfortably above $468 mark (from $7 in December last year) But as the fictitious value of crypto currency is growing, so does the cost of its production and environmental footprint of so-called mines.
The costs of production of crypto currency
Despite it being called mining, there is no hard labour involved in mining of crypto currency – the ‘mining’ is done entirely by machines. As explained by pcgamer: Bitcoin is created via a sort of distributed computing competition, dubbed 'mining' after the gold rush, where based on your computational contributions you have a chance of 'finding' a block of Bitcoins.
The reward is awarded based on proof-of-work algorithm. Every miner in the network is constantly tasked with preparing the next batch of transactions for the blockchain because mining also secures the Bitcoin network. Only one of these blocks will be randomly selected to become the latest block on the chain. In proof-of-work, the next block comes from the first miner that produces a valid one. This is easier said than done, as the Bitcoin protocol makes it very difficult for miners to do so. In fact, the difficulty is regularly adjusted by the protocol to ensure that all miners in the network will only produce one valid bock every 10 minutes on average - call it a lottery if you wish. Once one of the miners finally manages to produce a valid block, it will inform the rest of the network. Other miners will accept this block once they confirm it adheres to all rules, and then discard whatever block they had been working on themselves.
Basically, the difficulty of mining a block scales based on the total speed of the network, called the hashrate. So, the more people (processors) running the hashing algorithms, the more secure the network, and the harder it is to find a block solution. It is then natural to conclude that the more processors running the hashing algorithms, the more electricity these processors use.
The equation is dead simple: The cost of production on 1 bitcoin equals the cost of energy spent to produce that bitcoin.
For entrepreneurial minds, in order to be able to earn money mining cryptocurrency one either does it from unbilled student campuses or moves mines to countries with cheap electricity.
Bitcoin Mining Reward
The block reward started at 50 Bitcoins (BTC) and halves every 210,000 blocks (about four years)—it's currently 12.5 BTC. Mathematically, that means there will never be more than 21 million BTC.
Mining itself started with CPUs (Computer processors), then moved to Graphic cards GPUs, FPGAs, and eventually to custom ASICs (Application Specific Integrated Circuit)—processors designed purely for Bitcoin's hashing function. The fastest Bitcoin ASICs now do around 100 GH/s per chip, which is orders of magnitude faster than the best CPU or GPU. But they don't use just one chip—a typical Bitcoin ASIC miner can have anywhere from dozens to 100 or more chips in it, so Bitcoin mining hardware can do up to 14 TH/s. That used to be a lot, but now it means about $15 per day, give or take, according to pcgamer.com.
Doing the cryptocurrency energy math
Digiconomist have published a great article with step-by-step calculations of energy consumption of one mine located in Inner Mongolia. Here, the mining machines are powered with electricity coming mostly from the nearby coal-fired power plants, and costing only four cents per kilowatt-hour after a 30% discount by the local government. In exchange for this discount, the profit from the mine is taxed. The total daily electricity bill amounted to roughly $39,000, meaning the facility consumed around 40 megawatts of electricity per hour in August 2017. This mine was estimated to generate about $250,000 in revenue daily (at a BTC price of $3,500).
According to Digiconomist’s Bitcoin Energy Consumption Index, as of Monday November 20th, 2017 Bitcoin’s estimated annual electricity consumption stood at 29.05TWh – the figure has since increased to 30.98TWh. That’s the equivalent of 0.13% of total global electricity consumption. While that may not sound like a lot, it means Bitcoin mining is now using more electricity than 159 individual countries. The second largest cryptocurrency Ethereum consumes additional 10.96 TWh – that’s almost as much as Bosnia and Herzegovina and more than 129 individual countries.
Combined, just two main cryptocurrencies consume more electricity than countries like Singapore, Portugal, Hong Kong, Balgladesh and New Zealand.
Digiconomist have further compared the energy consumption of VISA network compared to crypto currencies. This data can be seen live here: https://digiconomist.net/bitcoin-energy-consumption
Energy consumption of VISA network compared to crypto currencies. It is worth noting that VISA alone processes 800 times more transactions than Bitcoin.
Climate Action Tracker rates China's actions as highly insufficient. Source: http://climateactiontracker.org/countries/china.html
Environmental impact of cryptocurrency
Same resource has calculated the coal-powered Inner Mongolia mine carbon footprint. It concluded that only this facility translates to a footprint of between 2 and 3 kg CO2 per transaction. Since the mine produces 3 Bitcoins per hour ($250,000 / $3,500 / 24), it also comes down to 8 to 13 tons of CO2 per mined coin. Full calculation here: https://digiconomist.net/deep-dive-real-world-bitcoin-mine
It should be kept in mind that the Inner Mongolia mine made up only 3.5% of the total Bitcoin network at the start of August (the network has expanded significantly since). Taking in account that all miners are working on the same block at the same time, It is calculated that the full network could have the carbon footprint equal to 55 to 91 kg CO2 per transaction.
In any case, Bitmain’s Inner Mongolia mine teaches us that the carbon footprint of a single Bitcoin transaction could be equal to that of being a passenger during one hour of flying a Boeing 747-400, or driving a Hummer for 200 kilometers (~120 miles). And while vehicles and planes are taxed based on their CO2 emission, the cryptocurrency production is not regulated nor it is taxed.
Amidst the recent news from US that the country is ditching Paris Climate Accord and China seemingly ‘taking the lead’, there is a valid question when it comes to wasteful cryptocurrency. Namely, why China is warmly hosting unsustainable cryptocurrency mines (Inner Mongolia being an autonomous region of China) and how it intends to offset the carbon emission.
Lastly, with both cost and consumption of electricity increasing, how long is mining going to remain profitable?