• Cassandra smith

How green is your cryptocurrency?

It is currently believed that cryptocurrency mining currently consumes more electricity than the whole of Ireland. I.e. cryptocurrency is not very green.

Miners are in competition with each other; the greater the share of hash power a miner has, the greater proportion of blocks the miner successfully mines and the greater the revenue.

There is an upper limit on the amount of resources miners in general can dedicate to mining. Suppose that a cryptocurrency creates £20,000,000 of coins over a period of a year. Miner would expect a rate of return of, say, 10%. (Since cryptocurrency generally has high volatility, the expected rate of return has to compensate for the volatility, so the expected rate of return would be higher that for risk-free assets such as government bonds). Assuming a 10% rate of return, miners would be willing to spend £18,200,000 to do business.

Most of that £18,200,000 would not be spent on hardware, rather on such outgoings as salary, rent, interest and above all electricity. Mining could consume, say, £15,000,000, which is a lot of electricity. If the value of cryptocurrency increases then the amount of money, and electricity consumed increases similarly. There are some silly arguments put forward that say that as the efficiency of ASIC hardware increases, the amount of electricity will decrease, but that ignores that the cost of electricity itself is the limiting factor. Cheaper, more efficient hardware only means hash power increases, the amount of electricity consumed does not change.

Is there a solution? One possibility is to adopt an algorithm other than POW for block selection. A less radical solution is to auction off the right to mine a blockchain the way the government auctions off radio bandwidth. That would generate a more predictable revenue stream for whoever owns the rights to the cryptocurrency and allow restrictions on the total number for miners and electricity consumed. The selection of miners participating in the auction could be done in such a way as to avoid the concentration of power in a few hands (which is not always the case at the moment). Changing the system however would probably be painful.

Is the lack of green credentials important? Does anyone care? The type of people that are attracted to cryptocurrency do care. Furthermore, there has been a great deal of talk about large organisations and governments putting information and even fiat currency tokens on blockchains. The lack of green credentials may put off large organisations, but it may be fatal for some public blockchains that want to attract government business. Why? Nearly all governments in the world have legal commitments to reducing the CO2 - and that probably rules out many public blockchains. Even if governments are keen, environmental groups can challenge their projects. IBM's HyperLedger on the other hand does not use the same mining model and has to be seen as being in the lead position for such projects.

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