Electricity consumption of blockchains
Are blockchains really destroying our planet?
The topic of electricity consumption and environmental footprint of blockchains like Bitcoin and Ethereum has been recently vehemently debated. However, these discussions are not free from clichés, biases, misconceptions, and pitfalls.
Let's take away some facts.
Takeaway #1
Blockchain energy consumption is due to block production (mining) via proof-of-work consensus method and not to transaction processing.
The energy consumption of a proof-of-work blockchain is essentially due to the work of miners in solving the proof-of-work puzzle. The energy consumed to execute transactions when the block is minted is instead negligible compared to the proof-of-work use. In other terms, all the rest equal, mining an empty block consumes the same amount of energy of mining a full block.
Takeaway #2
Proof-of-work is important to maintain the security and integrity of the blockchain system. It is a clever economic incentive design that promotes honesty over cheating.
Miners incur two types of financial costs.
Capital expenditures, which are one-time fixed costs such as the purchase of specialized hardware to solve the the proof-of-work. Miners use application-specific integrated circuits (ASICs), which are purpose-built hardware optimized explicitly for proof-of-work algorithms. These ASICs have little to no use value outside of cryptocurrency mining or for a different mining process. Capital expenditures represent on average 45% of miners’ total costs, according to the 3rd Global Cryptoasset Benchmarking Study (2020).
The remaining 55% of costs of miners are operational expenditures, ongoing variable costs dominated (75%) by the cost of electricity to run the application-specific hardware.
A clever economic incentive design that promotes honesty over cheating underpins Bitcoin’s consensus process.
Miners voluntarily incur financial costs ex ante in the expectation of a potential future reward. The threat of sunk costs (i.e. not receiving the block reward because of dishonest behavior but having already paid for the performed work) — creates the financial incentive for miners to play by the rules.
Assuming miners are profit-maximising economic agents, honesty is the most rational strategy. As a result, Bitcoin may be considered less a technical innovation and more a carefully calibrated socio-economic system that relies on a complex combination of economic incentives, game theory, and a solid technical foundation. [3]
Hence, essentially, proof-of-work is a method to reach a consensus over the state of the blockchain system (who owns what on the blockchain) in a trustless environment and the energy spent during for the proof-of-work method is functional to maintain the integrity of the blockchain system.
Takeaway #3
The energy consumption of a proof-of-work blockchain (such as Bitcoin) is not negligible.
According to the Cambridge Bitcoin Electricity Consumption Index (CBECI) - an ongoing project created and maintained by the Cambridge Centre for Alternative Finance, an independent research institute based at The University of Cambridge - today (10th October 2023):
Bitcoin blockchain uses 14.80 gigawatts (GW) of electrical power, which corresponds to a total yearly electricity consumption of 129.65 terawatt-hours (TWh), assuming continuous power usage at the aforementioned rate over the period of one year (129.65 TWh = 14.80 GW x 24 x 365). This corresponds to 0.58% of world’s total yearly electricity consumption.
Is this consumption rate high or low? See some comparisons here (source: CBECI).
On the other hand, after the the adoption of Proof-of-Stake consensus method, the energy consumption of Ethereum is negligible:
Proof-of-Stake Ethereum blockchain uses 789.94 kilowatts (KW) of electrical power, which corresponds to a total yearly electricity consumption of 6.92 gigawatt-hours (GWh), assuming continuous power usage at the aforementioned rate over the period of one year (6.92 GWh = 789.94 KW x 24 x 365). This corresponds to 0.005% of Bitcoin electricity consumption.
See some comparisons here (source: CBECI)
Takeaway #4
The main driver of blockchain energy consumption is expected mining profitability. This is mainly determined by the market price of the mined coin, the amount of fees paid by transaction senders, and the price of electricity used for the mining process.
Mining revenues are highly volatile and mainly depend on the bitcoin price (which is, essentially, unpredictable). Operational costs are more predictable and are primarily determined by electricity rates.
Rising bitcoin price or decreasing electricity costs generally lead to increased electricity consumption as profitability is higher and hence more hardware (including less efficient hardware) will be employed.
On the other hand, during Bitcoin bear markets or when electricity is expensive the mining profitability is lower. This discourages the deployment of older-generation mining equipment that is less energy-efficient and hence less competitive. Hence the total energy footprint is lower cetaris paribus.
Takeaway #5
It is essential to distinguish between electricity consumption and environmental footprint. What ultimately matters for the environment is not the level of electricity consumption per se, but the carbon intensity of the energy sources used to generate that electricity.
For instance, one kilowatt-hour (kWh) of electricity generated by a coal-fired power station has a substantially worse environmental footprint than one kWh of electricity produced by a wind farm. As a result, rising (or falling) power demand does not automatically lead to a proportional increase (or decrease) in carbon dioxide and other greenhouse gas (GHG) emissions.
In January 2022, CEBCI estimates that the energy mix of Bitcoin miners is composed as follows:
coal (36.55%), gas (24.97%), oil (0.89%), for a total share of fossil fuels equal to 62.41%
nuclear (11.3%)
hydro (14.87%), wind (6.52%), solar (3.17%), other renewable (1.72%), for a total share of renewable sources equal to 26.28%
putting together nuclear and renewables, the low-carbon sources share is equal to 37.58%
See Electricity Maps, a Danish startup company, for the amounts of greenhouse gases that is emitted for each unit of electricity consumed and produced (carbon intensity) by country.
It is worth noting that miners are economic actors that want to maximize their profits. In theory, mining requires only hardware, electricity, and a stable internet connection. Unlike almost all of the energy used worldwide, that must be produced relatively close to its end users, mining can happen anywhere.
Hence miners are energy nomads, attracted by renewable and waste energy that cannot be distributed or used in a cost-effective manner. Renewables in China (primarily hydro as a result of excess capacity during the wet season) as well as gas flaring in North America (turning natural gas from an undesirable by-product of oil extraction into a valuable commodity) are good examples. In general, in the age of satellite communication, this brings remote, sometimes underdeveloped regions with surplus energy into focus.
For instance, miners within China are staying mostly in the more stable coal-fired regions like Xinjiang in late autumn, winter and spring (’dry season’), and migrated to regions with significant temporary overcapacities in low-cost hydropower, like Sichuan, between May and October during the ‘wet season’ (see CEBCI mining map).
The largest push for decarbonization may, however, ultimately come from the investor side. Institutional investors and service providers are increasingly bound by stringent ESG (Environmental, Social, and Governance) rules and requirements. This raises questions about whether Bitcoin can be considered a compliant investment, which determines future inflows of funds into the ecosystem. Some have suggested that these considerations represent a potentially existential threat for miners, thereby creating a natural financial incentive for the industry to actively decarbonize.
In either case, operations will continue to be dictated by economic rather than ideological or environmental principles.
Conclusion
But how much energy should a blockchain consume?
How you answer that likely depends on how you feel about blockchain and how much value you think it creates for society:
If you believe that blockchains offer no utility beyond serving as a technology to create financial Ponzi schemes, to launder money or commit other crypto crimes, and to support the diffusion of foolish digital art and pesky collectibles and profile pictures, then it would only be logical to conclude that consuming any amount of energy is wasteful.
If, instead, you believe that blockchains will build a new decentralized Web, where users can finally own and control their own data, identity, and money, you most likely think that the consumed energy is extremely well spent.
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