The Next Energy Crisis: Cryptocurrency
The benefits of a decentralized financial system could be outweighed by its power needs.
By Deborah Jackson
Bitcoin, the current fintech fad, was the first viable cryptocurrency concept. Its key innovation was the conception of a decentralized currency accounting system. In lieu of centralization, “crypto miners” in a distributed network compete to be the first to complete a complex algorithm—the purpose of which is to monitor and validate bitcoin transactions taking place in the network. This ensures that only legitimate transactions are allowed. The computed output, which is referred to as a “block,” keeps track of all existing bitcoins in the network, who owns each bitcoin, and any bitcoin transactions that took place as the block was being computed. This is the crypto-block ledger.
Every ten minutes, a new block is completed. It is then time-stamped and distributed to all nodes in the network, where it is linked with previously completed blocks, thereby forming a blockchain. Miners are motivated to maintain the blockchain ledger because they can earn cryptocurrency through the act of mining without having to put down money for it.
The allure of cryptocurrencies like bitcoin is that they offer easy accessibility and liquidity across international borders, user anonymity, transaction transparency, high potential investment return, and especially independence from centralized government authorities. Indeed, some cryptocurrency enthusiasts are enamored with the idea of “seasteading,” or homesteading on the high seas, where cryptocurrencies can enable a tax-free existence, untethered from all forms of government authority. But the drawback of cryptocurrencies is that maintaining the blockchain ledger is energy-intensive and requires access to a hefty power grid.
The bitcoin algorithm caps the total number of mineable bitcoins at 21 million. When bitcoin first launched in 2009, an average home computer could run the mining algorithm because there were a small number of bitcoins to keep track of. Now that more than 18.5 million bitcoins are minted and have to be tracked in each block, the average home computer is no longer up to the job. Essentially, as the number of bitcoins grows, the blocks become larger and the validation algorithms become more difficult to complete in the allotted ten minutes. The Digiconomist’s Bitcoin Energy Consumption Index estimated that it took 1,544 kWh to complete a block in 2021. And as more bitcoin is put into circulation, maintaining the ledger requires more energy, and faster, higher-performance computers are necessary to complete the blockchain algorithm in the allotted ten minutes.
Nevertheless, the seasteaders’ dream of living in neutral offshore territory was bolstered in 2020 when the Panamanian government agreed to let them park offshore and buy high-speed internet, water, and electricity from the mainland. The benefit: no taxes would be due on their earnings made from the ventures outside of Panamanian territory. Seasteaders imagined living in an unobtrusive worker’s paradise, free to make, or mine, as much money as they pleased.
But in 2020, the worldwide bitcoin mining industry consumed 121.36 terawatt hours (TWh) alone. If bitcoin were a country, it would rank among the top 30 consumers of electricity in the world. So tethering an energy-intensive crypto mining operation to a small country like Panama, whose domestic energy infrastructure can only support a peak demand of 8.6 TWh, does not make sense. It creates a precarious situation in which the country’s energy needs could easily be displaced by those of the offshore miners, a lesson that Kazakhstan recently learned. When China outlawed bitcoin mining in late 2021, Kazakhstan enticed the country’s bitcoin miners to move their operations across the border. Although Kazakhstan’s power grid is capable of supporting a peak demand of 105kWh, the unfettered crypto mining operations led to soaring utility bills and riots in the streets and almost toppled the government.
Years ago, the United Nations Food and Agriculture Organization concluded that because global water, energy, and food security are inexorably linked to one another, a holistic planning approach for the water, energy, and food security nexus is necessary. The goal was to mitigate Kazakhstan-like disruptions when powerful entities compete to secure their disparate interests in scarce resources. The rise of cryptocurrencies may require expanding the current planning nexus into a tetrad of water, energy, food—and fintech.
Deborah Jackson is a program manager in the National Science Foundation’s Directorate for Engineering. The views expressed in the article do not necessarily represent those of NSF or of the US government.