Explainer: What is cryptocurrency mining and how does it harm… – eco-business

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Although the market has slipped from its all-time high of US$2.9 trillion at the end of 2021, cryptocurrencies are now worth US$1.1 trillion – five times the size of the gaming market.
The sheer size and volatility of the virtual currency has begun to worry regulators, who have taken action following the collapse of one of the largest cryptocurrency exchanges, FTX, in 2022. Because of its huge power consumption, it has started worrying climate advocates as well.
The United States government is trying to persuade Congress to pass a 30 percent tax on electricity used in cryptocurrency mining in the upcoming federal budget to reduce the growing climate impact of the industry. This will be known as the Digital Asset Mining Energy (DAME) tax.
Cryptocurrency mining is a competitive process that verifies and adds new transactions to a blockchain, which is a digital transaction record.
Since cryptocurrencies are a decentralized network that lacks any central governing authority, cryptocurrencies use a proof-of-work method to verify the accuracy of new transactions.
Proof of work is a form of cryptographic proof in which one party proves to a validator that a specified amount of computational effort has been expended.
The miner who completes the most transactions is rewarded with some amount of currency and/or transaction fees.
If a miner is able to successfully add a block to the blockchain, they will receive 6.25 bitcoins as a reward. Although the reward amount is halved every four years, or every 210,000 blocks, mining the cryptocurrency still offers quite lucrative rewards.
The two most popular cryptocurrencies in circulation today are Bitcoin and Ethereum.
As of March, bitcoin was trading at around US$24,300, making 6.25 bitcoins worth an astonishing US$152,000.
The proof-of-work concept in cryptomining encourages miners to scale up their operations as quickly as possible, often regardless of energy source, so that they can outperform their competitors.
As more bitcoin miners join the mining network, the difficulty of the computational problem increases, and the amount of electricity required to win the race also increases exponentially.
Bitcoin, the world’s most widely traded cryptocurrency, consumes 101 terawatt-hours of electricity annually, which is equivalent to the power consumption of Kazakhstan with a population of 19 million.
Producing that energy emits about 56 megatons of carbon dioxide into the atmosphere each year. This is equivalent to Peru’s emissions, making crypto a significant air pollutant.
Using the social cost of carbon, a common metric for measuring the financial damage from greenhouse gas emissions, the researchers calculated the climate cost of bitcoin, looking at the number of bitcoins mined daily between 2016 and 2021.
On average, they found that for every dollar in bitcoin value, the process resulted in 35 cents in global climate damage – or 35 percent of its market value. In contrast, the climate damage caused by beef accounts for 33 percent of its market value, while the damage caused by gasoline produced from crude oil accounts for 41 percent.
On the other hand, the cryptocurrency Ethereum implemented a major network upgrade in 2022 that completely changes the way the blockchain verifies transactions, mints new coins, and secures its network. This system, called proof-of-stake, has reduced Ethereum’s energy consumption by more than 99 percent.
Proof-of-stake networks like Ethereum secure themselves through staked cryptocurrencies. Instead of spending computing energy solving a puzzle, nodes validating new transactions stake their own value as collateral. These nodes run efficiently and faithfully to avoid losing that collateral.
In response to growing environmental concerns, the blockchain community is actively integrating ecological ideas and adopting more sustainable consensus mechanisms such as Ethereum, said Deng Xin, associate professor of banking and finance at Nanyang Technological University in Singapore.
Cryptocurrency mining also generates electronic waste. Since the equipment used for cryptomining is highly specialized, the hardware becomes obsolete within only a year and a half before becoming e-waste, says Alex de Vries, a digital currency researcher at the Vrije Universiteit Amsterdam in the Netherlands.
According to Digieconomist, a site that investigates the unintended consequences of digital trends, a single bitcoin transaction generates approximately 275 grams of e-waste, which is the equivalent of 1.68 iPhone 12 devices.
What are countries in Asia doing to reduce the climate impact of cryptocurrencies?
Deng added that the introduction of the DAME tax in the US is likely to spur an exodus of bitcoin miners, forcing them to seek more favorable jurisdictions given their cost sensitivity.
A possible destination for bitcoin miners from the US could be Asia, which is a leader in cryptocurrency regulations.
Attitudes towards the regulation of cryptocurrencies vary greatly across Asia. In the most extreme cases, developing Asian countries such as China and Bangladesh have banned cryptocurrencies entirely.
Some countries, such as Kazakhstan, have adopted punitive measures similar to those implemented by the US. To discourage over-consumption of energy, the central government last month implemented a 1 tenge (0.002 US cents) electricity rate surcharge on registered crypto miners, which is an increase of about 4 percent in total energy costs. To further regulate electricity demand, the state-owned Kazakhstan Electricity Grid Operating Company regularly restricts energy supply to cryptomining companies.
Ben Charoenwong, assistant professor of finance at the National University of Singapore Business School, says countries in Asia – which are mostly emerging economies – may have difficulty adopting such punitive measures because of enforcement issues.
“I have heard many stories of miners effectively stealing electricity by chopping down power poles. These miners, unlike the US, will not worry about energy prices. Similarly, it will be difficult for taxes to go after them,” he said.
As such, other countries such as Uzbekistan have adopted a carrot and stick approach.
The Central Asian country has legalized crypto-mining powered by solar power, and implemented a new federal income tax exemption that will benefit miners who install solar panels.
Also, the government in Uzbekistan has raised electricity tariffs for miners who do not want to switch to renewable energy, imposing surcharges during peak hours of the day. Miners using non-renewable energy will also have to pay double the electricity fee compared to those using solar power.
Meanwhile, countries with a surplus of renewable energy such as Japan have said they will channel excess renewable energy into the grid to distributed data centers that power cryptocurrency mining operations, thereby reducing energy waste.
“Encouraging miners’ participation in carbon offsetting programs may provide another opportunity to reduce their environmental impacts,” Deng said.
“Countries could also allow cryptocurrency miners to issue green bonds to help miners shift energy use from unsustainable sources to more sustainable sources,” Charoenvong said.
On the other end of the spectrum, cryptocurrency mining is currently not being regulated in land-scarce Asian countries such as Singapore. This is because the local conditions are not conducive to cryptocurrency mining.
,[Singapore’s] Relatively high land, labor and electricity costs, combined with our hot tropical climate, make cryptocurrency mining expensive to operate,” Environment Minister Grace Fu said in Parliament in 2021.
What is the future of crypto-mining?
Charoenvong concluded that all proof-of-work cryptocurrencies like bitcoin are at risk of future developments, such as technological change arising from pressure exerted by environmental groups and the open-source communities behind these decentralized cryptocurrencies to switch. Support.
Therefore, the energy discussion may one day become moot, just as it was whacked with Ethereum’s shift from proof-of-work to proof-of-stake.
“So in some sense, the mining issue can ‘solve itself’ simply by encouraging actors in their economies to develop new solutions without much government intervention,” he added.
There is one caveat, however, that this change is likely to take time as most bitcoin miners, who collectively mine 900 new bitcoins per day (worth over US$20 million) are still using existing proof-of-work. Love the concept of work. “To the extent that crypto activity generates negative externalities for the public, we should consider taxes or other schemes to correct the externality,” he added.
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