• Rahmat Adrian

The Environmental Impact of Cryptoasset

Updated: Aug 31

By: Rahmat Adrian (rahmat.adrian@launcher.id) and Qiyamullail Nuzhul Islam (qiyamullail.nuzhul@gmail.com)

Cryptoassets have come a long way since their inception. Major companies like Tesla, PayPal, and even J.P Morgan have all expressed their support for the value of cryptoassets, particularly Bitcoin. The prices of the top ten coins have also risen dramatically over the last five years. The price of Bitcoin, for example, increased by at least 10.600% at its peak in March 2021. One of the reasons that cryptoassets have risen in value is that many enthusiasts believe that crypto-asset will play an important role in the future.

However, there are still concerns about the long-term effects of widespread cryptoasset use. Many skeptics and environmentalists, in particular, have expressed concern about the energy consumption of cryptoasset mining, which may result in increased carbon emissions and climate change. Furthermore, crypto-asset mining generates a significant amount of electronic waste. As a result, one of the most important things to be concerned about for crypto-assets is their environmental impact.

How Much Energy Do Cryptoassets Consume?

Because of the computations required for mining, most cryptoassets, such as Bitcoin and other proof-of-work cryptoassets, require a large amount of energy. Mining activities on blockchain technology are important for proof-of-work cryptoassets because it is the system that makes cryptoassets decentralized and works without the intervention of a company or government.

According to the most recent estimates, the University of Cambridge Centre for Alternative Finance (CCAF), which studies the burgeoning business of cryptoassets, Bitcoin uses 130 Terawatt-hours of electricity per year, making the Bitcoin network use more energy in one year than the entire country of Argentina. According to another report, the Ethereum network consumes as much energy as the entire country of Qatar.

One major source of concern among environmentalists is that mining becomes less efficient as the price of cryptoasset rises. In the case of Bitcoin, the mathematical puzzles used to create blocks become more difficult as the price rises, but transaction throughput remains constant. This means that, over time, the network will require more computing power and energy to process the same number of transactions.

The idea is that the more computers competing to maintain the blockchain, the safer it becomes because anyone trying to dismantle the asset must possess and run at least as much computational power as the rest of the miners combined. According to the most recent estimates, miners are performing 160 quintillion calculations per second.

Coal and other fossil fuels are currently a major source of electricity worldwide, powering cryptoasset mining operations as well as other industries. However, the carbon dioxide produced by coal combustion is a significant contributor to climate change. According to CNBC, bitcoin mining emits about 35.95 million tons of CO2 per year, which is roughly the same as New Zealand.

According to a 2019 study conducted by two sustainability researchers at Aalborg University, Susanne Köhler and Massimo Pizzol, the Bitcoin mining network had an annual footprint of 17.29 metric tons of carbon dioxide equivalent in 2018. That is roughly equivalent to driving from San Francisco to New York 15,000 times, or the amount of carbon sequestered by a forest the size of Portugal.

Cambridge University's 3rd Global Cryptoasset Benchmarking Study, which used survey data from May 2020, discovered that renewable energy powered 39 percent of global proof of work mining. For miners in Europe and North America, that proportion rises to 70% and 66%, respectively. Finally, whether or not the energy used to mine Bitcoin is environmentally friendly is somewhat irrelevant. Because renewables only supply 28% of the world's electricity, the Bitcoin network's use of green energy simply means that other sectors of the economy cannot decarbonize. According to Christian Stoll, co-author of another paper that estimates Bitcoin's carbon footprint, Bitcoin is currently responsible for less than 1% of global carbon emissions. Although Stoll agrees that proof of work cryptoassets such as Bitcoin is "not climate conscious investments," he also suggests that "there are bigger levers to meet the Paris Agreement goals."

Cryptoassets and International Efforts to Reduce Carbon Emissions

According to John Truby, associate professor of law and director of the Center for Law & Development at Qatar University, in a study published in Energy Research & Social Science, the Paris Agreement is under threat due to the increasing energy consumption of cryptoasset mining. Turby wrote in his article that “the [Paris] Agreement mentions numerous times that technology should be utilized to achieve greenhouse gas mitigation, whereas a highly polluting use of technology would very much go against the spirit of the agreement, if not the commitments made.”

Despite the fact that digital assets have significant potential transactional, security, and financial access benefits, the design of Bitcoin's mining and trading system necessitates such a significant consumption of electricity that it is equivalent to powering Denmark. This endangers the planet to such an extent that intervention is required to prevent similar models from emerging.

The Paris Agreement, signed by 179 parties, calls for a focus on what can be done. Government intervention is one option, but intervening in a free market would be contentious, and the decentralized nature of the technology could complicate the prospect of government intervention.

Environmental concerns prompted China's most recent crackdown on cryptoassets. Concerns that cryptoasset mining has fueled a surge in illegal coal extraction, endangering lives, and undermining Xi Jinping's ambitious environmental goals have fueled China's escalating push to curb the practice.

According to a person who participated in high-level government meetings on the issue and asked not to be identified discussing private information, authorities decided to act after concluding that the surge in electricity consumption from server farms underpinning Bitcoin and other tokens was a key factor behind the rising demand for coal in certain parts of China.

With this in mind, a community known as Energy Web formed an alliance for innovative regulation and launched the Crypto Climate Accord. This agreement was inspired by the Paris Climate Agreement. The agreement is a private-sector-led initiative for the entire crypto community aimed at decarbonizing the cryptoasset industry in record time. The intention of the Crypto Climate Accord signatories is to achieve net-zero emissions from electricity consumption associated with all of their respective crypto-related operations by 2030 and to report progress toward this net-zero emissions target using best industry practices.

Achieving zero carbon emissions from electricity consumption is a difficult goal to achieve. As the popularity of cryptoassets grows, more third-world countries will join the hype, and it is difficult to imagine those countries using entirely renewable energy for cryptoasset use. However, the cryptoasset community is making efforts to reduce the amount of electricity used by cryptoassets. That is to change how cryptoassets transactions are confirmed using the Proof of Stake method rather than the Proof of Work method.

The global blockchain industry is rapidly expanding, and it is expected to grow from USD 3.0 billion in 2020 to USD 39.7 billion by 2025, with a Compound Annual Growth Rate of 67.3 percent between 2020 and 2025. The global fintech sector has expanded significantly in the last two years, and the situation in Southeast Asia is similar.

With a combined population of 570 million people, a young demographic, and excellent Internet connectivity, the region is appealing to firms and investors, particularly those interested in blockchain and cryptoasset in Southeast Asia. The use of blockchain in Southeast Asia has undoubtedly advanced far beyond the days when the technology was regarded as merely another speculative commodity or a passing fad.

In 2019, the Indonesian government announced the establishment of legal frameworks under which cryptoassets and digital asset futures will be classified as trading commodities following the successful use of blockchain verification. Tokocrypto became the first regulated cryptoasset exchange approved by Indonesian authorities for trading digital assets, demonstrating the country's commitment to the adoption of blockchain technology. The Indonesian government is also actively encouraging adoption in the private and public sectors by working with the Indonesian Regional Banks Association to investigate the possibilities of using blockchain to prevent fraud.

The rise of cryptoassets may have a positive impact on the Indonesian and SEA investment sectors. The environmental impact of cryptoassets, on the other hand, is a concern that governments must address. This is because all SEA countries, including Indonesia, are signatories to the Paris Agreement.

The Indonesian government has made several efforts to ensure the success of the Paris Agreement. According to Mahawan Kurniasa, an environmental studies lecturer at the University of Indonesia, the Cipta Kerja (Omnibus) Law is an attempt to develop a long-term strategy-low carbon and carbon resilience (LTS-LCCR) to achieve zero net global emissions by 2050. However, Indonesia's current emission trajectory is still around 3 to 4 degrees Celsius — far from the agreement's 1.5 degrees Celsius target. Cryptoassets mining could endanger this target even more if the government does not impose regulations on such massive energy consumption.

Proof-Of-Work Method Alternate

Some cryptoasset developers have recognized the environmental impact of the Proof of Work method. With this in mind, some developers are working on a decentralized method that is more environmentally friendly than the Proof of Stake method. Ethereum, the second-largest cryptoasset, is working on Ethereum 2.0, which will be the most ambitious proof of stake rollout to date.

Most cryptoassets use a proof-of-work concept, in which miners are rewarded for solving puzzles to validate a transaction, which consumes a lot of energy. Proof-of-stake is another method of verifying and confirming digital asset transactions. The creator of a new block is predetermined in this protocol and is rewarded with a transaction fee rather than a block, which requires much less energy.

Proof of work blockchains is designed to require computers to be running 24 hours a day, seven days a week. Proof-of-stake blockchains require only milliseconds of computer time. Proof of stake has the potential to significantly reduce the energy required to add blocks to a cryptoasset's blockchain because it does not require hard computing work. This is due to the fact that in proof of stake blockchains, blocks are “forged” rather than “mined,” and instead of solving difficult puzzles, the creator of the next block in the chain is chosen using a combination of randomization and the amount of cryptoasset they hold, which is the stake. As a result, full-scale Proof of Stake implementation would result in a massive reduction in the blockchain world's overall power consumption.