Cryptocurrencies are created and exist on blockchains, which can be decentralized or centralized. Although many cryptocurrency protocols often intersect with and implement practices that are typical to the traditional financial sector, many cryptocurrency companies do not rely on traditional central banking systems to conduct, approve, and verify transactions. Transactions using cryptocurrencies are normally validated and recorded using networks of computers, which can be located throughout the world.
In the case of fiat currencies, monetary supply is generally managed by a central governmental authority that is tasked with gauging market conditions to evaluate whether to make changes to the supply of fiat currency. The economics of cryptocurrencies are generally governed by issuing company or entity. This is often called tokenomics, and each company can set their own tokenomics to achieve their respective goals. For instance, some entities release many tokens at the outset of token offerings to incentivize early adopters. Other entities introduce the idea of scarcity in order to encourage steady growth in the price of an asset. New cryptocurrency tokens are created through a process known as “mining”. This involves miners offering processing time and power on their computer(s) to become part of a distributed network that carries out the essential tasks of updating and validating transactions on a given blockchain.
The two main methods of achieving consensus on a blockchain are through proof-of-work (PoW) and proof-of-stake (PoS). PoW often involves computers with large processing power and energy consumption competing to solve a series of mathematical equations in order to verify transactions. PoS is seen as the energy efficient option, because users do not have to expend energy to compete to solve an equation. Rather, stakers have a higher chance of being selected depending how much of the cryptocurrency token they have staked, or locked up in a smart contract. Bitcoin uses a PoW mechanism for transaction validation while Ethereum switched to a PoS validation mechanism in 2022.
Cambridge Centre for Alternative Finance (CCAF) has evaluated energy consumption and bitcoin mining from 2010 to 2022, updated every 24 hours using a range consisting of a hypothetical lower bound (floor) and a hypothetical upper bound (ceiling) estimate. You can find this here.
Many jurisdictions, including the United States, have proposed legislation and regulatory standards aiming to reduce the negative environmental effects of cryptocurrency mining. Sustainable and recycled energy is becoming increasingly more affordable than fossil fuel energy. New measures are being taken to reduce the environmental impact such as through the use of carbon offset programmes.
Additionally, Ethereum, the second largest cryptocurrency by market capitalization after Bitcoin, moved from the PoW model, to a PoS one, the consensus mechanism that reduces the energy consumption by 99%. The energy consumption resulting from the shift is estimated to drop from 8.5GW to less than 85MW.
It is estimated that Bitcoin consumes electricity at an annualized rate of between 100 and 125 terawatt-hours (TWh) and Bitcoin uses 707 kilowatt-hours (kWh) of electricity per transaction, which is 11 times that of Ethereum.
Finally, our partner, The Giving Block, created TGB Green, an initiative making the crypto donation platform the most environmentally friendly on the planet. You can learn more here: The Giving Block Announces Carbon Offsets for Crypto Donations. The back-end exchange Gemini also runs a carbon offset programme for all transactions running through the platform.