The Unexpected, Symbiotic Connection Between Water And Cryptocurrencies

21 Jan 2021 by Staff - Water Diplomat
EDINBURGH, United Kingdom

The rapid proliferation of cryptocurrencies in recent years (with Bitcoin the most prominent) is raising environmental concerns, and water resources deployed for hydropower are becoming central to the discourse.

Bitcoin may exist purely in the digital world, but the process that supports it is extremely energy intensive. The intentionally complex public ledger system used for verifying the hundreds of thousands of bitcoin transactions conducted every day is known as the blockchain. And the work done to add entries to it is carried out by so-called miners.

What started out as a cottage industry, akin to the panhandlers of the Goldrush, is now operating on an industrialised scale, with massive power-hungry server “farms” occupying hangar-like facilities.

As electricity is by far the biggest cost, consuming 60-80 percent of revenues, bitcoin miners seek out the cheapest power source they can find (often hydropower). Currently, according to the Cambridge Bitcoin Electricity Consumption Index (CBECI) set up by the University of Cambridge to track the estimated power used by bitcoin mining, around 65 Percent of the “farms” are in China.

While some use cheap and ample surplus electricity produced by hydropower installations during the nation’s wet season, environmentalists are concerned that non-renewable energy sources make up the bulk of energy consumption.

Speaking to the ASEAN Post, Christian Stoll, a researcher at the University of Munich and MIT said in January: “We do not question the efficiency gains that blockchain technology could, in certain cases, provide. However, the current debate is focused on anticipated benefits, and more attention needs to be given to costs.”

The power required for bitcoin mining increases as more bitcoin is released. The CBECI estimates that annualised consumption is currently running at around 112 TWh, up from less than 7 TWh at the start of 2017. Its analysis places current consumption at 0.45 percent of total electricity production worldwide and 0.51 percent of consumption, concluding that this could easily be absorbed by existing global renewable capacity.

Cryptocurrency advocates argue that bitcoin mining operations are well placed to improve the efficiency of renewable energy sources such as hydropower by consuming surplus energy. On the face of it, the relationship seems symbiotic.

However, the lack of transparency and regulation make it impossible to track what energy sources are actually used for bitcoin mining. Research conducted by Stoll at the University of Munich in 2018, when annual bitcoin energy consumption was running at 48.2 TWh, estimated CO2 emissions at between 23.6 and 28.8 mega-tonnes per year.

China’s dominance of bitcoin mining is not the result of active promotion or support by the government. In fact, in 2019, China’s National Development and Reform Commission (NDRC) sought the elimination of bitcoin mining, accusing it of being “resource-wasteful”. However, in a marked turnaround reported in Bitcoin Magazine and Bitcoin.com, China’s Sichuan Province, home to large number of hydropower dams on the Yangtze River and its tributaries, is now actively trying to court more mining operations with incentives, possibly in light of the economic impact of COVID-19.

In April 2020, the government of Ya’an, a city in western Sichuan published a document promoting its abundant hydropower stations to bitcoin mining operations, stating: “Blockchain companies should construct factories near power plants that have excessive power and are integrated with the State Grid.”

The intention is seemingly to bring greater state oversight and control to what has long been a regulatory grey area. Bitcoin.com quotes the document as saying: “Blockchain companies that use electricity privately generated from power plants (without integration to the State Grid) should be rectified in due time.”

This interest in retaining blockchain operations comes as some companies are opting to leave China in favour of the Nordic countries, according to a report in Bloomberg.

In addition to cheap electricity, the article points to the attraction of the consistently green credentials offered by hydropowered mining in Norway – a factor increasingly important to institutional investors. Despite substantial increases in installed capacity for renewable energy, China’s electricity mix is still dominated by coal.

Bitcoin miners are essentially the clerks that keep tabs on bitcoin transactions. They are paid in bitcoin for verifying and bundling transactions into blocks and adding them to the blockchain. The addition of a block to the chain releases more currency into the system. In order to function as a currency, cryptocurrency is designed to be finite – like gold – so the amount of currency released per block reduces over time. The more of it there is in circulation, the more computing power it takes to mine.

As the debate surrounding the climate implications of cryptocurrency widens, the industry itself is showing early signs of self-regulation as competing currencies seek sustainable low-energy models.