Inside crypto airdrops — why some free tokens thrive, and others die
Bitcoin and the environment — myth-busting BTC mining’s most repeated criticisms
An exploration of the often-flawed arguments made by those critical of Bitcoin for its energy consumption and carbon emissions
Following BTC’s meteoric price rise from below 10,000 USDT in 2020 to posting new all-time highs in 2021, Bitcoin once again finds itself the target of criticism. Among the detractors’ favorite topics is the network’s perceived environmental impact.
The macro context for this BTC price rally makes the debate more poignant than ever. One of United States President Joe Biden’s first acts in office was to rejoin the 2015 Paris Agreement in early February 2021. In April, U.S. and Chinese environmental envoys met in Shanghai to agree on further actions to keep climate change in check. Later the same month, Biden hosted a climate change summit with 40 other world leaders, including China.
With climate concerns very much back on the agenda in 2021, it is little surprise that Bitcoin has once again attracted negative press. Two events, in particular, seem to have rekindled critics’ interest in the debate.
Firstly, Tesla announced significant BTC investments and added the cryptocurrency as a supported payment method on Feb. 8, 2021. Numerous observers took issue with the electric car manufacturer’s apparent double standards. The company’s central position in the transition from fossil fuel-powered vehicles to more environmentally sound alternatives appears to be at odds with its speculation on an asset labeled by many as apocalyptic due to its widely reported reliance on fossil fuels. Citing concerns over the network’s energy consumption, Tesla later dropped BTC as a payment method for its vehicles on May 12, 2021.
Secondly, a complete power outage in the Bitcoin mining hub of Xinjiang, China, on April 16, 2021, caused a significant drop in the Bitcoin hash rate. A flood in one of its coal mines prompted authorities to shut off power to the region while they investigated. Naturally, those most critical of Bitcoin’s energy consumption jumped on the opportunity to discredit the network, once again.
In this OKX Insights article, we attempt to bust some of the myths surrounding the seemingly endless and often ill-framed Bitcoin energy debate. We question the validity of the data backing the most impassioned critiques, of the assumptions that processing BTC transactions drives the network’s electricity demands, and of the accusations that Bitcoin’s consumption deprives other energy users.
In addressing the recent Xinjiang power outage, we look at China’s involvement in the mining industry to determine whether available evidence really does support the sensationalist headlines that accompanied the blackout.
Finally, we consider Bitcoin from a global perspective and ask whether it is right to persecute a technology with potentially profound societal implications based on its early inefficiencies.
A history of the Bitcoin energy debate
Concern about Bitcoin’s energy use is nothing new. At the network’s birth, early enthusiasts were already aware of its potential environmental impact.
As interest in Bitcoin spread, its growing market price increased the incentive to deploy more sophisticated hardware to mine the network. What began with Satoshi Nakamoto and a few early hobbyists using everyday CPUs quickly developed into an industry.
Over subsequent years, the rising BTC price encouraged the transition from CPUs to GPUs — that is, central processing units that perform general computations were replaced by more task-specific graphics processing units. As the incentive continued to grow alongside the foremost cryptocurrency’s price, custom-built machines called ASICs — i.e., application-specific integrated circuits — became the most profitable equipment with which to mine.
Today, these highly efficient ASICs dominate the network, producing many thousands of times more hashes per second than CPUs. Yet, their increasing electricity demands would eventually raise eyebrows from those not involved with the young Bitcoin industry, prompting numerous efforts to quantify it.
BTC’s carbon footprint is…
The first studies into Bitcoin’s environmental impact appeared in 2014, and at least one slightly different approach has been put forward every year since. Reports like those published in Nature Climate Change and Nature Sustainability attempt to quantify the electricity consumption of Bitcoin and extrapolate the network’s carbon footprint from the figures at which they arrive. In doing so, most authors acknowledge shortcomings in both their own and previous efforts.
The network’s power draw is typically determined using its hash rate and more than a handful of assumptions about the equipment contributing to it. If we assume all miners always use the most energy-efficient hardware available, the result is radically different than if we base the figures exclusively on the least efficient hardware. The exact composition of equipment securing the network will lie somewhere in the middle of the upper and lower bound estimates presented.
Determining the network’s carbon footprint from these figures presents additional challenges. As such, many widely quoted studies fall back on generalizations about the mix of renewable and non-renewable energy used in the nations in which mining occurs. For example, renewables contributed about 30% of China’s total energy production for 2020. Yet, the country is simultaneously the planet’s largest producer of green energy while remaining the biggest consumer of fossil fuels.
Bitcoin miners are not spread uniformly across China. According to data presented by the Cambridge Centre for Alternative Finance, Xinjiang historically contributes the lion’s share of the nation’s total hash rate at just over 30%. Behind Xinjiang are Sichuan, Inner Mongolia and Yunnan at 18.6%, 7.7% and 7.1%, respectively. The almost 37% remaining hash rate is split between more than 25 other regions. However, that distribution changes throughout the year, with miners flocking to the hydroelectric-rich provinces in the wet season.
Comparing the energy mix of these mining hubs with China’s national ratio of renewable to non-renewable electricity production illustrates the shortcomings of relying on generalizations to produce carbon emission estimates for Bitcoin. For example, data reported by The Economist’s Intelligence Unit for 2016 showed 83% of the electricity used in Yunnan and 87% of that used in Sichuan was generated by hydropower. In east China, by contrast, almost 100% of the energy generated came from fossil fuels.
Such generalizations form the basis of many Bitcoin critiques. In a March 2021 report titled “Bitcoin’s Dirty Little Secrets,” Bank of America wrote:
“Fresh capital into Bitcoin breeds increased use of Chinese electricity networks. And what source of energy does China use the most? Nearly 60% of Chinese electrical generation is from coal-fired power plants, with less than 20% coming from natural gas or renewables. In other words, the main input into Bitcoin mining is coal, not exactly the cleanest source of energy on planet Earth.”
Not considering the vast regional discrepancies of the Chinese energy production mix, such conclusions present an overly damning picture — and one at odds with more thorough research. As cited by Fidelity Digital Assets, the Cambridge Centre for Alternative Finance estimates that renewables currently contribute around 39% of the total energy used to mine BTC. Given that BP estimated low carbon fuels only contributed approximately 39% to the planet’s entire energy mix in 2020, the BTC mining industry seems to be in line with the broader effort to reduce carbon emissions globally.
Speaking to OKX Insights, Nic Carter, a partner at Castle Island Ventures and author of numerous articles on the Bitcoin energy debate, commented on the prevalence of inadequate information and its impact on the broader discussion:
“Currently, we have a very weak factive environment — critics constantly cite wrong, outdated or misleading data — so the debate is incredibly unproductive right now.”
In a 2020 article, titled “The Last Word on Bitcoin’s Energy Consumption,” Carter addressed the flawed data more overtly:
“Even though lots of Bitcoin is mined in China, it’s not appropriate to map China’s generic CO2 footprint to Bitcoin mining. As discussed, Bitcoin seeks out otherwise-curtailed energy, like hydropower in Sichuan, which is relatively green. Any reliable estimate must take this into account.”
Do Bitcoin transactions require colossal energy expenditure?
Another favorite tactic of those discrediting Bitcoin for its energy consumption is to mischaracterize the network entirely. Digiconomist — a publication run by Alex de Vries, a data scientist for De Nederlandsche Bank — is among those guilty of misrepresenting Bitcoin’s functioning to advance its argument.
The website’s much-quoted Bitcoin Energy Consumption Index reports the apparent environmental impact of a single BTC transaction. As of early May 2021, the figures claim every transaction on the Bitcoin network is responsible for 545 kilograms of carbon emissions, 1,147 kilowatt-hours of consumed electricity and 103.9 grams of electrical waste. Digiconomist compares the environmental impact of a single Visa transaction to these figures. De Vries also uses the Visa comparison repeatedly in his 2019 article titled “Renewable Energy Will Not Solve Bitcoin’s Sustainability Problem.”
In a CoinDesk article from February 2021, Carter takes issue with what he believes to be an ill-conceived approach, writing:
“Bitcoin and Visa are fundamentally different systems. Bitcoin is a complete, self-contained monetary settlement system; Visa transactions are non-final credit transactions that rely on external underlying settlement rails. Visa relies on ACH, Fedwire, SWIFT, the global correspondent banking system, the Federal Reserve and, of course, the military and diplomatic strength of the U.S. government to ensure all of the above are working smoothly.”
Carter goes on to state that Visa represents one layer of the international dollar system. Bitcoin, by contrast, is a “full-stack monetary and payments system.” He argues that BTC provides final settlement in a matter of hours. Visa itself does not facilitate final settlement at all. Instead, payments are aggregated and settled using ACH or wire transfer periodically:
“These gigantic wire transfers that power settlement between cardholder banks and merchant banks for Visa are the transactions most comparable to those of Bitcoin. The individual payments happening between Visa users and Visa merchants are unsettled IOUs.”
The Castle Island partner then turns his attention to the task that Bitcoin miners are actually committing energy to — namely new BTC issuance. With only around 10% of miner revenue generated by transaction fees, the real lure for miners is the BTC awarded via block rewards. Carter reasons that “Bitcoin’s future carbon outlay is likely to shrink” because the block reward halving schedule reduces new issuance to zero.
Bitcoin provides a base settlement layer of a reimagined monetary system. In the same way that Visa is just a payment layer of the traditional financial system, other networks can be layered on top of the base blockchain. Already, we have seen the development of the Lightning Network and Liquid Network facilitate payments and other functionalities without requiring every transaction to receive validation from the entire Bitcoin network. When you consider that the closing of a single Lightning channel can potentially settle millions of payments, the consumption comparison between Visa and BTC becomes a spurious one.
Non-financial applications can also leverage the Bitcoin blockchain’s security. For example, ION by Microsoft is a Layer-2 implementation attempting to create decentralized, censorship-resistant digital identities on top of the Bitcoin network. ION v1 is already live on the Bitcoin mainnet, deriving its security from the network’s electrical consumption while not directly contributing to it. Such functionalities are never reflected in Bitcoin energy studies and make comparisons with the Visa network all the more irrelevant.
Does Bitcoin mining deprive others of energy?
Those critical of Bitcoin’s energy consumption frequently claim that the power required could be better used elsewhere. Owing to the levels of electricity generated but wasted on Earth, the reality once again appears quite different from the headlines.
In one of his many articles dedicated to Bitcoin’s environmental impact, Carter explicitly addresses this argument. Discussing wasted energy in China, he writes:
“Sichuan, second only in the hash power rankings to Xinjiang, is a province characterized by a massive overbuild of hydroelectric power in the last decade. Sichuan’s installed hydro capacity is double what its power grid can support, leading to lots of ‘curtailment’ (or waste). […] It’s an open secret that this otherwise wasted energy has been put to use mining Bitcoin.”
Bitcoin miners are uniquely positioned to take advantage of stranded energy. On top of mining hardware, abundant power and an internet connection, the industry requires little in the way of infrastructure. The numerous examples of Bitcoin miners leveraging this flexibility in remote areas support Carter’s claims. Mining operations have popped up next to hydroelectric facilities in former Canadian ghost towns; in Norway, where stranded wind, solar and hydro resources are in abundance; and deep in the Siberian wilderness. The climate of these areas also reduces the electricity required to cool mining equipment.
In correspondence with OKX Insights, Carter pointed out that Bitcoin miners have long been drawn to areas with low demand and high supply of energy. The concentration of miners in China, for example, was initially attracted by the high levels of curtailed energy in certain regions.
A 2016 report published in ScienceDirect elaborates on the observation. It claims that China wasted roughly 16.23 TWh of wind energy in 2013. Curtailed energy in China alone was enough to power the entire Bitcoin network — even using Digiconomist’s admittedly questionable figures — until mid-2017:
“In the northern regions of the [Chinese] grid where most of the wind capacity is located, electrical demand is low and insufficient transmission capacity prevents transport to other parts of the grid where demand is greater. In addition, integration of wind and other renewables is hindered by a lack of flexible generating units and a lack of demand-side flexibility.”
Meanwhile, a Ren21 study, titled “Renewables 2020 Global Status Report,” showed the total curtailment of Chinese electricity generated from solar and wind for 2019 was around 4.6 TWh and 16.9 TWh, respectively. Taken together, wasted wind and solar energy from China alone could have contributed 28% of the 73.1 TWh Digiconomist claims the Bitcoin network consumed for the year.
Citing the example of India, the same study explicitly states that curtailment is actively discouraging the creation of additional solar and wind facilities in some areas:
“Curtailment also acted as a deterrent to new installations, and the severity was worsened by a decline in power demand due to the slowing economy.”
This observation supports the conclusions drawn in a recent and much-discredited Tesla-sponsored report by asset manager ARK Invest and payments company Square. The authors of “Bitcoin is Key to an Abundant, Clean Energy Future” make the case that Bitcoin mining can make green energy production more economically viable in renewable-rich but sparsely populated areas.
Calling Bitcoin a “unique energy buyer,” the report states:
“In a sense, the unlimited appetite of miners allows them to eat whatever remains of the ‘duck’s belly.’ Given these benefits, we believe it makes logical sense for utility-scale storage developers to augment their current battery offerings with bitcoin miners.”
Indeed, companies are already utilizing energy destined never to be harnessed. U.S. company EZ Blockchain, for example, provides the mobile infrastructure required for oil and gas providers to put natural gas wasted through flaring to more productive use mining BTC. Estimates reported by WeForum put the total volume of flared gas at 150 billion cubic meters every year. This otherwise wasted energy is enough to generate around 800 TWh of electricity — or the entire Bitcoin network, today, more than seven times over. Additionally, using the gas instead of releasing it or flaring it prevents about 400 million tons of harmful greenhouse gasses from being emitted into the atmosphere.
Speaking to OKX Insights, Sergii Gerasymovych, EZ Blockchain’s founder and CEO, elaborated on Bitcoin’s potential to mitigate this waste:
“I strongly believe that Bitcoin mining’s huge power consumption can be used as a tool to solve the global waste energy problem with solutions like utilizing flared gas for mining or stranded natural gas. This area has to have more coverage and research.”
Gerasymovych added that EZ Blockchain is also working on a solar Bitcoin mining project that can offset the setup costs associated with harnessing sunlight to generate electricity. Speaking more generally about the issue of Bitcoin mining depriving communities of power, he commented:
“There are so many stories where Bitcoin mining companies took over the distressed plants and resurrected the towns with jobs. Our company’s first project in northern Indiana allowed a local utility company not to increase rates for the local communities because we had a consistent consumption of power that led to better power purchase deals from the grid.”
Did Xinjiang’s power outage expose Bitcoin’s fossil fuel consumption?
Blackouts caused by the recent flooding of a Xinjiang coal mine provided Bitcoin detractors with another vector to attack the cryptocurrency. However, yet again, their claims seem overstated.
Chinese media reported that authorities shut off power to the entire Xinjiang region while engineers conducted a safety inspection of the affected facility. Sure enough, Glassnode reports the network’s total hash rate plummeted from 197.9 million terra hashes per second on April 15 to around 106.7 TH/s two days later.
Those critical of Bitcoin used the fact that Xinjiang continues to source most of its electricity from fossil fuels to assume the network’s environmental impact. Yet, they completely ignore the vast solar and wind energy facilities installed in the region since 2015. Citing data from SGCC’s Xinjiang branch, GlobalTimes claims that the region’s new green energy facilities have a total capacity of 35.83 GW. The publication states that Xinjiang-generated renewable-derived power made up “a significant part” of the 24% contribution the region made to China’s total generated electricity in 2020.
Critics also dismiss the fact that the hash rate only flocks to Xinjiang during the dry season — which it was during the blackout. During the rest of the year, mining operations are more profitable in Yunnan and Sichuan — where cheap, abundant and often wasted renewable resources increase profit margins.
Speaking to OKX Insights, Carter commented on the implications of the Xinjiang blackout regarding Bitcoin’s environmental impact — and the network, more generally:
“The takeaway from me is that Xinjiang is most likely smaller in terms of its contribution to hash rate than we thought. That’s unequivocally positive. Second, it seems to me that China is harassing miners, and making sure they know who is in control. Inner Mongolia already banned mining, and this seems like an early move at potentially banning mining in Xinjiang too. That would obviously be very positive for Bitcoin, especially for U.S.-based miners.”
Carter explained how China is working to make its power system more efficient and that the authorities would get “impatient” with large consumers — like Bitcoin miners — first. This would not only benefit Bitcoin in terms of its environmental impact but also the network’s decentralization.
Indeed, following the Xinjiang blackout, Chinese authorities began investigating the industry’s impact in the region. Previously, the government banned BTC mining in Inner Mongolia — a heavily fossil-fuel-dependent region. Should Xinjiang regulate or ban mining entirely, the little validity of critiques based on the region’s coal dependence would quickly disappear.
Thanks to government crackdowns — along with efforts by EZ Blockchain and similar firms to enable mining expansion elsewhere — China’s share of the global hash rate is already falling.
Would proof-of-stake solve Bitcoin’s energy concerns?
Some critiques from those observing Bitcoin — both inside and outside the cryptocurrency industry — look to alternative blockchain networks for a quick solution to Bitcoin’s rampant energy consumption. Common among them is the suggestion to follow in Ethereum’s footsteps and transition from proof-of-work to a proof-of-stake consensus algorithm.
Such suggestions again demonstrate a poor understanding of what Bitcoin mining is supposed to achieve. As well as forming part of its consensus algorithm, mining is Bitcoin’s distribution mechanism. By implementing the proof-of-work competition, Satoshi Nakamoto ensured that initial distribution did not advantage any network participant. In Bitcoin’s early days, anyone with a computer and internet connection could mine BTC. A proof-of-stake system from day one would be infeasible because it would require both the staking of BTC that was not yet in circulation and a market value.
Although around 89% of BTC is in circulation today and the asset has a market value, proof-of-stake is still unpopular among Bitcoin enthusiasts. The issue once again comes down to distribution. In a proof-of-stake system, stakers receive rewards but have virtually no expenses. With much lower overheads than Bitcoin miners, there is little incentive to sell the coins rewarded. Instead, rewards continue to grow the staker’s holdings. While a lack of selling pressure might be great for an asset’s market price, it also encourages those participating in consensus to hoard enormous concentrations of coins. Eventually, this could threaten the network’s security.
Although Bitcoin miners receive 100% of newly circulating BTC via block rewards, their hardware, electricity and equipment-cooling systems all need financing. This forces miners to sell coins, promoting wider distribution. A miner’s holdings will not simply increase in perpetuity — and, even if it did, each miner’s balance has no bearing on their probability of finding another block. In most of the proof-of-stake systems existing today, the chance of being selected by the network for block validation is random but directly proportionate to the number of coins held.
Gerasymovych commented to OKX Insights on suggestions to replace proof-of-work with a less energy-hungry consensus mechanism:
“I do not think this is something that can happen in the near future. Bitcoin’s proof-of-work algorithm is the core of its security and decentralization. Because of proof-of-work, Bitcoin is compared to gold. It takes physical effort to create Bitcoin — that is the beauty of it. In the future, when AI and algorithms rule the world, having such a physical backbone of network stability will be very important to prevent manipulation of the network.”
Carter is equally dismissive of the suggestion, telling OKX Insights:
“Proof-of-stake is clearly not a direction Bitcoin will ever go in, nor does it really make sense. PoS is a system where economic weight gives you political power. This is exactly the problem that Bitcoin was designed to solve. So, moving to PoS would simply reinstitute the old system. Other blockchains that can accept more centralization are choosing PoS, but it doesn’t make sense for Bitcoin.”
Is an end to the Bitcoin energy debate in sight?
Both sides of the Bitcoin energy debate are highly charged. On the one hand, those that perceive no value in the network appear to want BTC to disappear entirely — or, at the very least, consume absolutely no electrical energy. On the other are those that find utility in a decentralized, censorship-resistant and stateless monetary network. Those in the latter camp rightly take issue with factually circumspect efforts to persecute something they believe to be a societal good.
Meltem Demirors, the chief strategy officer at investment firm CoinShares, is among them. Speaking to CoinDesk following the formation of the Crypto Climate Accord, she bluntly spelled out her grievances with the current debate:
“What people who are concerned about cryptocurrencies’ general climate footprint, what they’re advocating for is energy police. There is no energy police. […] Open markets dictate where energy gets produced and how it gets brought to market. If it’s not economically feasible to produce a certain type of energy, it won’t happen.”
Aware of its own environmental impact, the recently created Crypto Climate Accord represents a step by the digital asset industry to rein in its electricity consumption. Its goal is to unite cryptocurrency industry participants to achieve zero carbon emissions by the year 2030. Demirors commented on the CCA’s mission:
“Our objective is to make it economically viable and economically feasible for the crypto industry to align itself with the development and buildout of more renewable sources of energy so that we can put more renewables on the grid. We can use crypto as a catalyst to drive more investment in the production of renewable energy.”
Carter feels similarly. He explained to OKX Insights:
“In terms of the norms, it’s going to become patently clear that the solution to the energy debate is not to selectively ban industries that are deemed immoral or unworthy of energy (this would be counter-productive, anyway), but to reorient the grid around abundant, sustainable energy.”
Ultimately, this apparent requirement for technological breakthroughs like Bitcoin to prove themselves perfectly sustainable from day one sets back human ingenuity. It sends a clear message that an individual should give up on potentially revolutionary ideas simply because their first iterations might not be as efficient as perhaps decades of development could make them.
It is no secret that Bitcoin uses a lot of energy — but so do many luxuries with zero transformative societal potential. For example, estimates suggest that video gamers in California alone use more electricity than the entire nation of Ghana. Meanwhile, the California Energy Commission claims that heated swimming pools in the state consume around 4.5% of Digiconomist’s estimate for the whole Bitcoin network’s power requirement today.
The average Ghanian might very well find utility in Bitcoin through remittance payments, wealth preservation and access to the global economy — so too might millions of others who lack access to banking facilities or cannot afford the fees usually required to send money abroad. However, it is tough to see the benefit they would derive from the energy use of California’s video gamers or those choosing to heat their pool in one of the U.S. states with the most favorable climate. Yet, neither activity attracts anywhere near the same vitriol as those supporting Bitcoin routinely face.
Perhaps the animosity toward Bitcoin is down to its early associations with cybercrime. Maybe the massive wealth gains early believers benefitted from influences the criticism. It is ultimately unclear why BTC’s detractors reserve so much of their own energies for attacking the network.
Yet, Bitcoin is no stranger to stigma. Indeed, if the current trend toward greener energy within the industry continues — with the help of initiatives like EZ Blockchain, the Crypto Climate Accord and others — the network’s transition to completely clean energy will likely outpace that of broader society.
With the proliferation of more accurate information, Carter seems confident that the debate may finally be laid to rest one day. He told OKX Insights:
“One thing we can do is reset the epistemics of the debate. The way to do this is by getting better estimates of the energy mix and hash rate dynamics — where hash rate is navigating, etc. The other domain we can win on is by educating the critics about how Bitcoin actually works.”
Not a part of the OKX community yet? Sign up to get started.
OKX Insights presents market analyses, in-depth features and curated news from crypto professionals.