Category: Analysis

In recent years it has become well known that cryptocurrency networks such as the Bitcoin network are energy intensive systems. As of 2024, Bitcoin mining operates on more than 16 gigawatts of power demand, responsible for around 80 megatonnes of annual carbon emissions. Ethereum proved in 2022 that it is possible to replace this energy intensive (proof of work) mechanism with a more sustainable alternative known as proof of stake. As a result of this change, Ethereum reduced its total power demand by at least 99.85%.  However, while this was the most obvious impact of the change, it should be kept in mind that such a software change affected Ethereum in more ways that one. In particular, the Bitcoin community tends to argue that this software change has made Ethereum less decentralized and less secure.

Digiconomist has now added a new deep dive into the decentralization of cryptocurrencies to examine these claims in more detail. This new content explores how (de)centralization takes place in cryptocurrency networks when proof-of-work or proof-of-stake mechanisms are employed. Moreover, it also highlights other aspects of blockchain (de)centralization that aren’t exclusively related to the aforementioned mechanisms. By doing so, it is shown that centralization and decentralization in blockchain technology are not binary values, but rather a spectrum in which each software design will have its own unique landscape of risk factors that may impair decentralization.  A summarizing visual was added to the Bitcoin Energy Consumption Index page.

It has been nine years since Digiconomist was first launched with the objective of “exposing the unintended consequences of digital trends.” For a big part of these nine years, the sustainability of digital assets such as Bitcoin has been a key focus of the research by Digiconomist. However, in 2022 and 2023 a new digital trend has emerged that has an equal potential to rapidly grow in terms of electricity consumption: artificial intelligence (AI). If not managed properly, AI could be responsible for as much electricity consumption as Bitcoin is today in just a few years’ time. This is the conclusion of a new research by Digiconomist titled “The Growing Energy Footprint of Artificial Intelligence” that was published in the journal Joule today (October 10, 2023).

AI-servers are power-hungry devices. A single NVIDIA DGX A100 server can consume as much electricity as a handful of US households combined. Because of this, the electricity consumption of hundreds of thousands of these devices will start to add up quickly. While the supply chain of AI-servers is facing some bottlenecks in the immediate future that will hold back AI-related electricity consumption, it may not take long before these bottlenecks are resolved. By 2027 worldwide AI-related electricity consumption could increase by 85.4–134.0 TWh of annual electricity consumption from newly manufactured servers. This figure is comparable to the annual electricity consumption of countries such as the Netherlands, Argentina and Sweden. While this would represent half a percent of worldwide electricity consumption, it would also represent a potential significant increase in worldwide data center electricity consumption. The latter has been estimated to represent one percent of worldwide electricity consumption.

Given the potential growth of AI-related electricity consumption, the new research contains a call to action to be mindful about the use of AI. Emerging technologies such as AI and previously blockchain are accompanied by a lot of hype and fear of missing out. This often leads to the creation of applications that yield little to no benefit to the end-users. However, with AI being an energy-intensive technology, this can also result in a significant amount of wasted resources. A big part of this waste can be mitigated by taking a step back and attempting to build solutions that provide the best fit with the needs of the end-users (and avoid forcing the use of a specific technology). AI will not be a miracle cure for everything as it ultimately has various limitations. These limitations include factors such as hallucinations, discriminatory effects and privacy concerns. Environmental sustainability now represents another addition to this list of concerns.

For the first 50 days after the publication of the article it can be accessed for free using the following link: https://authors.elsevier.com/a/1huvY925JENm45 Copies can also be requested via email and through the contact form.

Also check out media headlines on this new release:

The New York Times: “A.I. Could Soon Need as Much Electricity as an Entire Country”
BBC News: “Warning AI industry could use as much energy as the Netherlands”
The Verge: “The environmental impact of the AI revolution is starting to come into focus”
NewScientist: “Should we be worried about AI’s growing energy use?”
Mirage News: “AI Power Demand May Equal Small Country’s Electricity Use“

It wasn’t long ago non-fungible tokens (NFTs) were making headlines for their excessive environmental impact. Most of these NFTs were making use of the Ethereum blockchain or a related platform, which meant they were also impacted by the energy-hungry proof-of-work (PoW) mechanism that was part of Ethereum until September of last year. During this month, the PoW mechanism in Ethereum was replaced with an alternative known as proof-of-stake in an event called The Merge, which reduced the energy requirement of the network by at least 99.84%. This event also alleviated environmental concerns surrounding NFTs. It was previously estimated that over the course of its lifespan, a single NFT could be responsible for hundreds of kilograms of CO2.

But whomever thought these numbers were alarming is about to get shocked by the latest trend in the NFT world: on-chain Bitcoin NFTs. In an on-chain NFT the underlying data (e.g. an image) is posted directly to the blockchain, whereas NFTs previously typically only posted a reference to certain data (hosted by a third party) on top of the blockchain itself. This idea can be criticized in many ways, as it does not take much imagination to see how problematic this could become if illegal content is made available on a public “immutable” blockchain, but it also leads to record-breaking carbon footprints.

Estimated impact

On February 1, 2023, Bitcoin mining company Luxor mined the largest block ever, containing nearly 4MB of data (which is the maximum amount of data that can be put into any Bitcoin block). The reason the size of this block peaked was the addition of an on-chain NFT based on the “magic internet money” meme, which took almost all of the available space. At the same time, this also means that the carbon footprint of this NFT is almost equivalent to the carbon footprint of a newly created Bitcoin block. With the power demand of the Bitcoin network estimated at 9.55 or even 12.58 GW, the average electricity consumed to create a block ranges from 1.59 to 2.10 GWh. With an average carbon intensity of 557.76 gCO2/kWh of electricity consumed by the Bitcoin network, this translates to a carbon footprint of 887 to 1171 metric tons of CO2. This carbon footprint would be equivalent to the per passenger carbon footprint of a flight from New York to Tokyo and back, 466-616 times, or the carbon footprint of an average U.S. household over a period of 23 to 31 years.

Other externalities

In the meanwhile the Bitcoin community also seems split about the latest innovation, though not for environmental reasons. The addition of image-data to the blockchain might reduce the available block space for monetary transactions. The same block that held the mentioned on-chain NFT was comprised of only 63 transactions in total, as there was no more room for additional data. Given that Bitcoin blocks are generated only once every 10 minutes on average, this comes down to just one processed transaction every ~10 seconds, which is a serious reduction of Bitcoin’s already low transaction processing capacity (just three to seven transactions per second). The community may have to sacrifice some of Bitcoin’s supposed censorship-resistance to tackle this issue. As long as nothing changes a new record-breaking NFT carbon footprint is likely to appear soon, as the overall power demand of the Bitcoin network has been on the rise along with the recent recovery of the Bitcoin price.

A new article published in the peer-reviewed journal “Patterns” has caught the attention of various mainstream media such as the BBC and Bloomberg. The article by Digiconomist-founder Alex de Vries, titled “Cryptocurrencies on the road to sustainability: Ethereum paving the way for Bitcoin,” discusses the progress that Ethereum has made in reducing its electrical energy consumption.

According to the article, Ethereum has achieved a reduction of at least 99.84% (and possibly up to 99.9996%) in its energy consumption through a event called “The Merge,” which took place on September 15, 2022. This event involved replacing Ethereum’s energy-intensive proof-of-work mining mechanism with a more sustainable proof-of-stake system.

Proof-of-work versus proof-of-stake

Proof-of-work (PoW) is the original mechanism used by cryptocurrencies like Bitcoin. In a PoW system, miners engage in what is effectively a massive numeric guessing game to produce the next block in the blockchain. The miner who guesses the correct number first gets to create the next block, and is rewarded with a certain amount of the cryptocurrency. This process consumes a significant amount of energy, as miners use powerful computers to make as many guesses as possible in a short amount of time.

In contrast, proof-of-stake (PoS) is a mechanism in which the network achieves distributed consensus by choosing the next block producer proportional to their stake (the number of coins locked up as collateral in the block creation process) in the network. This means that the bigger the stake, the more likely they are to be chosen to produce the next block. Because PoS does not require miners to compete against each other, it is much less energy-intensive than PoW. In absolute terms, the reduction in power demand of the Ethereum network could be equivalent to the electrical power requirement of a country such as Ireland or even Austria.

Limitations and way forward for cryptocurrencies

However, the article also notes that the electrical energy savings from The Merge may not have a global impact, as many of the machines used for Ethereum mining may have been repurposed for other tasks or switched to mining other PoW coins. In fact, it’s also possible that previously unused Bitcoin miners have claimed the data center space that Ethereum miners were using.

Despite this, the article suggests that Ethereum’s success in reducing its power demand is a positive sign for the future of cryptocurrency sustainability, even though Bitcoin, the largest polluter in the crypto world, continues to run on energy-intensive PoW mining. The article argues that the Bitcoin community could follow in Ethereum’s footsteps and work towards sustainability as well, but it may require a push from the outside to make it happen.

Digiconomist has launched a new API for developers to retrieve energy consumption and carbon footprint data on the Bitcoin, Ethereum and Dogecoin networks. The respective energy index pages already provide downloadable data on the annualized energy consumption of these networks, but the new API will enable developers to quickly retrieve the total energy consumption and carbon footprint for a specific date.

Moreover, the API will also returns additional metrics that can assist in determining the costs of an operation on a given network. The energy consumption indices already present unweighted averages of the energy consumption and carbon footprints of transactions taking place on the respective networks, but the Digiconomist API provides these metrics at a more granular level (considering transaction outputs or gas units depending on the network), to enable developers to determine a weighted footprint for their operations.

Possible use cases for this data include determining the weighted footprint of a batched transaction or the environmental cost of launching an NFT. It also be used to assess the maximum carbon footprint of a given “gas limit” before a transaction takes place.

The new API will be publicly available and may assist crypto asset service providers in providing more transparency on the environmental costs of their services, as regulators increasingly move to make environmental disclosure a requirement. The full API documentation can be found here.