Earlier this week, I wrote on social media that it costs significantly less energy to produce cryptocurrencies like bitcoin and Ethereum. The responses were, “that’s not true, once fiat money is created, no additional energy is required.”
Bitcoin and cryptocurrency have an energy problem?
People at the FED don't sit around painting Benjamin Franklin all day on pieces of paper with watercolor to make $100 bills. It costs energy, electricity, & manual labor.
It costs significantly less to produce cryptocurrencies.
— Joseph Young (@iamjosephyoung) May 24, 2018
Perhaps a better way to phrase the statement was to replace energy with resources, as fiat currencies do require significantly more resources than cryptocurrencies.
Currently, the vast majority of people are comparing bitcoin’s electricity consumption to the production of paper money at central banks like the Federal Reserve, dismissing manual labor, energy, and electricity required to distribute and transfer money.
Fiat requires commercial banks, central banks, ATMs, armored cars, hundreds of thousands of employees, among other things to work. The central bank, in this case the FED, does not magically distribute the US dollar to every person in the country at their doorstep. The FED distributes its US dollar to banks and its friends, who then distribute money with the hopes of trickling down the US dollar to the bottom of the economy.
Cash requires a truly massive infrastructure to function. In the US alone, there are more than 6,000 banks that process cash transactions. Most people no longer uses cash in its physical form to transact. They rely on third party service providers and banks like JPMorgan, Visa, and MasterCard to process payments. The amount of resources and energy these companies and their hundreds of thousands of employees consume should be included in the comparison between the energy consumption of bitcoin against banks.
Bitcoin is a peer-to-peer financial network and due its decentralized nature, no third party is required to transact. Alice can send Bob $100 by broadcasting the transaction to the mempool, which is than picked up by miners to process. In return, miners are incentivized by receiving bitcoin and transaction fees included in the block.
Hence, while it may be accurate to claim it requires more electricity to mine cryptocurrency, it is false to claim that to create or generate bitcoin, more resources are required than to create cash or paper money, as the majority of the energy used by the miners is attributable to confirming and validating transactions, which most of the banks do globally.
John Lilic, member at Ethereum blockchain development studio ConsenSys, stated that the cost per transaction is significantly higher with crypto and that is undoubtedly correct. Major banks like JPMorgan processes trillions of dollars on a daily basis. Lilic said that in the long-term, blockchain projects will have to find better ways to process transactions and information more efficiently.
“The per unit cost of each tx is significantly higher with crypto. Data centres banks use are much more efficient than mining operations & legacy systems process orders of magnitude more tx’s per day than crypto. We need specificity around the energy issue, not conjecture. The real question is whether the gross energy inefficiency costs in crypto is worth the benefits like custody over assets. My contention is Yes! It is worth it but only if our industry prioritizes & continues to work towards energy efficiency gains like Proof of Stake.”
As cryptocurrencies and blockchain technology mature, they will experiment with more efficient methods of consensus algorithms and mining methods that may decrease the energy output of cryptocurrencies in the long-term.