by JOSH HENDRICKSON
Recently, Tesla announced it would accept Bitcoin payments only to cancel that plan just over a month later. The company said, “Cryptocurrency is a good idea … but this cannot come at great cost to the environment.” Why is cryptocurrency bad for the environment? And can that change? Let’s dig in.
What Is Cryptocurrency?
Before we get into the environmental questions, it’s important to know what cryptocurrency is and where it comes from. At its heart, cryptocurrency is a form of digital currency. Chances are, you already have digital currency and might have never given that much thought. When you shop online or pay in person using a credit card, you’re using digital currency. After all, you aren’t handing over physical money.
But where cryptocurrency deviates from other digital currency is the ledger. When you pay with a credit card, a retail system contacts your bank and asks for your money. The bank checks its ledgers to ensure you have the funds and then disperses them. Most currency relies on a private or centralized ledger.
Cryptocurrency prides itself on using a decentralized ledger (also known as a blockchain). No one entity controls the information concerning who has how much of what kind of funds. Instead, that information is shared and validated among the many volunteers participating in a particular cryptocurrency coin.
Another unique facet of cryptocurrency is something it shares in common with physical currency—a limited pool of assets. The digital U.S, Dollar is effectively endless. It’s digits in a computer, and when someone earns another penny, we don’t need to find one to give that person. Likewise, billionaires don’t have to worry about where to store their money (Scrooge McDuck notwithstanding) or what to do if they earned more money than actually existed.
But physical money is made, circulated, destroyed, and made again. And similarly, most (if not all) cryptocurrency is “made” (called mining) and features a stopping point. Take Bitcoin, for example; at the start of 2011, only about 5.2 million Bitcoins existed. Today over 18 million Bitcoins exist. But the system only allows for 21 million Bitcoins—once we hit that number, that’s it: no more new Bitcoins.
And it’s the process of making cryptocurrency that can cause environmental problems. Because for many coins, mining cryptocurrency relies on “proof of work” instead of “proof of stake.” Here’s what that means.
For most popular crypto coins, like Bitcoin and Etherium 1.0, making more coins (called mining) is arduous. Anyone interested in mining crypto coins sets up software on any number of devices (PCs, phones, dedicated mining machines, etc.), then lets it run as long as they want.
But mining is a multistep process. The first part is a blind puzzle race that every miner participating tries to win. You might have heard that mining is all about doing complex math, but that’s not quite right. Instead, the system itself comes up with a complex equation with a single answer—but it doesn’t reveal the equation. Every miner essentially attempts to guess what the answer is without knowing the equation. Either the guess is right, and the miner wins, or it’s wrong and has to try again. The first miner to guess right wins the round.
The beauty of the system is, it’s hard to become the winner but easy to tell who won. It’s a bit like solving a puzzle with the picture side down by randomly putting all the pieces in place. It would take a lot of effort, but you know the moment it’s solved.