Sustainable Cryptocurrency Mining: Transitioning from Proof of Work to Proof of Stake

Cleaning Up Cryptocurrency: A Viable Path to Sustnable Mining

Elon Musk's recent announcement that Tesla will only accept Bitcoin for car sales when there is confirmation of a reasonable ~50 percent clean energy usage by miners has rekindled debate about the carbon footprint of Bitcoin mining. , essential to creating new bitcoins and updating transaction records through solving complex computational problems, consumes massive amounts of electricity and computing power. This difficulty in mining contributes to Bitcoin's status as a store of value but also to its significant environmental impact.

According to Cambridge University's Bitcoin Electricity Consumption Index, miners use approximately 73 terawatt-hours of electricity annually - roughly double the consumption of Denmark. The intense computational activities by millions of Bitcoin miners lead to over 64 million tons of CO2 emissions per year, comparable to Montenegro's annual carbon footprint as estimated by Alex de Vries, an economist at the Netherlands' central bank. Each Bitcoin transaction might release as much carbon as over 1.8 million Visa transactions.

Cryptocurrency operations can significantly reduce their environmental impact through a fundamental yet feasible change in how new blocks are created - moving from proof of work to proof of stake. This approach involves using validators instead of miners, who put down cryptocurrency as a stake. In return for this investment, validators get the right to validate transactions and update the blockchn.

ensures that validators are rewarded with cryptocurrency in proportion to their stake size. If they verify blocks contning false transaction or data histories, they lose their stake due to random selection without competitive bidding for validation slots. This method requires merely an internet connection on a device - reducing energy consumption by up to 99.95, according to de Vries.

Several prominent blockchn platforms such as Cardano, EOS, Polkadot, and Tezos utilize variations of proof-of-stake. However, their market share is relatively small compared to Bitcoin and Ethereum. If Ethereum successfully transitions to proof of stake, it could set a precedent for others to follow, significantly decreasing cryptocurrency's carbon footprint.

The transition won't be strghtforward; as John Kiff, a former financial sector expert at the IMF, notes that the use case of Bitcoin is very different from Ethereum, with Bitcoin ming to serve as a universal unit of account or currency, whereas Ethereum replace internet intermediaries like Facebook and Google through decentralized applications and contracts using its ether currency.

Anisa R. Bala is a senior communications officer in the IMF's Communications Department. reflects the opinions of the authors without necessarily orsing the International Monetary Fund policy.

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