The Cost of Cryptocurrencies, By Dr. Ferdinando Samaria

The use of energy by cryptocurrencies like Bitcoin has been attracting a lot of attention. As their value against real money fluctuates, an army of amateurs has joined the crypto extravaganza offering their home computers’ GPUs to pools of miners who try to extract this elusive new gold.

By analysing the hash power of their graphics card, the strength of competing mining adversaries, the current value of the cryptocurrency and their energy costs, wannabe digital-Klondike explorers calculate what daily profits they can achieve and how long it will take to pay for their newly acquired, overpriced GPUs.

This in turn has led to a global shortage of graphic cards, which has spilled into general microchip scarcity for other industries such as cars and smartphones. The cost of energy plays an important role as the main cryptocurrencies use an algorithm to validate transactions based on so-called “proof-of-work”.

In a decentralised world without a recognised clearing authority, when new transactions are ready to be validated a competition starts amongst miners to be the first to find the secret code that unlocks the new transactions and marks them as valid.

The winner of the competition is remunerated for their work with newly minted coins. In order to find the code, complex calculations are carried out repeatedly in the hope of being the first to converge on the correct solution. In the process, large amounts of energy have to be used with more and more participants joining every time the value of the cryptocurrency jumps up.

By current estimates, the annual electricity consumed to carry out this computational feat is comparable to that of a medium-sized nation.

This is a serious issue at a time when energy consumption considerations are of vital importance. Alternative approaches based on “proof-of-stake” are being discussed and at least one major cryptocurrency (Ethereum) has been testing its introduction.

Proof-of-stake would change the current way of validating transactions from proportionality to a repeated computational effort (most of which is wasted as there is only one winner) to having a stake in the system (for example, how many coins a “staker” holds and can put up as collateral).

This would altogether remove the need to establish supremacy through computational cycles and rely instead on a simple split based on stakeholder participation. This kind of architecture would also be much better suited for private blockchains which are one of the main areas of future expansion of the technology.

Dr. Ferdinando Samaria, May 2022