Hi guys. Welcome to the Fintech Coffee Break. I’m your host, Isabelle Castro, and today I shared my coffee break with Alex de Vries, founder of Digiconomist.
The Digiconomist is laser-focused on tracking the ecological impact of DeFi’s largest blockchains. Paying particular attention to bitcoin, Alex has conducted a number of studies into digital currencies and how their increased adoption is compounding issues of emissions and waste without being properly addressed.
I spoke to Alex about his environmental outlook on blockchains, particularly bitcoin, and what can be done to solve the problem.
Isabelle Castro – Hi, Alex, nice to see you.
Alex de Vries – Yeah. Good. Good to talk to you again.
Isabelle – Yeah, it’s been a while.
Alex – How are you doing?
Isabelle – I’m good. I’m good. Thank you. Now I’ve got a podcast. So this is all great.
So to begin with what gets you up in the morning?
Alex – Well, it depends on the day, but it usually is coffee.
Isabelle – Coffee is a lifesaver, right?
Alex – Exactly how it’s been. It’s been some crazy days slash weeks, especially on the crypto environmental front. I saw a thing a few days ago, there was a very interesting piece in The New York Times talking about emissions on the US grid and the situation with Bitcoin miners in Texas. And coincidentally, they’re also advancing new bill in Texas that is pushing back against the benefits of miners over there receiving So overall, these are very interesting times.
Isabelle – Yeah, I bet for your kind of focus. It’s super interesting, especially. Let’s start at the beginning what brought you to founding Digiconomist and focusing on tracking the environmental impact of blockchains?
Alex – Interestingly enough, I didn’t start out tracking the environmental impact of Bitcoin, I was actually writing about blockchains and cryptocurrencies in a more general way before. But then in 2016, I read an article from, from a journalist from I think motherboard, or five that wrote in 2015, the single Bitcoin transaction was responsible for consuming as much power as the average US household over a period of one and a half days. And I was thinking, Okay, that sounds pretty significant for something as simple as me just sending you a few coins. And I started looking into that I was like, Okay, why is no one talking about is writing about this, the most recent research I could find at the time was from 2014. And, you know, that was that was it, there was no live data, no one was really talking about it. And I figured, well, this, this is pretty significant. If you’re a user of the Bitcoin network, you should be aware about this. It’s not like you can find these numbers anywhere if you’re using because in the end, it is minus behind the screens paying for the energy bills that are responsible for a lot of electricity use, but as a user, you don’t you just don’t get to see that. So I figured, okay, you know what, this this, this sounds very significant. If Bitcoin gets adopted as any significant scale, these numbers are going to be exploding, and I want people to be aware about it. So that’s when I build my own Bitcoin energy consumption index, late 2016, and officially launched it at the start of 2017. And I’ve been providing live data on the energy use of the Bitcoin network ever since. And later I added other aspects. So I also looked into the carbon emissions of the network, the electronic waste generation of the network, but those were added later on.
Isabelle – Okay, yeah. Your tracker has been very helpful for me in writing certain articles.
So with this Texas news, how they’re resisting bitcoin mining, if miners are stopped there, what’s the likelihood they will just move? And what will be the impact of them resisting them?
Alex – Well, we know that miners are typically looking for the cheapest locations for getting electricity. And if they happen to get kicked out of one location, there’s a dangerous move to the next best one, and actually, tax isn’t looking to kick them out, but take some of their benefits, which may still lead to them moving away anyway. But as when it comes to, you know, these miners being kicked out of a location. We’ve seen that happen before in the spring of 2021, China banned Bitcoin mining altogether. And that was actually one of the main reasons why mining in the US is now as big as it is. Because previously,
half to three quarters of the Bitcoin mining network was located in China and after these after they got kicked out of China, they had to relocate and they just ended up mostly in the US with in certain states like Texas, Kentucky, Georgia, which apparently offer a really sweet deals when it comes to electricity, which is the main thing they need to run their machines that is their main cost.
Isabelle – I mean, with this whole moving and making restrictions so that they move, isn’t there a risk of them going to places where I don’t know, carbon emissions aren’t easy to kind of get the information for or they’re not leaning more on renewable energies? Is this a problem? If they’re just going to move, how do we stop this issue?
Alex – I won’t likely mine is moving from China to the US already made. The carbon impact of the network bigger, you wouldn’t expect that coming from China simply because we know that China isn’t very clean overall. But if you look at what was going on, within China, we actually saw that these miners were moving around through China throughout the year. So during the wintertime, they were using coal based power. But during the summertime in the summertime, they actually move to the south of China, the provinces of the world, especially Swan in the south, offers a lot of access hydropower, during the wet season, they just produce too much. And it couldn’t just be exported from that region to the rest of the country. So these miners took advantage of that. And they were using clean power, at least during the summertime, before moving back to coal, during the dry season in the winter. But if you average it over the year, we saw that at the time miners were using, on average 40% renewable energy
when they moved to the US, and actually not just to the US and other popular location was Kazakhstan.
They ended up with a lot more fossil fuels in their energy mix. So the percentage of renewables probably went down from 40% to just 25%, which is actually more in line with the average for the US energy grid. And in Kazakhstan, minus Kazakhstan, they barely know what renewables are over there, just a few percent of the entire grid is powered by renewables, and the rest is mostly coal based. So that already made the impact of the network worse. And then you could of course, argue that maybe they’re now in locations where it’s easy to get information from them. But at the same time, there is currently still no requirement for them to give that information and it’s actually still a work in progress in the US. There was a new bill last year, introduced by Senator Markey, who was saying, Okay, we need to get information from minors, they need to start disclosing their energy mix, how much energy they’re using, and, and associated carbon emissions. But right, right now, as it stands, where, you know, there might be in the US, but we’re not getting that information from them. Yeah.
Isabelle – Yeah, I mean, a lot. When you talk to kind of people about the Bitcoin mining issue, a lot of them kind of come back with the argument that the energy consumption can come from renewable sources. I mean, it doesn’t sound like this is a realistic argument.
Alex – Yeah, this was actually addressed by the New York Times a few days ago. And they
more they explain how a grid typically works, or they explain that, on most rates, renewables typically get dispatched first. And this is especially how it works in the US. Because we’re in the middle of an energy transition, we’re already trying to go green. So that means renewables tend to get prioritized on those grids. But that also means that in a situation where we have limited renewables already said that on the US grid, the average percentage coming from renewables is just 25%. It means that if we are going to be adding demand, that demand is going to be sourced from the fossil fuels that we’re trying to use less of, because we’re already using the renewables.
And the New York Times explained this really well, if you account for this dynamic, you’re going to realize that probably 90% of or around 90% of the energy mix of the power used by Bitcoin miners in the US is going to be sourced from fossil fuels simply because the x the extra demand, they add on the grid, which is already they already used up the renewable energy supply. The additional demand is just going to be sourced from the backup source the fossil fuels that we’re trying to use less of.
I mean, you’re you focus on other blockchains, but your main focus seems to be Bitcoin
which the concern the consumption of Bitcoin dropped as part of the crypto winter and all that. But now it looks like it’s rallying, and the price is coming higher. Have you seen an effect on its energy consumption in the short term? Are you concerned about the future?
Well, the thing is in Bitcoin, the price is very closely related to the environmental impact of the network for the very simple reason is the the Bitcoin miners they get paid a fixed amount of Bitcoins per block. So every 10 minutes, a new block is created for the Bitcoin Blockchain in the mind, and that creates that block gets six point 25 Bitcoins, that amount stays the same, regardless of the price of Bitcoin. But obviously, the more valuable the bitcoin is, the more money they will be making, but at the same time, it also incentivizes them to spend more on resources, which is just hardware in the electricity. So what typically happens if there is a big run up in the Bitcoin price, we also see that miners just start spending more and more on hardware and electricity. And then obviously, the environmental impact of the whole network flies up.
And with the bitcoin price coming from a low of $16,000 per coin, to Well, currently around double at $30,000 per coin. That also means that the potential energy use of the network has already doubled.
We see that for example, if you look at the estimates provided by Cambridge, for December of last year, they were estimating the Bitcoin network was consuming around 80 terawatt hours of electrical energy per year. If you look at their estimate today, just several months later, their estimate has gone up to around 142 hours of electrical energy per year. And to put that in perspective, then you’re talking about half a percent of global electricity consumption. It’s a significant amount. It’s as much power consumption as a country like Argentina or even more than that.
And it’s also well, more than half of what all our data centers in the world are consuming, of course, excluding crypto mining. So all the data centers used by legacy financial infrastructure, Amazon, Google, Facebook, everything together, is responsible for about 205 terawatt hours of electrical energy consumption per year. Bitcoin mining alone is doing currently around 140. If you look at Cambridge, so and how that’s that’s the best guess estimate. Worst case, it might be almost double that.
Isabelle – Okay, and how does this compare to kind of like fiat movements, card movements, and all of that?
Alex – Well, the thing is, we don’t really have exact numbers for traditional finance. But what I can say is that we know that all data centers in the world are responsible for consuming to about 205 terawatt hours of electrical energy per year, which includes the data centers that support everything that happens in regular finance today. And if just 10% is being used to support regular, the traditional financial industry, it would already be a lot.
So in any case, the Bitcoin mining network is definitely responsible for more energy consumption than the surface of the traditional financial industry. But, of course, the volumes that are being handled vary dramatically, we see that the traditional financial industry is handling over more than 700 billion digital payments every year.
The Bitcoin network is doing around 100 million. That’s it. So you’re talking about something like 0.00 12% a very, very small percentage of our real our traditional institution payment volume.
And I think that’s what gets people upset. It’s it’s that extreme difference, not in just in terms of absolute energy consumption, but especially in terms of what are you getting back from that? You’re getting back a system that can do seven transactions per second at most theoretically, and in reality doesn’t even make a handful.
It is a completely negligible amount in the world of finance, but it is not a negligible amount of energy consumption, and this is why you end up with really large footprints.
Whereas in 2016, It was found that the single Bitcoin transaction was on average consuming as much power as a US household for one and a half days, the same metric nowadays, because of the increased energy consumption of the network would come down to the power consumption of a US household for a period of 30 days, we’ll have it will be comparable to the average power consumed for processing a Bitcoin transaction with a carbon footprint associated with that, which is going to be larger than taking, you know, a flight from London to New York per passenger.
Isabelle – Okay, this is Yeah, it sounds like a really, really big problem. I mean, is there anything being done to make it better? Is there anything that can be done?
Alex – Absolutely. It’s already been done in the largest competitor of Bitcoin Aetherium network last year, which is about the half the size of Bitcoin in terms of market value, and the market value of Aetherium is about half of that of Bitcoin. They were previously running on proof of work, just like Bitcoin, and also their environmental impact was about half of bitcoins environmental impact. And I guess most people heard less about that, because well, bitcoin is the largest polluter, so people tend to focus on that you may have heard about the environmental footprint of nfts. That was definitely related to ethereum running on proof of work, because a lot of people were using that platform to do NFTs.
Last year in September, they got rid of their proof of work mechanism, their energy intensive proof of work mechanism, and they replaced it with a more sustainable alternative known as proof of stake. And as a result of that, they reduced their power demand by at least 99 point 84%, which is a tremendous reduction. And that’s the worst case. In the best case, and so well over 99.99%.
Either way, it’s a massive reduction. And you could do the same thing in Bitcoin, this, there is no technical reason why you could not do the exact same thing. In Bitcoin, it’s just that in Bitcoin, you’re dealing with a community that tends to be more conservative, is there more resistant to the more they don’t like change? They don’t like changing Bitcoin? Because they actually see the lack of change as a thing that gives Bitcoin value. They say bitcoin is safe. Bitcoin is a store of value simply because it doesn’t make any big changes.
But that’s, it’s a social thing. It’s not a technical reason why you couldn’t be doing this on Bitcoin as well. Okay. So really, if they wanted to, they could go through the same processes there.
Isabelle – I’ve heard that there’s issues kind of there might be issues of security with that. Are these just kind of excuses?
Alex – Yeah, to a pretty big extent, yes. We, obviously we have seen ethereum going from proof of work to proof of stake. Now it’s been, well, almost a month ago, the system is still running, how we’re talking about a multi billion dollar network. And nothing crazy has happened in the time that they moved from proof of work to proof of stake. So the security concerns are definitely a little overblown. And I think a lot of people forget that Bitcoin and proof of work is definitely not looking perfectly secure, either. Because one of the big, biggest risk factors of the network is centralization. If you end up with a network that is, to a large extent, centralized, that presents a risk to the network, because that could potentially be abused, to do harm to the network, depending of course, to what extent, you managed to get control over the network. But I think a lot of people may have heard of the infamous 51% attack, if you are capable of getting a majority of what in bitcoins case, the majority of the computational power in the network, you could do, you could start doing stuff like paralyzing the network, you could prevent transactions from taking place, you can start double spending your own money.
And the more centralized network is, the bigger the risk of something like that happening. We previously saw that more than half of the network was located in China, which theoretically, gave China the opportunity to just take control over those machines within their borders, and do exactly what I just described, and that 51% attack.
They never did it. But you know, that doesn’t mean It’s not a risk. It’s a kind of like, you know, you’re driving around, and you’re not wearing your seatbelt and saying, Okay, well, driving without a seatbelt is perfectly safe. Just because I haven’t been in an accident in Bitcoin on proof of work isn’t looking great either.
Isabelle – I mean, with ethereum when they first moved to staking, it was kind of seen that it was quite a lot of stakers. Were in the US, I think it wasn’t over 51%. But it was quite a significant amount.
Alex – But there is also the issue, there is the risk of that happening as well with staking, is that not correct. So the majority attack is always a risk, it’s just how do you get to a majority that difference for proof of work proof of stake or proof of work, you obviously need a majority of the computational power, whereas in proof of stake, you need a majority of the stake, you need a majority of the coins put at stake in order to do harm to the network.
And then, of course, we have seen that a lot of people tend to use staking services, they leave their coins at a platform that does taking other servers, which tend to get a disproportionate level of control as a result of that. And we also see that a lot of those parties are based in the US. So you could say okay, there’s also introduces a lot of centralization, and if possible is good and natural, which is absolutely true.
In the end, ou’re getting the same result, except in a completely different way. And yeah, which which one is more problematic than that, that is more has more complicated discussion, you could say, in both cases is problematic because you don’t want centralization in either case. Which one is worse? Well, I guess the good news for ethereum is that regulators are kind of cracking down on staking as a service. They’re saying, Okay, you’re not allowed to do this, which kind of forces people to do staking by themselves, which is theoretically, good for decentralization. But yeah, we still have to see how this network is going to end up looking like handle might always be players who end up with a disproportionate amount of influence. But in all honesty, that is the same in bitcoins proof of work here, we see that there are miners who are capable of investing millions, if not billions of dollars into building out a mining facility. Now, of course, they also have a disproportionate amount of influence as well. So we’ll have to see how how staking develops over time. But you could say that at least for now, it appears solid enough to keep the ethereum network safe. Nothing crazy has happened since ethereum has moved from proof of work to proof of stake.
Isabelle – Well, that is promising. Just kind of one more question on this before I go to that end in questions.
Obviously, it’s not all about emissions, it’s about E waste. It’s about water consumption, which you mentioned that you track, as well. What has been the effect of Have you seen the effect of ethereum turning to proof of stake in those areas as well.
Alex – The downside of ethereum was the mining was done with graphic cards. And the thing with graphic cards is that they are general purpose equipment. So even though ethereum might have reduced the energy requirement on the network, it doesn’t mean that the graphic cards that were being used to do mining are no longer running, or they might just be repurposed to do something different.
So it doesn’t mean that all of those graphic cards just went to straight to the landfill that definitely not and that sadly, that kind of reduces the overall benefit that we had from ethereum moving from proof of work to proof of stake.
And it’s really hard to say exactly by how much because we have we can see how much the energy consumption of the same network went down but we can’t trace the machines to the new purpose that’s that’s a lot more difficult. So we don’t really now
If bitcoin were to ever make this switch as well, it would be a different story. So in bitcoins case people are using highly specialized equipment. They’re based on application specific integrated circuits. And those machines, they just can’t do anything. But mining Bitcoins, that is really they’re hardwired to do one task, and one test only. So if you move Bitcoin from proof of work to proof of stake, then yes, those machines will go straight to the landfill. And at least from an energy consumption perspective, that would be really good. From an E waste perspective, you could say, Okay, well, that does mean how you’re going to end up with a really big spike in electronic waste, at least for the moment when that switch is made, because machines will go to being useless overnight. And the moment you flip the switch from proof of work to proof of stake, all those machines are useless, and you can, you can immediately ship them to landfill.
But don’t forget that if bitcoin continues to run on proof of work, and that electronic waste generation is still taking place, people are still developing new and more powerful equipment all the time. And all the generations of specialized mining equipment are going to the landfill anyway, it’s just more spread out over time. So also there, it’s not a bad idea to move from proof of work to proof of stake, you just have to manage that spike in E waste that takes place. But otherwise, that spike would be more spread out over time, and would be more ultimately, simply because you continue being in that machine development cycle.
And well, I’m not really sure if I answered the question there.
Isabelle – You did. You did? I think so. What do you hope the digital asset landscape will look like in terms of sustainability in 10 years? In 10 years there’s the first net zero deadline and that kind of stuff.
Alex – I hope that you know, these crypto assets, will have gotten rid of their proof of work mechanisms a lot sooner than in 10 years from now. Especially given that we’ve seen that you can you can do this on a live blockchain ethereum showed that you can do this on live blockchain.
You can move from proof of work to proof of stake and how you can replicate that in Bitcoin. But if it takes another 10 years how we kind of need to cut our emissions today, not not in 10 years. So the sooner the better.
And then, well, if that’s taken care of, you will be mitigating the majority of the pollution coming from crypto assets, moving from proof of work to proof of stake cuts around 99.99% of the energy use. So it’s a very effective way in mitigating at least the biggest part of the environmental impact of these systems. Yeah, and again, I hope we get to that point well before the 10 year mark.
Isabelle – Yeah, so do I. So I, hopefully, more information will breed action.
What’s the what’s your favorite piece of advice that you’ve been given that you would give to someone else?
Alex – In general? I’m currently very focused on this on this topic. So what is the best general advice? Well, I think I think I don’t have any everyone if anyone has given me the this advice, but I would personally give the advice to you know, be Be persistent. Don’t give up because in all the years that I’ve been researching the energy consumption of the Bitcoin network, I have gotten a ton of negative reactions from the community.
They have it because the numbers get so big, it automatically looks bad, whatever you publish about this topic, and of course, it triggers a lot of angry reactions from the community. So you know, not not just for myself, but also to other researchers, no matter what topic they are working on. Don’t let those type of things distract you. Keep doing the good work.
Isabelle – Okay. I like that you are a living testament to that advice as well.
Curveball question, who do you admire most and why?
Alex – It’s a tricky question. I don’t think I ever tried to admire anyone because you know there’s always a risk you end up disappointed if you admire people too much like we have seen people admire the likes of Elon Musk and at the same time, even though Elon Musk has, for a long time been pushing the transition to electric vehicles at the same time he started supporting Bitcoin, which is kind of environmentally destructive. I personally, I don’t think you should be admiring anyone for the simple reason that it can be a disappointment if, if you get if you get too deep into that.
Isabelle – Everyone is human for sure. How can people find you online, follow you or maybe get in contact?
Alex – Or the best way would be to look on my website digiconomist.net or.com Whatever extension you like, and you will find my contact details there. I’m on Twitter, Linkedin. You can find me Alex de Vries by my own name, or my company, which is Digiconomist is also there.
Yeah. Pick one.
Isabelle – Perfect. Well, thank you so much for coming on the show today. I’ve really enjoyed our conversation as always. Have a good rest of your day.
Alex – All right. Bye.
Isabelle – As always, you can chat with me on my LinkedIn or Twitter at @IZYcastrowrites. But to access great daily content, check out Fintech Nexus on LinkedIn, Twitter, Facebook, or Instagram. You can also sign up for our daily newsletter, bringing news straight to your inbox.
For more fintech podcast fun, check out the website, where you can find more fascinating conversations hosted by Peter Renton and Todd Anderson.
That’s it from me. Until next time, enjoy your downtime.
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