Crypto or Banks: Which is More Energy Efficient?

The high energy consumption of cryptocurrency mining is well known. Because any raw material you extract requires the use of energy. Whether it is physical gold, silver, copper or manganese or a virtual Bitcoin, Ethereum or Digibyte. A physical commodity gains its value when it is extracted from the mine, purified and made available as a high-quality commodity. A digital commodity gains its value if a new block has been calculated decentralized on a blockchain, declared valid and becomes available as a linked block. You can then mint coins from the available resource or use it as a token, a proof of value.

Giro is digital

Both the non-cash and cash forms of money are now also dependent on digital activities. To get money from an ATM or to process a credit card transaction, a lot of digital processes are performed. Each process and each network activity, in turn, also costs energy. Because we want to use less energy together, it makes sense to see what the ‘old’ banking system costs us in energy compared to cryptocurrency. You have to compare the energy consumption of Bitcoin with all energy aspects of the classic monetary system. Think of banknote production, ATMs, both for public and private retailers, card payments, Point of Sale payments and finally bank and interbank energy consumption in data centers.

Our banks do not have small data centers. On the contrary, they are one of the biggest customers in the IT world. Their data centers use enormous amounts of energy. Add to that all physical bank branches and employees and the banking industry is quite an energy-intensive industry. In addition, the production and storage of gold must also be counted. According to a study from 2022, the calculated energy consumption in the banking sector worldwide is around 5000 TWh. Compared to Bitcoin’s 89TWh, that’s 50 times more. Of course, bitcoin is much smaller than all bank payments combined. But these figures indicate that a bank payment and a crypto payment do not differ by orders of magnitude in terms of energy consumption. On the contrary…

Energy, information and handling are connected

An IMF blog states that crypto payments, especially if they become more energy efficient in the future, could well be the solution to greening the banking sector. Monetary authorities have a unique opportunity to improve their energy efficiency with this innovation. Policymakers must weigh energy needs against other benefits and risks when designing CBDCs or considering crypto regulation.

The new trend in the information world is characterized by decentralization. Also in the energy world, an increasing number of prosumers are demanding decentralized, grid-based infrastructures. Information and energy are the foundations of economy and prosperity, and this interconnected decentralization reinforces each other and even partially brings them together. Decentralized information and energy architectures require open and decentralized data management. Blockchain is increasingly seen as the solution to design and realize that decentralization from ‘a central vision’ – and therefore architecture. Together with NTFs for asset management, smart contracts as an internal algorithm and cryptoassets as a ‘utility payment’ for the costs of the internal and local network, computer and energy consumption.

Comparison

Digital currencies rely on distributed ledgers via blockchain to validate and record transactions. How much energy they use depends on two main factors. First, how network participants “agree” on transaction histories. Crypto-assets such as Bitcoin use a proof-of-work (PoW) consensus mechanism that requires significant computing power and energy to gain the right to update the transaction trail. Other cryptotypes use different approaches to their ledger updates that require (much) less computing power.

The second factor is how access to the distributed financial systems is arranged. Public blockchains are usually permissionless, allowing anyone to participate and validate transactions. Permissioned blockchains require permission from a central authority, which provides greater control over aspects of energy consumption, such as number of network participants, geographic location, and software updates.

Results

The IMF’s study of the energy consumption of digital currencies is based on academic and industry estimates for various processing techniques. The research shows that proof-of-work crypto uses much more energy than credit cards. Replacing proof-of-work with other consensus mechanisms is a first green step for crypto, and using consent systems is another. Together, these developments mean that the energy consumption of crypto is far below that of credit cards. Crypto and CBDCs can therefore be more energy efficient than existing payment systems.

Crypto is more eco than banks or gold mining

So if we compare gold mines or bank payments in terms of energy with the new cryptocurrency, crypto can turn out to be much more ‘eco’. This has been thoroughly researched and elaborated on in this blog. In an electrifying world, the energy consumption of cryptocurrencies is therefore not so bad. It is even more eco-friendly than the banking system and the gold mining industry. Partly because gold mining releases a huge amount of CO2. While crypto is increasingly working with green energy. Surplus wind or solar energy that cannot be used immediately can be used cheaply and green to mine new currencies. Seen this way, crypto is therefore a kind of monetary energy storage ????

By: Hans Timmerman (photo)

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