Bitcoin mining, the computationally intensive process by which bitcoins are created and accounted for, has become a global problem. After China clamped down on Bitcoin mining in mid-2021, miners looked to other areas of the world where energy is cheap but not always clean. In places like Kazakhstan, miners are putting pressure on power grids that rely heavily on carbon-intensive coal-fired power plants, causing local blackouts and fueling civil unrest. In upstate New York, where miners have taken over shuttered factories and empty warehouses, locals have complained about rising power bills and the high-frequency whine of data center fans — and worry about the environmental damage mining brings. The US currently hosts 38% of all Bitcoin mining operations.

One Bitcoin transaction uses the same amount of energy as one US household for nearly a month. But should it be so? The bitcoin community has historically been fiercely resistant to change, but pressure from regulators and environmentalists fed up with bitcoin’s huge carbon footprint could force them to reconsider that position.

A number of other countries, including Kazakhstan, Iran, and Singapore, have also imposed restrictions on crypto mining. In April 2023, the European Parliament is set to pass a landmark crypto bill called Markets in Crypto Assets (MiCA), which mandates environmental disclosures from crypto firms. The law is expected to take effect sometime in 2024.

This could be just the beginning for the EU: The European Central Bank previously said it could not imagine a world in which governments would ban petrol-engined cars in favor of electric cars but not act against bitcoins continuing to emit CO2. “Some members of the European Parliament are already wondering why Bitcoin isn’t following Ethereum,” Alex de Vries, the data scientist behind Digiconomist, a website that tracks cryptocurrency energy use, told MIT Technology Review .

Efforts to combat bitcoin waste are gaining momentum in the US as well. In November, New York became the first state to impose a temporary ban on new cryptocurrency mining permits at fossil fuel plants. The new law also requires New York to study the impact of crypto mining on the state’s efforts to reduce greenhouse gas emissions.

So what will it take to make the switch?

Proof of Work vs. Proof of Stake

Cryptocurrencies have no central custodian, like a bank, to oversee their public ledgers—a shared digital record of every transaction on the blockchain. Instead, they rely on consensus mechanisms to agree on updates. As proof-of-work, the approach that underpins Bitcoin, a global network of computers known as “miners” waste electricity trying to win a kind of lottery. Whoever wins can add the next block and collect new coins in the process. The probability of winning is directly proportional to the number of calculations the miner does. As a result, huge server farms have sprung up around the world dedicated solely to winning the Bitcoin lottery.

Proof-of-stake, the approach currently used by Ethereum, eliminates massive energy consumption. Instead of miners, proof of stake systems use a huge number of “validators”. To become a validator, you must deposit or “stake” a set number of coins – 32 Ether in the case of Ethereum. Staking allows validators to validate new transaction blocks and add them to the block chain so they can earn rewards in addition to their staking coins. The more coins you stake, the better your chances of being selected to add the next block of transactions to the chain.

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