Bitcoin’s rise from the ashes
last week, 39-year-old Najib Bukele, the president of El Salvador legalised bitcoin as official tender. people can now use bitcoin to buy a pack of bread, pay for utilities, and whatever else they like.
after Bukele’s announcement, Bitcoin’s value jumped over 10% within a few hours of trading. in February, it became the fastest asset to reach a $1 trillion market cap, beating the likes of Google and Amazon.
recently, however, Bitcoin and other cryptocurrencies have been criticised for their impact on the environment. Bukele was lauded when he said that the country planned to set up Bitcoin “mining” plants that will be powered by renewable energy sourced from its volcanoes.
Bitcoin’s acceptance in El Salvador will force the world to take cryptocurrencies seriously.
let’s get the basics right. cryptocurrencies are built on a network of millions of computers that process transactions on a blockchain — an encrypted digital ledger that maintains a record of every single transaction. nothing ever escapes this ledger.
every time a full block is mined i.e. a certain number of transactions are processed, fresh tokens are created and those that run the machines are rewarded proportionately to their computing power.
Bitcoin is one such digital token which was envisioned as a decentralised system to rival banks.
everyone wants to mine as much cryptocurrency as they can. there are millions of people running mining machines across the world. the business model will only work when the cost of producing a Bitcoin is lesser than the value of the Bitcoin. thus miners prefer cheap electricity, generated from fossil fuels, to run their machines. which is perhaps why instead of being spread evenly across the world, 70% of Bitcoin mining was reportedly concentrated in China.
the use of coal for generating electricity, however, results in carbon dioxide and other harmful emissions. a Nature study claims that the continued adoption of Bitcoin under present conditions could push global warming above 2°C within three decades. and that is not good news. to put this in perspective, the International Energy Agency found that Bitcoin’s annual electricity consumption stood at around 120 terawatts per hour per year (TWh/year). that’s more than the total energy consumption of Argentina.
there are different methods of creating tokens. Bitcoin follows a Proof of Work (PoW) mechanism, and in this, all systems are engaged in mining the block, with the one fastest to complete the calculation reaping the reward. so essentially, the only way to ensure you keep mining more Bitcoin is by investing in more computing power which inevitably consumes a lot of electricity.
there’s another mechanism titled Proof of Stake (PoS). here, instead of miners, you have validators. these validators lock up some of the cryptocurrency (say Ethereum) as a ‘stake’ in the ecosystem. this essentially showcases ‘skin in the game.’ these validators bet on the blocks that they feel will be added next to the chain. When the block finally gets added, the validators get rewards proportional to what they staked. inevitably, since not all systems are rushing to solve a computational puzzle but instead taking turns to do so, a lot of energy is conserved. as the mining process is also centralised, renewable energy sources can be used to generate this with lower carbon emissions.
if cryptocurrencies really are the future, there’s a certain pressure they’re facing to switch to greener production methods. the good news? it’s working.
Ethereum, which is the second-largest cryptocurrency, will switch from PoW to PoS soon. Bitcoin is also adapting. many Central and South American nations, endorsed by their governments, have decided to encourage the use of renewable energy to mine cryptocurrency. Scandinavian countries are getting into the act as well. it may even encourage other industries to leave carbon-based power behind for good and embrace a greener future.
Bitcoin's journey from a speculative asset to one that is officially recognised as legal tender by a nation has been anything but smooth. its journey ahead now lies in converting some of its harsher critics by moving to greener mining methods. it's a tough road ahead, but if there's anything to learn from its meteoric rise so far, it's to leave room for possibility—a lot of room.