Are cryptocurrencies more environmentally friendly than the current banking system?

Often, media reports claim that cryptocurrencies like Bitcoin are environmentally harmful due to their high energy consumption. However, this is not the whole truth. In fact, there are now cryptocurrencies that operate much more energy-efficiently, thereby significantly reducing environmental impact.

For example, Ethereum. The largest competitor to Bitcoin consumed an average of only 0.03 kilowatt-hours of electricity per transaction in 2022, which is 40,000 times less than Bitcoin. But how does this significant difference arise? And what makes Ethereum different from Bitcoin? The reasons lie in different algorithms.

The Bitcoin network operates without a central authority. It is not managed by a central data center like a bank but by thousands of interconnected computers around the world.

The anonymous inventor of Bitcoin, who goes by the name Satoshi Nakamoto, aimed to create a payment system where no one can freeze an account or alter the overall money supply, for example, by printing more currency. To achieve this, he integrated a sophisticated consensus algorithm known as "Proof of Work."

To operate this algorithm, the involved computers (referred to as "miners") must solve highly complex mathematical problems to confirm the validity of a transaction. This process requires enormous computational power and thus incurs high energy costs. Due to the significant energy consumption, Bitcoin's competitor Ethereum switched to a different consensus algorithm in 2021: the so-called "Proof of Stake."

In this model, instead of computational power, a monetary stake ("stake") is required to act as a validator to verify and confirm transactions. This significantly reduces energy consumption. For example, in 2022, the Ethereum network consumed 36,000 times less energy due to this new algorithm than streaming movies on Netflix.

Thus, the Proof of Stake algorithm offers a solution for drastically reducing the energy consumption of cryptocurrencies. It is expected that this relatively new algorithm will continue to gain traction, even though many Bitcoin users hold the "Proof of Work" in high regard. They reject deviations from it, as they see the decentralized structure as being at risk.

Which of the two systems consumes less energy? A direct comparison between cryptocurrencies and the traditional banking system is not easy. Accordingly, various studies come to different and sometimes contradictory results.

However, it is clear that cryptocurrencies operating with the Proof-of-Work algorithm consume significantly less energy than the traditional financial system. On one hand, the operation of the payment network itself is less energy-intensive, and often more transactions can be processed in a shorter time. On the other hand, there is no need to print banknotes and mint coins, or to maintain ATMs or operate branches, and so on...

Thus, payment systems are likely to be not only fairer and more transparent in the future thanks to cryptocurrencies but also significantly more environmentally friendly.