Short Wave - Cryptocurrency Is An Energy Drain

Episode Date: April 25, 2022

As cryptocurrencies become increasingly popular, the environmental impact of the technology is gaining more attention. Local, state and national governments are trying to figure out how to regulate the massive amounts of energy that some cryptocurrencies consume.Short Wave host Aaron Scott and producer Eva Tesfaye are joined by Planet Money reporter Alexi Horowitz-Ghazi who unpacks what cryptocurrencies are, how the technology works and why it all sucks up so much energy. Check out the episodes of Planet Money and The Indicator that Alexi mentioned: - Bitcoin Losers: What happens when you lose access to your bitcoin - n.pr/3La5y6x- Such Cryptocurrency. So Amaze.: The origin of Dogecoin. - n.pr/3k5sg3S- The $69 Million JPEG: A record-breaking NFT sale. - n.pr/3rM2iGBSee pcm.adswizz.com for information about our collection and use of personal data for sponsorship and to manage your podcast sponsorship preferences.NPR Privacy Policy

You're listening to Shortwave from NPR. Erin Scott, have you or a loved one ever been confused by the concept of cryptocurrencies, NFTs, and or Bitcoin? Am I in a crypto commercial here, Shortwave producer Eva Tesfi? Just play along, Aaron. Well then, yes, Eva, I find everything about blockchain technology bewildering. I see. Seriously, though.

I mean, sometimes it seems like the more I read about crypto and blockchain, the less sense it makes. Same. One thing I've read about it is that crypto has a large impact on the environment. But I never really understood exactly how. But lately there's been a lot of action taken on it. Some countries are cracking down on cryptocurrencies, in part because of its environmental toll. Let's get back to China's increasing crackdown on crypto. It looks like they've gone absolute.

And a bill in New York State would put a moratorium. on something called crypto mining, which is a concept that's really important to this discussion. The mining ban is back. It failed in the last session and it has reemerged. And one of the biggest cryptocurrencies, Ethereum, plans on changing up their whole system in order to be more eco-friendly. Three months from now, Ethereum is going to undergo the merge, an upgrade that will switch off the proof-of-work consensus mechanism and replace it with proof of stake. Proof of work, proof of stake. What are they talking about? Don't worry.

It will all make sense by the end of the episode because we're bringing in reinforcements. A special guest from Planet Money, NPR's economics podcast, is going to help us out. Ooh, I love a good team up. Me too. Today on the show, we're going to find out how cryptocurrencies work. We're going to learn a bit about their underlying blockchain technology and why it all sucks up so much.

energy. But there's so much to cover we can't do it all in one episode. So we're going to break it into two episodes over two days. I'm Erin Scott. I'm Yvaheufi. And you're listening to Shortwave, the Daily Science CryptoCast from NPR. Okay, Aaron, so the world of the blockchain can be really confusing. So I asked our friends at Planet Money, who have done a ton of reporting on this to help us out. Say hi to my crypto brother from another mother, Alexi Horowitz. It's Ghazi. It's his official title. Hello there.

Alexi, it is a pleasure to have you join us. Hi, Aaron and Eva. I like to think of us as a big happy crypto family. So thank you for having me. We're tied together by the blockchain. Yeah. Okay. So, Alexi, you've done quite a bit of reporting on crypto over at Planet Money.

So to start us off, could you just explain as best you can what is cryptocurrency? Okay. So cryptocurrencies are kind of virtual currencies that are supposed to be. decentralized and independent from, you know, traditional financial or banking institutions or governments. The one people usually think of, the first one is Bitcoin, but there have been thousands invented since then, including, you know, Ethereum and Dogecoin, which actually started as a joke. Wait, a joke? Yeah, the originator basically made them as a kind of way of poking fun at this craze around cryptocurrencies. And before he knew it, they had actually, you know,

blown up, become a huge, real, ridiculously valuable currency, in part with the help of a lot of tweeting from Elon Musk. And this is Doge isn't like the little like Shiba dog meme. Yeah, the little Shiba Minos speaking ungramatically. Okay. So as I understand it, part of how these cryptocurrencies work is with this thing called the blockchain. So I don't know about you, Aaron, but I feel like that's the hardest part for me to wrap my

head around. Yeah. I mean, my understanding basically is, you know, with our savings account or whatnot, it's our bank that is keeping track of our money. But in the case of the blockchain, it's like everybody is keeping track of our transactions, right? Right. So the whole promise of cryptocurrency is that it's decentralized. So you can think of this kind of giant open ledger system. You know, every user of a given currency has basically a copy showing the accounting of every transaction that's ever occurred within that system. So, for example, Eva, if you wanted to transfer, say, a Bitcoin to Aaron, I don't know what for. Basically, what you will do is you state your intention to transfer one Bitcoin across the system.

And what follows is this kind of mass accounting process where everybody inside the system updates their accounts to show one Bitcoin sliding from your account to errands. And that is basically the way that it's kept decentralized. There's kind of this open record that anybody can check. makes it very hard to manipulate or fudge the data in any way. There are so many backups. Okay. So when I transfer a Bitcoin, what's really happening is that all of the ledgers across the system are updated to show one less Bitcoin in my account and one more in errands. But what about crypto mining? What is that? Okay. So mining sounds very exciting. It sounds kind of gold rushy. But, you know,

there actually isn't any physical mining. In this case, there aren't, you know, pickaxes or or mine shafts. What mining refers to is the process by which a blockchain system validates the new transactions that are happening before they are entered into the permanent record. And this requires computers across the system competing to solve mathematical puzzles in order to participate. And then doing that allows you to validate the transactions, which then earns you more cryptocurrency, right? That's right. And the amount of power required to solve these puzzles has actually been changing over time. So when Bitcoin first started back in 2000, and nine, it took very little

comparatively energy and computing power to be able to solve one of these puzzles, which would help validate whatever the latest transactions were, and would actually create a new Bitcoin. You could do it basically on your personal home computer. But the more and more Bitcoin users there are, the more and more computers

attached to this network, the more difficult these mathematical puzzles become and the more computing power is required. So it's been growing and growing over the last decade and a half to the point where now Bitcoin mining or cryptocurrency mining is essentially an industrial activity. You need warehouses full of computer servers processing these randomized puzzles all the time in the hopes

of creating a new Bitcoin or other unit of whatever cryptocurrency you're using. And the way this algorithm works is called the proof of work system. And this proof of work system uses a lot of energy. Right. The Cambridge Bitcoin Electricity Index estimates that Bitcoin alone uses 142.84.84 terawatts annually of electricity. That would be more than the entire country of Norway. Wow. I feel like every time I hear those stats, it's a different country. It's crazy. I know. It's just gobbling up the globe. I mean, what it just tells you is this is a lot of energy. Yeah. Alexi, so far we've been discussing cryptocurrencies, but crypto advocates talk about

how blockchain technology can be used for all sorts of things, beyond just currency. One of the big things right now that's getting a lot of attention are NFTs or non-fundable tokens. Can you tell us a little bit about what they are and how they fit into this bigger power puzzle? Sure. So NFTs or non-fungible tokens are basically a way of using this same open ledger system, this blockchain technology, to attach basically unique barcodes onto digital files. So instead of Bitcoins or Doge coins, which are fungible in the way that cash is fungible, If we exchange them, there's no difference between the thing that we've exchanged. NFTs are designed to be unique and specific. So I can attach one particular NFT to one particular, I don't know, JPEG file or something.

And if I sell that file, it's shown in this open ledger system. You can trace everywhere that that file has been all the way back to the beginning since it was created. So this is basically what, you know, what we think of as provenance in the art market. It's a way of keeping track of the authenticity of any sort of given file. which could have all sorts of applications in the art world, but also beyond to all sorts of other forms of ownership potentially. The problem that people often raise is that NFTs exist on the Ethereum blockchain, which up until now has been one of these proof-of-work systems,

which means that it requires an enormous amount of electricity just to function. And that's because the proof-of-work system is the one that requires solving complex puzzles. So all these computers are sucking up energy in order to validate each time in an NFT is created and sold. And I've read that some artists have big reservations about this idea that their work is sucking up so much energy. Yes, there's carbon all over their hands. Right. Well, Alexi, if our listeners want to know more about cryptocurrency from a more economic perspective, they can check out Planet Money in the indicator, right?

Yeah, we have all sorts of reporting on this. We've done episodes on what happens when you lose access to your Bitcoin. We've done stuff on, you know, record-breaking sales of NFT. and even an indicator episode on the origins of the doge coin, that joke coin. Okay, well, this was super helpful for me. I don't know about you, Aaron. Yes, thank you. Yeah, thank you, Alexi, for coming here and explaining all this.

Thank you, my crypto family. So, Eva, Alexi explained why blockchain technology requires so much energy, and the main thing seems to be this decentralized process called proof of work, where all these computers around the world are processing each transaction. So if that's the problem, could they just change that aspect of the technology? Yeah, they can. So I learned that there is actually another way of validating transactions called proof of stake. To find out how it works, I talked to Iwasolami.

She's a law professor at the University of East London who focuses on financial tech. Cryptocurrency owners are required to put up their own cryptocurrency as collateral for the opportunity to be able to approve transactions. So instead of requiring people to solve complex mathematical puzzles, like proof of work does, proof of stake requires people to put up their own currency as stake and then randomly selects them to validate transactions, which is how they earn more currency. So basically it takes out all that complex number crunching that sucks up so much energy.

Exactly. It's a much more environmentally friendly process. that is actually deemed to be able to reduce the amount of energy that's currently consumed, so really very close to zero. Close to zero. That sounds great. So are there any cryptocurrencies that use proof of stake? Yeah.

So there are a few, including Solana, Terra, and Cardano. Alexei mentioned Ethereum earlier when he was talking about NFTs. That's another huge cryptocurrency second only to Bitcoin. And it plans on switching over to this more environmentally friendly proof of stake sometime this year. Okay, Eva, but I feel like I'm beginning to see a problem here because didn't Alexi tell us that one reason people are interested in cryptocurrency is that it's decentralized. So there isn't some small group of people controlling at all. And yet this proof of stake sounds like a smaller number of people are actually getting more power and more crypto just because they already have cryptocurrency. Yeah, so you've identified one of the issues with switching to proof of stake, and linked to that is security.

Iwasolami told me that proof of work is more secure because of decentralization. If something goes wrong with one computer, there are so many others keeping track that it's not such a big deal. But with proof of stake, that's not the case because there are fewer computers validating transactions. Which theoretically introduces greater risk for errors, or that people can make. manipulate the transactions. Yeah, that's what people are afraid of. We're coming to an end here, so to summarize, crypto was created to be a decentralized form of currency.

The way that's been done traditionally is by requiring other users, lots of other users, to validate transactions. That validation process, which involves complicated computer mathematical puzzles, takes up a lot of energy. What if they use clean-exam? Erin, my brain is about to explode after just explaining all of that. So let's save that question for tomorrow's episode. Perfect.

That's when I'm going to talk about other ways to clean up crypto. And we'll dive into more of its environmental impacts beyond energy consumption. So you're not getting rid of me yet. Not that I would ever dream of such a thing. I will see you tomorrow, Eva, for part two. See you tomorrow. This episode was produced by Eva Tesfai. Stephanie O'Neill was the editor and Catherine Seifer Check the Facts.

Giselle Grayson is our senior supervising editor. The audio engineer for this episode was Josh Newell. Thanks again to Alexei Horowitz Ghazi from Planet Money. We'll have links to the Planet Money episodes mentioned in the show notes. Neil Carruth is our senior director of On Demand News Programming, and Anya Grunman is our senior vice president of programming. I'm Eva Tesfi. I'm Aaron Scott.

Thank you for listening to show. Shortwave, the Daily Science podcast from NPR.