Bitcoin (CRYPTO: BTC) has gained popularity especially in recent years. This was a breakthrough year and the cryptocurrency is now trading at around $ 47,000. Many large investors have started investing money in the cryptocurrency, including The Motley Fool.
However, investors have raised concerns about the environmental impact of cryptocurrency for good reason. According to the University of Cambridge in England, Bitcoin mining uses more energy than alphabet, Apple, Facebook parent Meta platforms, and Microsoft combined. Before we look at green alternatives to bitcoin, let’s dig deeper into bitcoin’s energy consumption.
The environmental impact of Bitcoin
Bitcoin uses a decentralized ledger system. This means that there is no central point to record and validate transactions made in Bitcoin. Instead, the transactions are validated by miners who verify transactions that are bundled in a block. Essentially, computers have to solve a problem in order to mine bitcoin that also validates transactions on the ledger.
This process is known as proof of work, but this method of validating transactions is very resource-intensive due to the processing power required to perform it.
An analysis by the University of Cambridge found that bitcoin mining consumes 121 terawatt hours per year. For comparison: According to the US Energy Information Administration, the average US household consumes 11,000 kilowatt hours per year. Converted to kilowatt hours, Bitcoin consumes 121 billion per year – this corresponds to 11 million US households.
Other cryptocurrencies use different methods of verifying transactions, which is why not all cryptos are as energy-intensive as Bitcoin. We’re exploring three green alternatives to Bitcoin: Stellar lumens (CRYPTO: XLM), ether (CRYPTO: ETH), and Cardano (CRYPTO: NO).
1. Stellar lumens
Stellar is a cryptocurrency that was split off from Ripple in 2014. This crypto got its initial funding from financial services company Stripe, and other Stellar supporters include Google, BlackRock, and IBM. Stellar focuses on being a payments network, much like Visainstead of focusing on a quick price hike like many of the meme coins we’ve seen this year.
The network uses the Lumens token to facilitate transactions on its network. Instead of using proof of work to verify transactions, Stellar uses the Stellar Consensus Protocol (SCP). It works like this: Individual users download Stellar’s software to validate transactions. These users with the software are known as nodes on the network. The nodes are used to update the ledger. If the nodes match, a consensus is established, the transaction is validated and the ledger is updated.
This consensus mechanism means transactions can be completed in five seconds or less and validation costs just a few cents. So while Bitcoin consumes 1,575 kilowatt hours per transaction, Stellar only uses 0.00022 kilowatt hours per transaction, making it a much more efficient cryptocurrency and better for the environment.
Ethereum is the second largest cryptocurrency after Bitcoin and is working to drastically reduce its energy consumption. However, the cryptocurrency currently uses a significant amount of energy per year and is not much more efficient than Bitcoin. It consumes 96 terawatt hours a year, more electricity than Belgium or Finland consume each year. With such a high energy consumption, why should Ethereum be on this list?
The founders of Ethereum want to reduce the energy used to validate and record transactions. You acknowledge that the network is currently badly bloated, meaning that the network is almost at full capacity, making it slow and difficult to do calculations and build on the network. It still uses a proof of work, similar to Bitcoin. However, the cryptocurrency is moving to the proof of stake.
The proof of stake doesn’t require that much computing power and energy. Instead, it works like a lottery system. You use your Ethereum coins. The more coins you wager, the higher the chance that you will be selected at random to validate transactions. If validators cheat or accept bogus transactions, they lose their stake. This gives these users an incentive to accurately record transactions.
Ethereum plans to switch completely to a proof-of-stake method in 2022, which will reduce its energy consumption by 99.95%.
If you don’t want to wait for Ethereum to lower its energy consumption, there is an alternative that is already more efficient. Cardano is a cryptocurrency that was developed by Charles Hoskinson, one of the founders of Ethereum. This cryptocurrency is used for digital contracts, similar to Ethereum.
One thing that makes Cardano so efficient is that it can process 1,000 transactions per second, compared to Bitcoins 7 per second. This cryptocurrency already uses the Proof of Stake to validate and record transactions. This method is similar to what Ethereum is transitioning to, but without the same bloat as Ethereum.
As a result, Cardano can scale larger without sacrificing speed or efficiency, and helps reduce energy consumption. Cardano says it uses 6 gigawatt hours of energy annually, roughly the same as serving 600 US homes a year.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all reflect critically about investing and make decisions that will help us get smarter, happier, and richer.