Expert says crypto currency collapse unlikely to reduce climate impact | cryptocurrencies

One economist has warned that while the environmental footprint of digital currencies is theoretically determined by their market value, the crypto crash will not reduce the industry’s impact on the climate anytime soon.

“Unless Bitcoin crashes further, there is no reason to expect a reduction in environmental impact,” said Alex de Vries, a data scientist at the Dutch central bank and founder of Digiconomist, which monitors the sustainability of cryptocurrency projects.

His research shows that while a rise in the price of a cryptocurrency encourages it to allocate more computing capacity – increasing carbon emissions – it takes a long time for that capacity to disappear after the value drops, so the climate impact remains.

Cryptocurrencies work by validating their transactions through a large number of “miners” who use their computers to solve extremely complex mathematical problems in exchange for a chance to receive coins as a reward, in an extremely energy-intensive process.

De Vries estimates that the bitcoin network uses around 204 terawatt-hours (TWh) of electricity per year; this is the same as Thailand’s energy consumption and the same as 23 independent countries’ energy consumption.

Other cryptocurrencies are contributing to this footprint: even dogecoin is carefree, while the token ethereum, which supports the NFT boom and the “decentralized finance” sector, has an annual footprint of around 104TWh (equivalent to Kazakhstan, more than all but 34 countries). Famous for the positive attitude of its community, the bitcoin byproduct consumes an estimated 4TWh per year.

Despite $1 trillion being wiped out of the crypto sector, these numbers have remained virtually unchanged in the past month, and the amount of other processing power devoted to “mining” has similarly declined slightly.

All major cryptocurrencies use electrical power roughly proportional to the price of the token, as it determines the value of the reward given to the miners. For bitcoin, for example, the reward for successful mining is 6.25 bitcoins every 10 minutes – currently around $210,000.

The higher the value of the prize, the more energy it is worth using to earn it, allowing the bitcoin price to rise from $8,000 in October 2019 to $60,000 two years later, while also increasing the industry’s energy use. 73TWh to its current high.

But while the rise in the price of the cryptocurrency has led to a rapid increase in the industry’s carbon emissions, a crash like the one seen last month does not do the opposite. “It likely stops the environmental impact from escalating further,” De Vries said, “but a bitcoin price of $25,200 is enough to sustain annual electricity consumption of 184TWh.”

A stablecoin, as the name suggests, is a type of cryptocurrency that must have a fixed value of $1 per coin. How they achieve this varies: the biggest ones like Tether and USD Coin are effectively banks. They hold large reserves in cash, liquid assets and other investments and use these reserves to maintain a fixed price.

Others, known as “algorithmic stablecoins,” are trying to do the same, but without any reserve. They have been criticized for being effectively supported by ponzi schemes because they need constant cash inflows to ensure they don’t collapse.

Stablecoins are an important part of the cryptocurrency ecosystem. They provide investors with a safer place to store capital without the hassle of fully withdrawing cash and allow assets to be denominated in fiat currency rather than other highly volatile tokens.

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What is stablecoin?

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A stablecoin, as the name suggests, is a type of cryptocurrency that must have a fixed value of $1 per coin. How they achieve this varies: the biggest ones like Tether and USD Coin are effectively banks. They hold large reserves in cash, liquid assets and other investments and use these reserves to maintain a fixed price.

Others, known as “algorithmic stablecoins,” are trying to do the same, but without any reserve. They have been criticized for being effectively supported by ponzi schemes because they need constant cash inflows to ensure they don’t collapse.

Stablecoins are an important part of the cryptocurrency ecosystem. They provide investors with a safer place to store capital without the hassle of fully withdrawing cash and allow assets to be denominated in fiat currency rather than other highly volatile tokens.

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This is because the cost of mining cryptocurrency is divided into two main areas: purchasing hardware and paying for electricity. When prices rise, miners buy new computers – expensive graphics cards for ethereum or purpose-built “rigs” for bitcoin – but once established, it’s only worth turning them off when the cost of electricity is higher. more than expected income.

In an article published in the journal Joule last year, de Vries predicted that a major crash in the bitcoin price again by $8,000 would be necessary to significantly reduce mining’s overall emissions, and could sustain an energy even then. consumption up to 60TWh per year.

The ongoing turmoil in the cryptocurrency markets means the industry may need to contract further. On Wednesday morning, Tether, a stablecoin that effectively functions as a bank, paid another $1.5 billion to depositors who pulled their cash from their vaults. Last week, the slow-moving bank run saw the withdrawal of $9 billion in reserves, more than 10% of its total market capitalization, and more than double the cash on hand it announced at the start of the year.

Andreessen Horowitz, a leading venture capital firm and one of the crypto industry’s key financial backers, said on Tuesday we could enter a “crypto winter”, echoing a warning from Coinbase CEO Brian Armstrong that valuations could be low. depressed for a while.

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