Peterly Gondre

You may have heard about companies deciding to implement “blockchain technology”, had a friend recommend you get into crypto, or heard about the environmental impact of bitcoin mining.

“Following the 2008 global financial crisis, the world’s first digital cryptocurrency (Bitcoin) was proposed,” states economic text, Blockchain Based Smart Grids. The crisis, and a surge of data breaches made consumers keenly aware that once a bank received their money and private information, they had no control or knowledge of what would happen to it. 

In a typical financial system, consumers open up an account with a major banking institution to store or transfer their money. The flow of currency is controlled by a central bank, such as the Federal Reserve in the US. 

A bank takes your money and account information and stores it in a central database, a large single network containing the information of every account created with that bank.

What is Crypto?

According to Investopedia, “A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.”

Crypto-currencies were created to be an alternative form of monetization, meant to avoid oversight from governments or banks, as a global digital currency.

Crypto-currencies attempt to achieve this independence by making their networks decentralized. In a decentralized network no government or institution controls the flow of money. 

Instead all account and transactional history is stored on a Blockchain. User information is stored across a large network of servers around the world. Each user has a copy of all the information. The information is encrypted, but transaction history is known to all users and added as a block on the blockchain. 

The blockchain system ensures validity through consensus. Everyone using the network knows the transaction history of the entire network, potentially ensuring that no one can game the system, as all others on the blockchain would decide to ignore the account with a discrepancy. 

Each transaction in the blockchain has to be validated before it can be completed. The validation process is designed to prove that each transaction is correct and avoid things like account discrepancies. The account holder that validates a transaction gets rewarded with new currency, ensuring a constant flow of tokens is added into the system.

There are two methods of validation: Proof-of-Work, and Proof-of-Stake.

Proof-of-Work

In the oldest validation method, used by Bitcoin and many much smaller cryptocurrencies, new tokens are handed out to the first user to validate a transaction. Users all over the world build up expensive computer rigs and compete against each other to see who can decrypt the code first. 

What they’re really doing is solving an elaborate math problem. With each block added, the problems become more complicated. The computer rigs made to mine bitcoin have to grow more elaborate in turn. RWB Consulting Engineers is just one of the companies contracted to create Whole warehouses of computers run 24 hours a day attempting to mine bitcoin. 

The system is inefficient by design because only one user actually gets anything for solving the puzzle. The rest get nothing.

The total yearly energy consumption of Bitcoin mining rivals and exceeds that of some countries. The University of Cambridge Centre For Alternative Science estimates the annual consumption to be over 100 TWh at time of writing. That’s more than the yearly energy consumption of the Philippines.

Proof-of-Stake

The Proof-of-Stake system was created as an alternative to the energy intensive mining of the Proof-of-Work. 

In Proof-of-Stake, a validator can stake, i.e. lock in, some of their crypto into the blockchain with the chance of being randomly selected to validate the next transaction on the blockchain.

Again, validating a transaction rewards a user with new tokens. The more tokens you have staked into the system, the more likely you are to be selected. 

Ethereum, the second largest cryptocurrency, currently uses the Proof of Stake System. And proponents tout it as a huge energy saving measure. According to the Ethereum website, “The switch to proof-of-stake means the energy expended by the Ethereum network is relatively small – on the order of 0.01 TWh/yr.”

That makes Proof-of-Stake orders of magnitude more efficient than Proof-of-Work’s current consumption of  100 TWh/yr.

Problems with Mass Adoption

In order for Cryptocurrency to be taken seriously as a form of monetization, it would have to get past some major hurdles.

As of right now the main value of crypto is as a trading tool. Users just buy in hopes of selling their coins for actual money at a profit down the line. The state of crypto then is controlled by a sort of “hype-based” economy.

This means the value of all crypto-currencies fluctuate, not on government interest but user interest. When people buy a crypto-currency, the value goes up, and when people sell the value goes down, invalidating claims of stability.

The transaction speeds of crypto are also unacceptably slow. According to crypto.com, “While Visa can process up to 24,000 transactions per second (tps), Bitcoin can only process seven tps, and Ethereum can handle 20 tps.”

The average transaction time for Bitcoin and other cryptos is actually much slower than those numbers would have you believe.

The speeds vary, but the average Bitcoin transaction takes about 10 minutes. And obviously there are far fewer crypto transactions than visa. Visa reports an average of 150 million transactions a day. It would take more than 17000 years for Bitcoin to complete that same amount at its current rate.

Environmental Impact

Going back to Bitcoin’s energy problem, the combined arms race to build better mining rigs to combat the complexity of the encryption puzzles has raised environmental concerns.

The Cambridge data collected on Bitcoin also includes the carbon dioxide (CO2) Bitcoin produces. Bitcoin mining produces 36.95 megatons of CO2 annually, comparable to New Zealand.

The Environmental Working Group is pressuring bitcoin holders to switch to the cleaner proof-of-stake system, their “Change the Code, Not the Climate” campaign will now intensify its efforts with $1 million in new online advertisements.”

But as of right now there are no plans for Bitcoin to switch. According to Cryptonomist, “no one has the power to arbitrarily change the Bitcoin protocol, and right now there is not a large majority of Bitcoin users who would accept such a radical change to it.”

Crypto Fraud

Money stored in traditional banks can be insured through the FDIC, crypto-currency has no such luxury. There is no governing body to facilitate it.

The decentralized nature of crypto means that currently, consumer protection measures are lacking. Decentralization goes hand in hand with deregulation.

That makes cryptocurrency an attractive target for scammers, especially online. The FTC reports, “nearly four out of every ten dollars reported lost to a fraud originating on social media was lost in crypto, far more than any other payment method.”

Many of these fraud attempts focus on the excitement of crypto as an investment tool.

Market Manipulation

Crypto-currencies cannot be manipulated in the most literal sense. No one person owns blockchain technology, so no one person has final say. But it can easily be manipulated by celebrities or influencers convincing their audience to buy into a new crypto to inflate the price.

New cryptocurrencies are launched constantly, and some of them pay or partner with a well know influencer to get a push in hype. Kim Kardashian was charged by the SEC in October 2022 for not properly disclosing the $250,000 payment she received for promoting a new crypto, EthereumMax, on her Instagram. She settled for $1.26 million, and the EtheriumMax token later lost 93% of its value.

Artificial hype building campaigns like this one try to get you emotionally attached to a volatile investments without considering the risks. They seem especially focused on targeting younger investors.