Anyone who watches the news or uses social media will be familiar with the ongoing energy crisis. As the cost of living soars in most countries, many of the most vulnerable communities face food shortages and supply chain disruptions. The world is undergoing a significant transformation in response to the COVID-19 pandemic, political turmoil, social unrest, and military escalations. The effect of these issues can be felt globally and sector-wide. In the Web3 and blockchain space, energy consumption has been a hot topic for several years. However, increased electricity prices appear to be playing a major role in shaping the future of the Web3 landscape.
Cryptocurrency mining often comes under fire for being energy intensive. After all, the Bitcoin network uses roughly the same amount of electricity as countries such as Sweden and Argentina. PoW (proof-of-work) mining requires specialized hardware for verifying cryptocurrency transactions and creating new coins. As PoW blockchains grow in size, they require more energy to validate transactions, raising questions about their sustainability. So, to remedy this, many prominent blockchains are opting for a proof-of-stake (PoS) consensus mechanism to reduce carbon emissions and facilitate ease of scaling. Nonetheless, increased electricity prices could disrupt even the most efficient and environment-friendly blockchains.
In this article, we’re going to dive deep into the effects of increased electricity prices on the blockchain industry. We’ll explore why energy prices are increasing, how it affects Web3, and what the blockchain industry can do collectively to address this issue.
Why are Energy Prices Increasing?
There are many factors at play involving the global energy crisis. Many analysts cite disruptions to global supply chains during and after the COVID-19 pandemic as major influences. During the pandemic, economic output was significantly low in almost every country. Some major energy suppliers had to close sites temporarily, while others experienced disruptions resulting from lockdowns, isolation, and staff illness.
In 2021, 40% of Europe’s gas and oil came from Russia. However, Russia’s invasion of Ukraine threatens oil and gas supplies throughout Europe and other parts of the world. As political tensions rise, many countries seek alternative sources heading into winter. As such, there is a substantial energy deficit to cover.
While this may seem concurrent with energy price increases, many onlookers believe that energy suppliers are simply taking advantage of recent events in the name of profit. Furthermore, it’s no secret that major energy suppliers continue to report record profits, despite the many efforts to justify the recent price hikes. However, the reasons for energy price increases likely stretch beyond a single factor.
How Do Increased Electricity Prices Influence Web3?
Most Bitcoin mining firms rely on huge amounts of electricity to validate transactions and generate new coins. The approximate 110 terawatt-hours per year the Bitcoin network consumes accounts for around 0.55% of global electricity production. Accordingly, many onlookers share concerns about the environmental impact of cryptocurrency mining. Nonetheless, the recent Ethereum 2.0 merge will see the number one smart contract blockchain transition from proof-of-work (PoW) to proof-of-stake (PoS). This move intends to substantially reduce the carbon footprint of the blockchain industry while increasing scalability and lowering transaction fees.
However, energy price increases are prompting a significant number of mining firms to source clean or renewable energy. The widespread use of solar by independent mining firms suggests that the industry is already moving away from energy grids and taking matters into its own hands. Furthermore, major energy suppliers are using excess and waste energy to mine cryptocurrencies rather than releasing them into the atmosphere.
As one of the most profitable companies in the world, Shell is at the forefront of global energy gas and oil supply. The British multinational company recently announced plans to move away from fossil fuels toward greener and more sustainable sources. With a target of reaching net-zero carbon emissions by 2050, Shell appears to be adapting to the shifting narrative around energy consumption.
Also, the company plans to utilize artificial intelligence (AI), the internet of things (IoT), and blockchain. Specifically, the firm intends to create a trustless framework for sharing sensitive data and generating new tokenized economies and markets. Furthermore, the use of blockchain technology could improve transparency, traceability, customer loyalty incentives, and efficiency. Plus, the initiative aims to encourage decarbonization at a societal level. Moreover, many Web3 projects use blockchain technology to tokenize carbon credits and offset carbon emissions. The adoption of blockchain by the energy sector could play a pivotal role in minimizing fossil fuels. In the future, we may see blockchain assisting in creating an immutable provenance history for “every electron”, according to Shell’s blockchain lead, Sabine Brink.
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Bitcoin Mining Profitability
Bitcoin mining is often compared to the 18th-century North American “gold rush”. The rapid influx of wealth generated by Bitcoin mining has undoubtedly changed the lives of many operators. However, rising electricity costs are jeopardizing Bitcoin mining’s profitability in many parts of the world. While some are adapting to 70% energy price increases by switching to less intensive mining methods, others are simply closing shop and selling their equipment.
Some experts predict that the cost of mining a single Bitcoin will be as much as $25,000 in 2022. In the first few years of inception, miners could use relatively modest laptops or computers to mine Bitcoin. However, the cost of an ASIC miner alone is enough to prevent most from entering the Bitcoin mining community today. Nonetheless, several initiatives aim to reduce Bitcoin’s reliance on fossil fuels. This includes an effort from Tesla CEO Elon Musk and other prominent technologists to create powerful solar mining farms using Tesla batteries.
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Concentration of Hash Power
If electricity was affordable globally, anyone could mine Bitcoin. However, electricity prices vary drastically between countries. As a result, Bitcoin mining is in danger of becoming something only available to the rich. The growing number of large-scale mining operations in North America has some analysts speculating on the potential concentration of hash power that could occur as a result of rising energy costs.
The trend for hash power concentration threatens the decentralization of the Bitcoin network. If a small number of mining farms control enough hash power, they can manipulate the network in a way that doesn’t benefit the Bitcoin community. If this happens, the primary value proposition of Bitcoin comes into question.
The Broader Impact
Many parts of North America have seen a surge in crypto mining over the last few years. In May 2022, Chinese officials announced the banning of cryptocurrency mining. This led to a mass exodus of hash power from China. Furthermore, it would soon be snapped up by US and Canadian mining firms. With many profitable energy rates throughout the continent, North America has become a hotbed for crypto mining. However, local residents and small businesses are feeling the knock-on effects of the crypto gold rush.
Some mining farms are driving up energy prices for nearby communities. What’s more, many crypto mining firms do not serve these communities and local economies in proportion to their energy usage. Estimates suggest that crypto mining farms in upstate New York are responsible for the $165 million increase in energy bills for small businesses and the $79 million increase for residents. Furthermore, this equates to a monthly energy bill rise of around $8 for individuals and $12 for small businesses.
Moreover, because Bitcoin and crypto mining profits are not distributed among the communities in which they reside, many analysts suggest mining operations could be a detriment to communities. As such, the socio-economic impact of crypto mining is becoming as much of a talking point as the environmental impact in the wake of increased electricity prices.
Market Cycle Disruptions
The recent cost of living and energy crises have unexpected consequences on both traditional and crypto markets. Several analysts predict that these disruptions may have a negative effect on the regularity of market cycles. Furthermore, the market-wide crash of March 2020 saw stock prices plummet significantly. Bitcoin and the broader crypto markets followed suit. However, the next 18 months were filled with record highs in almost every market.
Some argue that the rapid inflation of stock and crypto markets was inevitable after central banks created so much money out of thin air. After all, currency debasement often correlates with an increase in the valuation of stocks and commodities. However, the subsequent downturn following the November 2021 peak is proving to be longer in duration than many predictions would suggest. As such, many Web3 projects have run into financial difficulties as a result of the global economic downturn.
Furthermore, increasing energy prices are causing many businesses to downsize, including several prominent Web3 projects. Staff lay-offs and budget changes are present in every industry, including blockchain. Nonetheless, the investment and innovation taking place in Web3 show that blockchain is here for the long haul despite these disruptions.
Electricity makes up the vast majority of Bitcoin mining costs. As such, the price of electricity is directly linked to Bitcoin mining profitability. However, some analysts predict that Bitcoin mining operations must become more energy-efficient to remain profitable. That said, some researchers predict that increasing efficiency in Bitcoin mining could bring down the valuation of the number one crypto asset.
Though Bitcoin mining can thrive competitively in countries where geothermal, solar, and wind energy are prominent, some suggest that miners may have to offer their products at lower prices to remain competitive. Nonetheless, there is little in the way of evidence to suggest that the cost of electricity influences the price of Bitcoin or other crypto assets.
How Increased Electricity Prices Influence Web3 Technology – Summary
Despite the many pockets of cheap, “unclean” energy sources, most nations are experiencing increased electricity prices. As global energy prices continue to soar, many Web3 projects seek alternative energy sources to those present during the creation of first-generation blockchains. For example, the use of solar, hydro, and wind energy are becoming increasingly prominent for many independent mining companies.
The effects of rising energy prices can be felt sector-wide. While many businesses face closures due to rising costs, others are adapting to the new economic climate. However, although increased electricity prices are a considerable hurdle for those most affected, it does present an opportunity for the Web3 industry to become more sustainable and less reliant on electricity.
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