Bitcoin (BTC -3.54%) has exploded in popularity, especially in the last couple of years. This has been a breakout year, and the cryptocurrency now trades at around $47,000. Many big investors have begun allocating money to the cryptocurrency, including The Motley Fool.
However, investors have expressed concerns about the cryptocurrency's impact on the environment, and for good reason. According to the University of Cambridge in England, Bitcoin mining consumes more energy than Alphabet, Apple, Facebook parent Meta Platforms, and Microsoft combined. Before looking at green alternatives to Bitcoin, let's dive more into Bitcoin's energy consumption.
The environmental impact of Bitcoin
Bitcoin uses a decentralized ledger system. That means there is no central agency to record and validate transactions made in Bitcoin. Instead, the transactions are validated by miners, who verify transactions that are bundled into a block. Essentially, computers must solve a problem to mine Bitcoin, which also validates transactions on the ledger.
This process is called proof of work, but this method of validating transactions is very resource-intensive because of the computing power needed to carry it out.
In an analysis by the University of Cambridge, it was found that Bitcoin mining consumes 121 terawatt-hours per year. To put this figure in perspective, according to the U.S. Energy Information Administration, the average U.S. household consumes 11,000 kilowatt-hours per year. Translated into kilowatt-hours, Bitcoin uses 121 billion per year -- the equivalent of 11 million U.S. households.
Other cryptocurrencies use different methods of verifying transactions, which is why not all cryptos are as energy demanding as Bitcoin is. We'll explore three green alternatives to Bitcoin: Stellar Lumens (XLM -1.84%), Ethereum (ETH -3.87%), and Cardano (ADA -4.73%).
Image source: Getty Images.
1. Stellar Lumens
Stellar is a cryptocurrency that forked off of Ripple in 2014. This crypto got its initial funding from the financial services company Stripe, and other backers of Stellar include Google, BlackRock, and IBM. Stellar is focused on being a payments network much like Visa, instead of focusing on rapid price appreciation 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. Those users with the software are called nodes in the network. The nodes are used to update the ledger. If the nodes agree, a consensus is made, the transaction is validated, and the ledger is updated.
This consensus mechanism means that transactions settle in five seconds or less and cost only pennies to validate. So while Bitcoin uses 1,575 kilowatt-hours per transaction, Stellar uses just 0.00022 kilowatt-hours per transaction, making it a much more efficient cryptocurrency and better for the environment.
2. Ethereum
Ethereum is the second-largest cryptocurrency behind Bitcoin and is working toward drastically cutting down its energy consumption. However, the cryptocurrency currently uses a significant amount of energy per year and isn't much more efficient than Bitcoin. It uses 96 terawatt-hours annually, more power than Belgium or Finland use in a year. With such high energy use, why include Ethereum in this list?
The founders of Ethereum are looking to reduce the energy used for validating and recording transactions. They acknowledge that there is a lot of bloat to the network right now, meaning the network is near full capacity, making it slow and difficult to perform computations and build on the network. It still uses proof of work, similar to Bitcoin. However, the cryptocurrency is transitioning to proof of stake.
Proof of stake doesn't require so much computational power and energy. Instead, it works like a lottery system. You stake your Ethereum coins. The more coins you stake, the better the chance you will be randomly selected to validate transactions. If validators cheat or accept false transactions, they will lose the stake they put up. This incentivizes those users to accurately record transactions.
Ethereum plans to transition entirely to a proof-of-stake method in 2022, which it says will reduce its energy use by 99.95%.
Image source: Getty Images.
3. Cardano
If you don't want to wait for Ethereum to cut its energy use, there is an alternative that's already more efficient. Cardano is a crypto 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 handle 1,000 transactions per second, compared to Bitcoin's 7 per second. This cryptocurrency already uses 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 up larger without giving up speed or efficiency, helping it cut down on energy use. Cardano says it uses 6 gigawatt-hours of energy annually, about the same amount used to power 600 U.S. homes per year.
