Lessons from crypto assets for the design of energy efficient digital currencies

Abstract

This paper considers the energy profile of the main components and technological options of digital currencies, including crypto assets. Digital currencies differ widely in energy consumption depending on how they are designed. We draw on academic, institutional, and industry estimates of the energy use resulting from the processing and settlement of payments to compare digital currencies to each other and to existing payment systems. Results show that, depending on their designs, digital currencies have the potential to aid in reducing energy consumption compared to the current payment system. Energy efficient designs limit payment system actors and redundancies. For distributed ledger technologies (DLT), the key factors affecting energy consumption are the ability to control participation and the consensus algorithm. Estimates for prospective non-DLT digital currencies match the lowest energy consumption of the DLT-based designs. We discuss the relation between these findings and the energy profile of potential Central Bank Digital Currencies (CBDC) that are under consideration.