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Is crypto bad news for the environment? It’s complicated

Is crypto bad news for the environment? It’s complicated

Is crypto bad for the environment? It's complicated
OpinionSavings and investment

Zumo’s Amelie Aras writes that not all crypto is equal when it comes to the amount of electricity required to power the digital asset ecosystem.

Is crypto bad for the environment? It's complicated

Image source: Photo taken by Jack Juliussen at Pexels

One of the biggest criticisms of the crypto sector is its energy use. But ‘cryptocurrencies are bad for the environment’ is a broad and rather misleading statement.

It obscures a complex reality and fails in its duty to recognize the growing number of cryptocurrencies available and the various consensus mechanisms used to create them. CoinGecko is a data aggregator that tracks over 11,000 cryptocurrencies. It also tracks blockchain-based tokens. Many of these tokens have very different energy and underpinning technologies.

One of the major differences is in how the crypto network is secured and decides which transactions are legitimate. This is known as the consensus mechanism.

Proof of Work and Proof of stake are two of the main methods. Below is a table that compares and briefly discusses each of these methods.

Evidence of work 

Miners must dedicate computing power to solving complex puzzles in order to verify transactions and add them to the blockchain. For solving the puzzle correctly, miners receive a reward (in new coin and transaction fees).

Mechanism: The more valuable the mining reward, miners will want to join the network. This increases the combined computing power and competition, as well as the difficulty of the puzzle and – ultimately – electricity consumption.

People are motivated to invest more energy and resources to achieve the reward, as long as the value of the reward is increasing.

Benefit: A strong, intrinsic monetary incentive to work for the network security. With increasing network value, decentralisation (through network involvement) increases.

Drawback: Security and network resilience are a significant expense.

 

The Proof of Stake

Validators must own and stake a certain amount of native coins in order to verify transactions and add them to the blockchain. Transaction fees are paid to validators for creating new blocks in randomised processes. 

Mechanism:All network validators verify and confirm transactions within a block. One of these pseudo-randomly selects one to create the block, and is paid the block reward (weighted according to certain factors, usually the stake size). The consensus is not proof of work done; it comes from an economic stake in a network. 

Benefit:There is less energy consumption than PoW because the rewards are distributed according the financial stake in the network, as opposed to a mining process that is based on the competition for computing resources. 

Drawback:Debatable shortcomings in immutability. PoS systems are unable draw on the sheer energy costliness PoW mechanisms and the accumulated computational effort behind them.

A PoW blockchain like Bitcoin may consume around 101 Terawatt Hours of electricity per year (TWh), which is roughly equivalent to the energy draw for a country like Malaysia and Sweden. However, a PoS Blockchain, such as Tezos, could have an equivalent annual consumption rate of just 0.00006 TWh. That’s quite a difference.

When we’re talking about crypto’s environmental challenge, we’re really talking about Bitcoin and other prominent PoW blockchains, which involve energy-intensive crypto mining.

See Also

It is important to note that not all electricity used for mining Bitcoin is drawn directly from a grid. A mining rig can be used in any location where there’s cheap electricity and a moderate bandwidth connection. This means the more savvy Bitcoin miners are now making use of important sources of electricity that would otherwise go to waste – such as stranded renewables.

These two points show the lack of understanding that blocks the path to a more open and rational debate to move us forward. The crypto-carbon footprint is a highly-partisan issue. It is not possible to make meaningful progress on the critical challenge of decarbonisation without collaboration, collective action, and open discussion.

As an industry, we’re only just beginning to understand blockchain’s potential impact. To realize its full potential and to be widely adopted by society, crypto must address its carbon footprint. However, we must also remember to highlight the inherent benefits it offers in this area.

Technologically speaking, crypto has a relatively straightforward decarbonisation path ahead of it compared to many other sectors – not least due to its data transparency and defined energy inputs – but this depends on the entire ecosystem, including miners, exchanges and holders, working together.

Renewable electricity can be used to decarbonize crypto. There are no complicated supply chains, no deeply embedded ways of working, and we know where the impacts are. This puts us miles ahead of traditional finance, which has a complicated web of financed emissions to manage.

These are positive signs that the industry is working to maximize these benefits. It’s been well-reported that Ethereum is pivoting from a PoW to a PoS model, and at COP26 Blockchain for Climate Foundation launched the BITMO Platform, an innovative new tool to help countries achieve their climate goals. The tool allows signatories for the Paris Agreement, to issue and exchange carbon credits (NFTs), on the Ethereum Blockchain.

As crypto has moved away from Bitcoin, so has it diversified away from any single application. Decentralised finance, blockchain gaming, NFTs: these are comparatively recent trends – ones that didn’t exist when Bitcoin was created, but ones that potentially change the factors of the energy-utility equation.

We’re a young and agile sector, and we have a huge opportunity to show the world how an entire sector can successfully decarbonise. We must seize this opportunity.

 

AltFi is not responsible for the views and opinions expressed.

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