Opinion Savings And Investment

Is crypto bad for the environment? It's complicated

Not all crypto is created equal when its comes to how much electricity is needed to power the digital asset ecosystem, writes Zumo's Amelie Arras.

a factory with smoke stacks

Photo by Jack Juliussen from Pexels

One of the main criticisms levelled at the crypto sector is its energy consumption. But ‘cryptocurrencies are bad for the environment' is a broad and rather misleading statement.

It masks a much more complex reality and fails to do justice to the growing variety of cryptocurrencies that exist, and the differing consensus mechanisms used to create them. The data aggregator CoinGecko tracks nearly 11,000 cryptocurrencies and blockchain-based tokens, many of which differ hugely in their underpinning technology and energy usage.

One major difference is in the way the crypto network in question is secured and agrees which transactions are legitimate, otherwise known as the consensus mechanism.

Two of the main methods are Proof of Work and Proof of Stake. These are briefly discussed and compared in the table below.

Proof of Work 

For transactions to be verified and added to the blockchain, miners are required to dedicate computing power to solving a complex puzzle. Miners are rewarded (in newly-created coin as well as transaction fees) for being the first to correctly solve the puzzle.

Mechanism:The greater the value of the mining reward, the more miners want to join the network. This increases the combined computing power, the competition, the difficulty of the puzzle, and - ultimately - electricity consumption.

If the value of the reward on offer continues to rise, people are incentivised to spend more energy and more resources to get that reward within the parameters of profitability.

Benefit: A strong inbuilt monetary incentive to do the work of keeping the network secure, with increasing decentralisation (through network participation) as the value of the network increases.

Drawback: Security and network resilience comes at a significant energy cost.

Proof of Stake

For transactions to be verified and added to the blockchain, validators need to own and stake a certain number of coins native to that network. Validators are rewarded (in transaction fees) for creating a new block as part of a randomised process. 

Mechanism: All network validators check and confirm the transactions within a given block; of these, one is selected pseudo-randomly to create the block and receive the block reward (weighted by certain factors, generally the size of the stake). In a nutshell, the consensus comes not from proof of work done, but from an economic stake held in the network. 

Benefit: Less energy consumption compared to PoW as the rewards are distributed according to the financial stake held in the network as opposed to a mining process based on the competitive expenditure of computing resources. 

Drawback: Debated shortcomings in immutability, as PoS systems are unable to draw on the sheer energy costliness of PoW mechanisms, and the accumulated computational work behind them.

Whereas a PoW blockchain such as Bitcoin, for example, may have an annual electricity consumption of around 101 Terawatt Hours (TWh), roughly equivalent to the energy draw of a country like Malaysia or Sweden, a PoS blockchain, like Tezos, may have an equivalent annual consumption 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.

It should also be noted that not all electricity used to mine Bitcoin is drawn directly from the 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 highlight the lack of understanding that obscures the path to the more open and reasoned debate required to move us forward. The carbon footprint of crypto is a partisan and highly-emotive issue, and meaningful progress on the vital challenge of decarbonisation will only be achieved through collaboration, collective action and open dialogue.

As an industry, we’re only just beginning to understand blockchain’s potential impact. For crypto to reach its full potential, and be widely adopted by society, the sector does of course need to address its carbon footprint, however, we must remember too to focus on the inherent advantages it has 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.

The decarbonisation of crypto can be easily achieved by using renewable electricity. There are no complex supply chains, no deeply entrenched ways of working, and we have a clear understanding of where the impacts are. This puts us streets ahead of many other sectors, including traditional finance, which has a complex web of financed emissions to deal with.

There are positive signs the industry is working on maximising these advantages. 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 to the Paris Agreement to issue and exchange carbon credits as non-fungible tokens (NFTs) on the Ethereum blockchain.

In the same way that crypto has diversified away from Bitcoin, so too has it diversified away from any one 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 make sure we take it.

The views and opinions expressed are not necessarily those of AltFi.

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