Life After 'The Merge': Can Crypto Go Green?

By Josh Gregory on Thursday 29 September 2022

OpinionAlternative LendingDigital BankingSavings and InvestmentCrypto

Sugi's Josh Gregory argues to say crypto is going truly green - for the moment - may be wishful thinking.

Life After 'The Merge': Can Crypto Go Green?
Image source: Shutterstock

Many view crypto’s environmental footprint as one of its biggest flaws. But changes are afoot. Last week the crypto world was buzzing as Ethereum, the second largest cryptocurrency by market value, upgraded to a more environmentally friendly mode of production (known as the 'Merge'), which should mean 99.99 per cent fewer carbon emissions.

So some are starting to ask, is crypto now truly ‘green’?

By way of background, the original crypto algorithm, ‘proof of work’, is incredibly energy-intensive. Ethereum, which is also used by other blockchains and decentralised apps, has moved to ‘proof of stake’, which operates in a much more energy-efficient way. On the face of it, this should lead to a substantial decrease in the overall emissions of the crypto ecosystem.

But not so fast. There are two major issues which mean that crypto will struggle to rebrand itself as green.

First of all, bitcoin, by far the largest cryptocurrency, is still created and transacted using the energy-intensive proof of work algorithm. That’s baked in as part of bitcoin’s core function; it’s not going to change. And mining bitcoin has a massive footprint. Some estimates put it as 191 tonnes of carbon per bitcoin - the equivalent of chopping down 13,000 trees. Each day the bitcoin network uses as much energy as Norway.

For the environmentally conscious bitcoin investor, there are a few options to mitigate this footprint. The Crypto Climate Accord, an industry body founded in 2021, encourages mining operations to use more renewable energy, and soon one will be able to look for bitcoins labelled as such. It’s also possible to buy carbon credits to offset the footprint of your bitcoin portfolio, either separately or as part of the bitcoin purchase itself.

This brings us on to the second, more systemic, issue. The environmental footprint of crypto is calculated in a limited way that doesn’t take into account important indirect emissions that are increasingly included when calculating the impact of other types of investment. 

What does that mean? We conventionally consider a company’s carbon emissions using three different ‘scopes’, or to put it another way, using three, ever-larger circles. These are Scope 1 (the emissions a company creates when it produces things); Scope 2 (the emissions from its electricity providers); and Scope 3 (the emissions from all its suppliers and all the eventual users of its products). Scope 3 is often the largest proportion by far.

Although no one would argue that crypto is a company, its production and use does have important indirect impacts, which should not be excluded. Indeed, the Crypto Climate Accord suggests treating crypto like a company when considering its impact.

Let’s use the example of bitcoin. Its Scope 1 emissions are negligible, as bitcoin is not physically ‘mined’ in the same way that other commodities are. On the other hand, its Scope 2 emissions can be enormous, covering the vast amount of electricity used by the servers and air conditioning units of a mining outfit.

And then there’s Scope 3, most of which is never considered.

Who are the ‘suppliers’ to bitcoin? 

Well, the computers that mining groups use, for starters. These pieces of equipment can have long, complex supply chains, with components assembled across the globe, including rare earths mined in difficult-to-reach places. And because bitcoin, by design, requires miners to solve progressively harder mathematical problems, computers and their components must be frequently disposed of and upgraded.

What about downstream usage? Bitcoin is not ‘used up’ like a conventional commodity or product, but it certainly has an onward life, being part of perhaps thousands of onward transactions validated by the mining network, each of which may emit up to 500kg of carbon.

Finally, we can look at the centralised exchanges, such as Coinbase, on which many crypto enthusiasts hold their wallets. These have their own carbon footprints from servers, electricity, air conditioning, etc. They are a significant part of the crypto network and to ignore their footprints would be negligent.

In the regular investment world, we speak of greenwashing. There’s a potential for that here too.

Of course, bitcoin’s egregious and very public carbon footprint should not obscure the fact that the regular banking system has a footprint too: all those draughty bank branches, rooms full of servers to manage online banking, and even the mining of metal to produce coinage.

Due to Ethereum’s core position within crypto and the larger blockchain ecosystem, the Merge will probably make a difference to crypto emissions. And this may be enough to persuade some institutions to come off the fence when it comes to investing.

But to speak of truly green crypto may be - for the moment - wishful thinking.

 

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

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