8mins read
Published on: Jul 29, 2024
#Crypto 360
Unlike PoW, a PoS consensus system requires validators to simply stake cryptocurrency, hence energy consumption is up to 99.95% lower compared to PoW. Can this be the key to crypto shifting to green principles?
Key takeaways:
• Bitcoin and other cryptocurrencies built on the PoW consensus mechanism tend to have concerning levels of energy use.
• Over 200 companies and individuals promised to stop using cryptocurrencies that harm the environment by 2030, promising to shift to green energy.
• Most of the newer digital currencies are implementing new consensus algorithms such as Proof of Stake (PoS) to mitigate the environmental effects.
• There are projects which are now reducing their carbon footprint by using renewable energy sources in their operations.
Many investors are willing to open their first position in cryptocurrency but are concerned about environmental issues and power consumption.
As more and more investors start valuing companies that prioritize environmental, social, and governance (ESG) principles—particularly the environmental aspect—the question arises: Is it possible for cryptocurrency to be sustainable?
The high energy consumption of Bitcoin is an inherent feature of how the Bitcoin network functions based on blockchain technology. The creation of new Bitcoins (BTCs), also known as “mining,” involves solving a set of mathematical problems known as “proof of work.” The operation is computationally intensive as miners try to be the first to solve these problems, which helps maintain the decentralised nature of the blockchain.
In response to environmental concerns, more than 200 companies and individuals launched the Crypto Climate Accord in 2020. The accord targets eliminating emissions from the industry by 2030, mainly by using renewable energy, to create a green cryptocurrency landscape.
Green crypto is a term used to describe cryptocurrency projects and activities that aim at sustainability and minimising the negative effects of blockchain technology on the environment, especially the proof of work (PoW) model employed by cryptocurrencies such as Bitcoin.
Those concerned over the environmental impact of crypto call for other consensus mechanisms such as proof-of-stake (PoS) or proof-of-authority (PoA), where instead of miners competing to solve a puzzle, validators or stakeholders are used, which is less energy-consuming. There are also green crypto initiatives that encourage using renewable energy sources in mining, implement energy efficiency in blockchain protocols, and adopt carbon offset practices to mitigate the carbon footprint of crypto mining.
Bitcoin mining is intensive, and miners are always working towards acquiring better and more efficient devices. With these devices evolving rapidly, the older ones become obsolete quickly. This rapid turnover also leads to increased carbon emissions and the disposal of I.T. equipment containing toxic materials that can pollute water. Ultimately, these parts find their way into incinerators, which are detrimental to the environment and cannot be solved by renewable energy sources.
Proof of Work (PoW) is a consensus system that requires a lot of computational power to solve puzzles and mine new coins. These cryptographic computations are quite resource-intensive and have a high carbon footprint. Even though ASICs are developed to minimise energy usage in mining procedures, they still consume a lot of energy.
On the other hand, newer cryptocurrencies are implementing better and more efficient consensus mechanisms such as the proof of stake (PoS). The PoS mechanism has very low energy consumption as the process of creating blocks and rewards relies on the stake held by the participants in the network. This system has evolved into more complicated forms like Delegated PoS, Nominated PoS, and Mutualised PoS.
Some current networks deploying different types of PoS consensus include Cardano, Polygon (MATIC), and Polkadot (DOT). Some companies, like Genesis Mining in Iceland, utilize renewable energy sources to power their cloud mining operations as part of sustainable practices.
Concerns over energy usage in the crypto industry and regulatory crackdowns in countries like US, China, and India are forcing the industry to change. In response, blockchain projects are considering measures like switching to less energy-consuming consensus mechanisms or using green energy for mining. Ethereum is a prominent example that shifted from the proof-of-work to the proof-of-stake algorithm to decrease energy consumption by 99.95%.
Unlike PoW, PoS chooses validators based on the amount of the project’s native tokens they stake in a smart contract. The more tokens staked, the higher the chances of being chosen to update the blockchain. Like mining, new tokens are distributed among validators but with much less computational power needed.
This makes it easier for more people to become validators, increases the decentralisation and security of the network, and reduces the energy needed to sustain the network. Plus, there is growing pressure to reduce cryptocurrency's carbon footprint due to increasing financial penalties.
The negative impact of blockchain and cryptocurrencies on the environment is massive; thus, many developers and enthusiasts strive to address the issue. Efforts such as the Crypto Climate Accord are planned to achieve the full transition of all the blockchains to renewable energy sources by 2030.
They have even prepared a 32-page audit to estimate the influence of cryptocurrencies on the environment. In its recent report, in which the council engaged 32% of the Bitcoin network, members stated that 67% of the energy they use in mining is renewable.
Some mining operators, like Equinor and Crusoe Energy, use idle conventional power plants or gas from oil drilling that would have otherwise been burnt to generate electricity for their mining process. However, critics have pointed out that this does not cut down on the emission of other pollutants but only transfers them to another sector and could draw more exploration for oil.
An attempt has also been made to fully ensure that mining operations are run on renewable energy sources like solar or wind energy. For example, the Houston-based technology solutions provider Lancium revealed in 2022 that it would be investing $150 million in renewable mining facilities. Despite the seeming positivism of the idea, concerns arise about the financial viability of building new renewable energy plants to support cryptocurrencies.
The Merge, Ethereum’s key upgrade, switched from the proof-of-work (PoW) consensus to the proof-of-stake (PoS), reducing energy consumption by more than 99.5%. The goal was to create a more energy-efficient and environmentally sound system. Thus, it is important to assess whether this goal was achieved six months after it was set.
To understand the impact of the merger, we must consider Ethereum’s energy consumption before the Merge. The Cambridge Digital Assets Programme showed that Ethereum used from 2015 to switch to PoS. Half of that amount is 26 terawatt-hours (TWh) of electricity. To put it into perspective, Switzerland’s yearly electricity consumption of 54.88 TWh.
After the Merge, Ethereum’s power usage plunged from 244 GW to as low as 224 kW, a decline 99.991%. This is a rather sharp reduction, considering the Ethereum blockchain has thousands of crypto projects based on it.
Except Ethereum, some new cryptocurrencies have incorporated renewable energy and other unique models of transaction validation, requiring massively less energy than the previous forms.
Cardano is an open-source cryptocurrency that uses the proof-of-stake consensus algorithm and is based on a peer-reviewed protocol invented by the co-founder of Ethereum. Instead of mining new coins, users buy Cardano coins to become part of the network, which is much more efficient than mining, or PoW. This also helps Cardano accommodate more users without having to consume much energy.
Stellar is another energy-saving blockchain that facilitates global payment using lumen (XLM) as its cryptocurrency. Its consensus mechanism is faster than PoW and PoS and uses a group of trusted nodes to check the transactions. This allows people to swap traditional and digital assets for the Stellar network and use it to facilitate cheap and fast cross-border payments.
Nano, which has been around since 2015, is also low energy. It is not based on mining but employs what is known as a ‘blockchain lattice’ in which every user on the Nano network has his/her blockchain. The transactions are executed through Open Representative Voting (ORV), in which the representatives of the network are validators. This means that instead of transacting on the main network blockchain, they can transact directly on their blockchains, which is time and energy effective.
These are examples of some of the cryptocurrencies developed with environmental protection in mind. They show how the model of transaction validation and the emphasis on the use of renewable energy sources can decrease the negative impact of cryptocurrencies and blockchain technology. Still, there is a challenge of e-waste from previous mining activities, but these non-PoW cryptocurrencies may reduce the need to establish large mining farms in the future, hence reducing this this waste.
Cryptocurrency projects that are trying to make the world cleaner by reducing their carbon footprint are also improving their image in the eyes of investors. This is especially important for investors, especially at a time when environmental, social, and governance (ESG) factors play a crucial role.
At the end of 2021, Tesla decided to suspend Bitcoin because of environmental issues. The European Central Bank has pointed out that cryptocurrencies' high carbon footprint may affect their value in regions that focus on green policies. They have also noted that if the EU is mulling over a ban on new fossil fuel cars by 2035, then environmentally unfriendly cryptocurrencies may be in for a similar treatment.
This concern is among the major subjects discussed in the European Parliament’s Markets in Crypto-assets (MiCA) Regulation.
Bitcoin has come under a lot of criticism due to the energy consumption required for mining. However, the trend is slowly shifting to finding more eco-friendly products within the industry. Cryptocurrencies indeed have adverse environmental effects, but the sector is working to address these challenges.
The transition of Ethereum to a Proof of Stake (PoS) model and the increase in environmentally conscious cryptos are encouraging. Therefore, funding projects that can reduce the crypto industry's carbon footprint can contribute to making the world greener.
Some ways through which cryptocurrency can be made more environmentally friendly include switching to a new consensus model such as PoS and ensuring that mining is done using renewable energy.
The Crypto Climate Accord is a program in which more than 200 institutional and individual investors pledged to reduce the crypto industry’s greenhouse gas emissions by 2030; the majority will achieve it with the help of renewable energy.
Bitcoin mining uses about 120 TW each year and is a major source of carbon footprint and e-waste.
Unlike PoW, a PoS consensus system requires validators to simply stake cryptocurrency, hence energy consumption is up to 99.95% lower compared to PoW.
Some of the green cryptocurrencies are Cardano, Stellar, Nano, Hedera Hashgraph, and Gridcoin. They apply less power consumption and focus on using green energy.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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