Can cryptocurrencies go carbon neutral?

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June 03 2021
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As the volume of the conversation around the environmental impact of cryptocurrencies like bitcoin grows louder, new more eco-friendly blockchain solutions are looking to seize the limelight.

When it comes to carbon footprint, the greatest strengths of decentralised blockchain networks like bitcoin threaten to become weaknesses.

In terms of the electricity consumed by the maintenance and operation of the blockchain network, bitcoin transactions are significantly more expensive than other means of payment.

The reason for this is that bitcoin mining isn’t just an activity that introduces new bitcoins into the system, it’s fundamental to how the network processes payments.

At the most basic level, the blockchain rewards those who do the work involved with maintaining it. Bitcoin miners are competing to be the one who completes a complex mathematical problem and earn the right to place the next block in the chain.

Older blockchains like that of bitcoin or ethereum currently operate on this kind of system, called a proof-of-work system.

In this system, all the electricity used by the miners who did not solve the problem is essentially wasted. This is why the electricity consumed by the bitcoin network is so high.

The cost of doing business on the blockchain

Research by digiconomist.net founder Alex de Vries back in March suggested that the bitcoin network could consume as much energy as all data centres globally.

According to research done by Visual Capitalist, the annual power consumption of the bitcoin network totalled 129 terawatt-hours. If this blockchain was a country, it would rank 29th in the world for power consumption by that metric.

Some within the crypto world argue that the climate impact of the bitcoin blockchain is partially offset by the widespread use of renewable and/or “trapped” energy that would otherwise go to waste.

However, it remains the case that a world that doesn’t have to deal with this carbon footprint at all would probably be one that is closer to realising its decarbonisation goals.

An article on Nature.com puts the potential power usage of the blockchain in dire terms, claiming that “projected bitcoin usage, should it follow the rate of adoption of other broadly adopted technologies, could alone produce enough CO2 emissions to push warming above [2 degrees Celsius] within less than three decades.”

The quest to green crypto

While some groups like the Crypto Climate Accord have sought to shift the entire cryptocurrency industry towards renewable and sustainable resources by 2030 as a way of offsetting the network’s carbon impact, others have looked to build new and modify existing cryptocurrencies in a way that reduces emissions.

The main thrust of this is a proposed shift to what is called a proof-of-stake system.

Rather than mine new coins, users forge them by locking a pre-determined amount of crypto into the system. This is called staking and is somewhat similar to something like a traditional term deposit.

When it comes time to add a new block to the blockchain, proof-of-stake essentially works like a lottery. The larger someone’s stake, the greater the chances that they will be selected to forge a block.

While some newer cryptocurrencies like Cardano have opted to embrace a proof-of-stake model right out of the gate, others are eyeing a transition later down the line.

Under the proposed ethereum 2.0 revamp, the world’s second most popular cryptocurrency is set to migrate from a proof-of-work system to a proof-of-stake system.

According to the Ethereum Foundation, the shift to a proof-of-stake system will reduce the energy costs of the network by 99.95 per cent.

While some experts have suggested that a similar transition from proof-of-work to proof-of-stake may not be technically feasible for bitcoin, others insist that such a shift is only a matter of time.

“I’m sure, once the technology is proven, that bitcoin will adapt to it as well,” Niklas Nikolajsen, the founder of Bitcoin Suisse, said in an interview about ether’s transition to proof-of-stake.

When a market is growing as fast as the crypto one is, relying on renewables, linking crypto investment with carbon offsets and reducing the amount of wasted energy involved is only the first step towards a greener crypto economy.

As put by the director of the University of Edinburgh’s Blockchain Technology Lab, Professor Aggelos Kiayias, “being merely less resource-hungry compared to bitcoin is a rather low bar as far as ‘green’ technology is concerned”.

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

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