Despite the countless articles, videos and news stories, many consumers continue to be hesitant of cryptocurrency and its underlying blockchain technology. It can seem an opaque and complex system, of interest solely to shadowy groups for diabolical purposes. Yet, recently cryptocurrency has received attention from a more official group – The White House.
The US government recently revealed its first ever executive framework for managing the opportunities and risks of cryptocurrency.1* Whilst cautionary tales relating to fraud and theft get their expected due mention, you might also be surprised to hear that the environment took up its fair share of the document.
Most would not rank the environment as one of the most harmful impacts of cryptocurrency, if at all. But as consumers and businesses increasingly prioritise ESG, crypto’s potential harmful environmental impacts could be an increasingly heavy barrier to socially responsible adoption.
Crypto’s struggle to go green
Exactly how bad is crypto’s environmental footprint thought to be? Well… it’s not insignificant.
A single transaction of the world’s largest cryptocurrency, Bitcoin, has been estimated to emit the same amount of CO2 as an average family does in three weeks,2 or, on a lighter but no less significant note, could power all the tea kettles in the UK for 22 years.3 This would give Bitcoin a greater annual energy consumption than many nations, such as Malaysia or Sweden.4 Of course, such estimates are just that, as calculating the energy use of a system that is by nature distributed and decentralised amongst individuals is difficult. Regardless, most calculations err on the side of ‘a lot’ rather than ‘a little’ with, seemingly, good reason.
As the popularity of cryptocurrency increases and more people and hardware are used to create new digital coins and validate transactions (a process known as mining), these environmental impacts are set to increase.
However, last month the world’s second largest cryptocurrency, Ethereum, announced it was set to cut its energy consumption significantly in a development called ‘The Merge’. This could offer a pathway for other cryptocurrencies to become more environmentally friendly and significantly strengthen the case for adopting these technologies into a sustainable world.
The struggle for acceptance
The vision of a decentralised digital currency was conceptualised in the 80s. Early ventures including eCash BitGold and HashCash failed to stand the test of time but were important predecessors to the release of Bitcoin in 2009, the world’s oldest surviving cryptocurrency.5
Crypto’s main ‘claim to fame’ is its ability to transact without the need for a central authority to enforce cooperation between parties. Instead, honesty is maintained by the blockchain where transactional data (date/time, total value etc) is gathered, recorded as a ‘block’ of data and linked to the public ledger for anyone to see. This ledger, or chain, is stored in multiple copies on a decentralised network. For the ledger to be updated, the whole network has to agree.
Advocates argue this trustless mechanism provides a faster, safer and more efficient method of transacting globally. To hard-core believers, Bitcoin, Ethereum and the many digital coins that followed were the inevitable replacement for conventional fiat currencies (like the Aussie dollar).
Despite the hype, that imagined world has failed to materialise. Whilst the number of crypto holders and speculative transactions have exponentially increased since Bitcoin was first released 13 years ago, the average Joe or Jane can still no easier buy a donut than a house using cryptocurrency.
Unfavourable market conditions have played their part, as has the spectacular crash of certain digital coin values, the implosion of crypto lending companies and countless prolific scams.
And then there is the environmental issue.
A rigid environmental problem
Cryptocurrencies aren’t guaranteed by banks or governments. Instead cryptographic methods are used to validate transactions. Many cryptocurrencies, including Bitcoin, use a process called Proof of Work to do this. Here, validators (known as ‘miners’) use incredibly powerful computers to check a crypto transaction is valid and then add it to a ‘block’ before it is linked to the blockchain.**
These miners are constantly competing with each-other to validate user transactions, as the first to do so will be rewarded with Bitcoin. But to be first they need to solve complex mathematical equations – which use a lot of computer processing power, in the form of mining farms, to crack. The energy use can be so excessive that nations have banned mining altogether.6
As Proof of Work cryptocurrencies become more popular, the amount of energy they consume increases exponentially. Of course, where that energy comes from matters, and there is an argument that crypto already uses a substantial amount of renewable energy, but data on what that looks like varies wildly by study, citing anywhere from 25-60 percent.7 When taking into account renewable energy currently only provides around 29 percent of the world’s energy needs, it’s perhaps wise to be cautious of such claims.8
For many ESG-oriented businesses and consumers, blockchain being seen as environmentally unfriendly, even if the truth may be somewhat greener than thought, can be enough of a disincentive for adopting these technologies into their practices. And if of course certain blockchain types are environmentally unfriendly, that’s even worse.
How The Merge could solve the issue
Historically, the world’s second largest blockchain, Ethereum, has fallen onto the potentially unfriendly side – environmentally speaking – with some estimates suggesting it consumed the same amount of electricity as Chile in a given year.9 That’s set to change with Ethereum announcing the completion of The Merge, a painstaking project, seven years in the making, to transition from a Proof of Work system to a Proof of Stake system.
With Proof of Stake, instead of rewarding users with the largest and most energy intensive mining farms, anyone with a basic laptop can participate in, and benefit from, the verification of blockchain transactions. From September 15th 2022, any Ethereum holder that volunteers to put up, or stake, 32 ETH (Ethereum’s blockchain currency) is entered into a lottery.*** Randomly selected winners are then given the right to verify information and add their block to the blockchain.
Putting up that 32 ETH (around AU$75,432.96 at the time of publication) is similar to paying a deposit on a house, in that the user takes on risk to prove good faith. If the validator fails to validate a transaction, they may lose a small portion of their stake.10 If they deliberately validate a fraudulent transaction, they stand to lose it all. Alternatively, if they correctly validate information, they are rewarded with freshly minted Ethereum.
Whilst it’s too early to tell the exact environmental implications of this, Ethereum’s new model is estimated to consume 99% less energy.11 Indeed, Ethereum’s founder, Vitalik Buterin, declared The Merge had cut global energy usage by 0.2%.12 If accurate, it would make Ethereum’s Merge one of the largest decarbonisation events ever.13
The potential for change
If the environmental effects of the Merge play out, or indeed renewable energy becomes the main source of powering blockchain generally, it may give green conscious businesses and consumers cause to re-examine opportunities for crypto integration. Importantly, as Proof of Stake requires less specialist hardware and computing power, it can be significantly scaled without producing exponentially greater environmental damage. There is still a ways to go, as The White House notes, Ethereum only accounted for 20-39 percent of crypto-electricity usage in August of 2022. Bitcoin had the much larger lion’s share at 60-77 percent.14 Regardless, business leaders and consumers should watch the outcomes of The Merge and other blockchain claims closely. If the anticipated benefits are realised and expanded across other blockchain validation methods, it could help open up the door to greater adoption and a greener planet.
Source by www.pwc.com.au