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Since 2009, cryptocurrencies have been an innovation to watch and a subject of several debates. One such debate is its impact on our environment.
Now more than ever before, the sanity of this debate cannot be questioned as the world continues to battle with challenges posed by climate change. Scientists fear that 2050 climate change could displace millions of people from their homes if no drastic measures are taken.
Therefore, there is a need to explore the current environmental impact of cryptocurrencies and how it influences the emergence of eco-friendly crypto projects.
While fossil fuels have dominated environmental discussions, in the last few years, cryptocurrencies have begun to enter the fray. So much one might wonder if the concerns are exaggerated or might hold some truth.
Bitcoin’s environmental challenge: Weighing the costs of financial freedom
While Bitcoin is a powerful tool for decentralization and financial freedom, its critics point to its significant carbon footprint as a major flaw. BTC’s footprint is a product of the energy-intensive mining that mints it. Bitcoin mining is powered by the proof-of-work (PoW) consensus, which requires miners to solve complex math problems through powerful computers that utilize large amounts of energy.
Many argue that Bitcoin mining is becoming increasingly energy efficient, but a peer-reviewed study highlighted by TIME casts aspersions on these claims. Rather than the opposite, the study showed that Bitcoin’s use of renewable energy fell from 42% in 2020 to 25% in 2021. It also suggested that the regulatory crackdown in China, known for its abundant hydropower resources, may have played a role in this decline.
However, this study suggests that the environmental concerns surrounding Bitcoin mining appear to be more regulatory-based. Bitcoin miners have demonstrated their willingness to shift entirely to renewable energy sources, despite how expensive they are. The Bitcoin Mining Council reports that 60% of mining operations utilize renewable energy. On the other hand, the Cambridge Center for Alternative Finance estimates this figure to be around 40%. Regardless of the variations, these statistics emphasize miners’ dedication to embracing renewable energy. Nonetheless, the big question remains: will governments provide the necessary support?
Ethereum’s Proof-of-Stake: A game-changer for environmental sustainability
In its famous upgrade known as The Merge, Ethereum transitioned from PoW to the proof-of-stake (PoS) consensus and aimed to reduce its energy consumption by more than 99%. Ethereum’s goal was to create a more energy-efficient and eco-friendly environment. Now, over six months after, it is important to see if it succeeded.
We must trace Ethereum’s energy consumption before The Merge to do this. Data obtained from the Cambridge Digital Assets Programme revealed that between 2015 and the PoS transition, Ethereum’s electricity consumed approximately 58.26 TWh. To put this into perspective, Switzerland’s annual electricity consumption is 54.88 TWh.
However, following the transition to PoS, Ethereum’s power demand decreased significantly from 2.44 GW to a mere 224 kW, that’s a 99.991% decrease. Mission accomplished! This achievement is even more monumental considering that the Ethereum blockchain powers thousands of other crypto projects. It benefited the Ethereum network and influenced the rise of eco-friendly crypto projects throughout the broader crypto ecosystem.
Towards cultivating a sustainable crypto ecosystem
We can question the environmental safety of cryptocurrencies if we focus on Bitcoin alone. However, if we extend our viewpoint to other cryptocurrencies, we’d see that the crypto ecosystem is not lacking in sustainability. With Ethereum leading the march, 2023 saw several eco-friendly cryptocurrencies gaining attention.
One notable example is the Chia Network with its proof-of-space-and-time protocol. Transactions are validated through a process called farming, utilizing tech structures such as cloud computing and data storage platforms like AWS. Chia’s unique farming process allows it to consume only about 0.12% of Bitcoin’s annualized energy.
Similarly, Algorand has emerged as a key player in promoting a greener environment. Touted as the first pure proof-of-stake (PPoS) fundamental blockchain, Algorand took proactive steps in 2021 to offset its carbon footprint and monitor emissions through its partnership with ClimateTrade. This collaboration, coupled with Algorand’s PoS consensus, positions it as a more energy-efficient alternative to Bitcoin. In fact, a single Algorand transaction consumes just 0.000008 kWh of electricity compared to Bitcoin’s 1,206.52 kWh.
These examples, alongside projects like Solana and Avalanche, align with the objectives of the Crypto Climate Accord. This Accord, a coalition of industry stakeholders, aims to transition the cryptocurrency sector to 100% renewable energy by 2025. Through these collective efforts, the industry moves closer to achieving a greener and more sustainable crypto landscape.
Putting money in eco-conscious crypto
As crypto projects “clean” the earth by reducing its carbon footprint, it is also sanitizing its image in the eyes of investors. The environmental impact of cryptocurrencies can be a huge turnoff for investors, especially in this era of environmental, social, and corporate governance. (Recall that in 2021, Tesla halted Bitcoin payments citing environmental reasons.)
The European Central Bank stated that significant carbon footprints from cryptocurrencies could affect their valuation in countries or regions where green policies thrive. They further highlighted that if EU authorities are considering banning fossil fuel cars by 2035, it is unlikely that cryptocurrencies would be spared (that is if they still impact the environment significantly). This is even a notable aspect of the European Parliament’s Markets in Crypto-assets (MiCA) Regulation.
So where does this leave us?
Although Bitcoin, the pioneering cryptocurrency, has faced criticism for its significant carbon footprint resulting from energy-intensive mining, the industry is moving towards more sustainable alternatives. So, while there are valid concerns about the environmental impact of cryptocurrencies, the ecosystem is evolving to address these issues. The shift towards sustainable practices, exemplified by Ethereum’s transition to PoS and the emergence of eco-friendly crypto projects, demonstrates a positive pathway.
Governments also need to play their part in minimizing the costs of renewable energy. Through state efforts and by supporting projects that actively reduce their carbon footprint, the crypto ecosystem has the potential to contribute to a more sustainable future.