Is crypto bad for the environment? It is complicated

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OpinionSavings and investment

Not all cryptos are created equal when it comes to the amount of electricity needed to power the digital asset ecosystem, writes Amélie Arras of Zumo.

Image source: Photo by Jack Juliussen from Pexels

One of the main criticisms leveled at the crypto industry is its power consumption. But “cryptocurrencies are bad for the environment” is a broad and rather misleading statement.

It masks a much more complex reality and does not do justice to the growing variety of existing cryptocurrencies and the different consensus mechanisms used to create them. Data aggregator CoinGecko tracks nearly 11,000 blockchain-based cryptocurrencies and tokens, many of which differ wildly in their underlying technology and power consumption.

One major difference is how the crypto network in question is secured and accepts which transactions are legitimate, otherwise known as the consensus mechanism.

Two of the main methods are proof of work and proof of stake. These are briefly discussed and compared in the table below.

Proof of work

In order for transactions to be verified and added to the blockchain, miners must devote computing power to solving a complex puzzle. Miners are rewarded (in newly created coins as well as transaction fees) for being the first to correctly solve the puzzle.

Mechanism: The higher the value of the mining reward, the more miners want to join the network. This increases the combined computing power, competition, puzzle difficulty, and – ultimately – electricity consumption.

If the value of the reward offered continues to increase, there is an incentive for people to spend more energy and more resources to get that reward within profitability parameters.

Benefit: A strong monetary incentive built in to ensure grid security, with increasing decentralization (through grid participation) as the value of the grid increases.

Disadvantage: the security and resilience of the network have a significant energy cost.

Proof of participation

In order for transactions to be verified and added to the blockchain, validators must own and put into play a number of native coins from that network. Validators are rewarded (in transaction fees) for creating a new block as part of a random process.

Mechanism: All validators in the network verify and confirm transactions within a given block; of these, one is pseudo-randomly selected to create the block and receive the block’s reward (weighted by certain factors, usually the size of the stake). In short, the consensus does not come from proof of work accomplished, but from an economic stake held in the network.

Advantage: Less power consumption compared to PoW because the rewards are distributed according to the financial stake held in the network as opposed to an extraction process based on the competitive expenditure of IT resources.

Downside: Debated immutability shortcomings, as PoS systems are unable to take advantage of the power cost of PoW mechanisms and the computational work accumulated behind them.

While a PoW blockchain like Bitcoin, for example, can have an annual power consumption of around 101 terawatt-hours (TWh), roughly equivalent to the power consumption of a country like Malaysia or Sweden, a PoS blockchain, like Tezos, can have an equivalent annual consumption of only 0.00006 TWh. It is quite a difference.

When we talk about the environmental challenge of crypto, we are actually talking about Bitcoin and other leading PoW blockchains, which involve energy-intensive cryptocurrency mining.

It’s also worth noting that not all of the electricity used to mine Bitcoin is coming directly from the grid. A mining rig can be used anywhere where there is cheap electricity and a moderate bandwidth connection. This means that the most savvy Bitcoin miners are now using significant sources of electricity that would otherwise be wasted, such as stranded renewables.

These two points highlight the misunderstanding that obscures the path to the more open and reasoned debate necessary to move us forward. The carbon footprint of crypto is a partisan and highly emotional issue, and significant progress on the vital challenge of decarbonization will only be achieved through collaboration, collective action, and open dialogue.

As an industry, we are only just beginning to understand the potential impact of blockchain. In order for crypto to reach its full potential and be widely adopted by society, the industry must of course address its carbon footprint, however, we must also remember to focus on the inherent advantages it has in this area.

From a technological standpoint, crypto has a relatively straightforward decarbonization path ahead of it compared to many other sectors – not least because of its data transparency and defined energy inputs – but it depends on the whole. of the ecosystem, including miners, scholarships and holders, working together.

Decarbonization of crypto can be easily achieved using renewable electricity. There are no complex supply chains, no deep-rooted ways of working, and we have a clear understanding of where the impacts lie. This gives us a head start over many other sectors, including traditional finance, which must manage a complex web of funded issues.

There are positive signs that the industry is working to maximize these benefits. It has been well reported that Ethereum is moving from a PoW model to a PoS model, and at the COP26 Blockchain for Climate Foundation has launched the BITMO platform, an innovative new tool to help countries achieve their climate goals. The tool allows signatories to the Paris Agreement to issue and trade carbon credits in the form of non-fungible tokens (NFTs) on the Ethereum blockchain.

In the same way that crypto has diversified away from Bitcoin, it has also diversified away from a single app. Decentralized finance, blockchain games, NFT: these are relatively recent trends – the ones that didn’t exist when Bitcoin was created, but the ones that are potentially changing factors in the energy-utility equation.

We are a young and agile industry, and we have a huge opportunity to show the world how an entire industry can successfully decarbonize. We have to make sure we take it.

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