Sustainability of Cryptocurrencies
2020 was a breakthrough year for cryptocurrencies. Since then, many of my university friends have developed a keen interest in them. Proud of the share they owned in different coin projects, they never wanted to stop talking about their investment and the technology behind it.
Sharing their enthusiasm, I will consider cryptocurrencies from a different perspective -- environmental sustainability. Surely, sustainability is not the first thing you consider when investing in one. Knowing their environmental impact, however, can help you make a more future-proof prediction about their place in a more sustainable global economy in the following decades.
Before discussing cryptocurrencies, one should first realise the environmental impact of fiat money. Its secondary impact from maintaining thousands of bank branches, employees’ transportation fuels, and more than 3.5 million ATMs around the globe using power day and night is certainly not negligible. The pandemic increased the speed of the closures of physical bank offices, a trend we got accustomed to since the development of online banking. However, due to the physical nature of the asset, fiat money will always require people, bank branches and offices to operate.
On the other hand, cryptocurrencies require very little human element and, in contrast, require less space. Investopedia defines cryptocurrency as:
“a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit. Many cryptocurrencies are decentralised networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers”.
The most famous example of crypto is Bitcoin which, when taking a closer look, produces scary environmental impact statistics.
Crypto’s environmental impact
According to the UN estimations, every year, the Bitcoin network consumes more energy than several countries such as Kazakhstan and the Netherlands, and generates as much carbon footprint as Argentina. This is due to the proof of work (PoW) consensus mechanism it uses for mining new tokens and validating transactions whereby members of the network – advanced computers – expend effort solving an arbitrary mathematical puzzle, requiring lots of electricity.
Bearing in mind that a significant percentage of Bitcoin miners are located in China and that coal is currently the biggest energy source in China – around 62 per cent of all energy generated as of 2019 - it does not seem sustainable at all. This was why Elon Musk reverted Tesla’s decision to accept Bitcoin as payment, stating cryptocurrencies could “not come at great cost to the environment.” However, two critical points make me hopeful for cryptocurrencies and their potential as an impetus for a sustainable future.
First, the proof of stake (PoS) consensus mechanism is gaining momentum in the crypto scene, seeing big guns such as Ethereum 2.0 and Cardano use this mechanism instead of PoW. PoS eliminates the massive energy need by utilising collateral offers - stakes - of the validators to create the blockchain blocks and establish a consensus. According to researcher Carl Beekhuizen, cryptocurrencies that operate with the PoS mechanism use 99.5 per cent less energy than those operating with PoW.
Second, cryptocurrencies have a significant location advantage compared to fiat money. Renewable energy is intermittent and difficult to store. This makes it a dream combination with cryptocurrency, as the rooms filled with highly advanced computers can be settled anywhere in the world. Including countries such as Paraguay, which enjoys an energy supply based on nearly 100 per cent hydroelectric sources. I believe this to be a massive factor that can make cryptocurrencies take the light in the future with strategic planning.
To sum up with my closing thoughts, as more cryptocurrencies adopt the PoS model and with strategic location planning for cryptocurrency facilities near renewable energy source sites, they will play a significant role in the future of finance and trade. It has the potential to drive the sustainability agenda forward. Sharing the same belief, Elon Musk confirmed that ‘when there’s confirmation of reasonable (around 50 per cent) clean energy usage by miners with a positive future trend, Tesla will resume allowing bitcoin transactions’.
I believe that in this scenario, other companies may also follow suit and accept cryptocurrency transactions. Further, New York and San Francisco mayors recently declared their intention to make their states crypto hubs. If taxes could be paid without intermediaries, this could potentially make municipalities more sustainable. One thing I am sure of is that it will be very interesting to follow the attempts from governments to regulate the cryptocurrencies and crypto market while balancing their sustainability targets.