Delve into the intersection of cryptocurrency and sustainability. Explore the challenges, innovations, and opportunities for building a greener crypto ecosystem.
Introduction
Cryptocurrency has transformed the financial landscape, offering decentralised and borderless alternatives to traditional currencies. Yet, this technology has faced increasing scrutiny due to its environmental impact. Cryptocurrencies use more electricity than many countries. In 2019, Bitcoin alone used 143 TWh, placing its rate of consumption above Norway (at 124 TWh) and Bangladesh (at 71 TWh). This figure doesn’t account for the added environmental costs of other cryptocurrencies, such as Ethereum and Tether. However, proponents of Bitcoin argue that Bitcoin and other cryptocurrencies can be made more sustainable through the transition to renewable energies.
Understanding Cryptocurrency Mining
To comprehend the environmental concerns surrounding cryptocurrency, it's essential to understand the mechanics of mining. Cryptocurrencies, like Bitcoin, rely on Proof-of-Work (PoW), a consensus mechanism that demands substantial computational power. This is because it requires more time and energy to validate the work underlaying the blockchain, which leads to high energy consumption.
There are other less energy-intensive means of validation: Proof-of-Stake (PoS). This method offers a more energy-efficient alternative as owners can offer their coins as collateral—staking—for the chance to validate blocks and earn rewards. This reduces the amount of computational power – and therefore electricity – expended on validating the blockchain. Regardless of the method, cryptocurrency mining still uses significant amounts of electricity, and this will continue to increase as interest in cryptocurrency grows.
The Environmental Debate
Evidently, the energy-intensive nature of PoW and even PoS cryptocurrencies result in a significant carbon footprint. However, proponents contend that the crypto industry is actively seeking sustainable solutions and further argue that traditional financial systems and fiat currencies have their own environmental impacts.
Fiat currencies contribute to a carbon footprint through the processing of raw materials, the printing process, the shipping of raw materials, and the shipping of printed banknotes. In the same vein, traditional banking systems generate a large carbon footprint as thousands of bank branches need to be powered, as do ATMs.
However, sustainability isn’t a tit-for-tat game. The carbon footprint of fiat currencies does not negate the carbon footprint of cryptocurrency. As such, it is up to the cryptocurrency industry to innovate and find ways to reduce and eventually eliminate their carbon footprint.
Green Innovations in Cryptocurrency
Acknowledging the concerns, some members of the crypto community are actively exploring green innovations. The three main solutions to date are reducing the consumption of energy or computing power, using sustainable energy sources, and offsetting carbon.
Reduce Computing Power Required
The previously discussed PoS system of validation is one innovation that allows cryptocurrencies to reduce their energy consumption. Innovators in the industry have also developed several eco-friendly blockchain projects and cryptocurrencies with low environmental impact. Some of these environmentally friendly cryptocurrencies include Chia, Cardano, Nane, Stellar Lumens, and Algorand. Most of these projects focus on finding ways to making the mining process more energy efficient, by requiring less computing power.
Switch Renewable Energies
There is also the obvious proposal: that cryptocurrencies run on renewable energies such as hydro, solar, and wind. The main challenges with using renewable energy to power cryptocurrency are that it is not yet a mainstream system, that renewable energy production can be unpredictable, and that it is challenging and inefficient to store renewable energy. Once renewables become a more mainstream source of energy and the cost to use renewable energy drops, many cryptocurrencies will make the switch. This is largely a matter of cost and infrastructure.
Carbon Offsets
Others have sought to reduce their carbon footprint by purchasing carbon credits or offsets. The keys to this strategy are to ensure that the carbon offset programs being bought into are reputable and that the carbon footprint is calculated correctly. Kōura’s Carbon Neutral Cryptocurrency fund uses this strategy to offset the calculated carbon produced by the cryptocurrency funds that it invests in. Some criticisms of this method argue that offsets are greenwashing and that offsets are often severely underestimated.
Ultimately, reducing one’s carbon footprint – as an investor of cryptocurrency or a cryptocurrency fund manager – is not a straightforward process as the technology is so energy-intensive. Cryptocurrencies seeking true sustainability will likely need to use a mix of all three strategies to become carbon neutral or even carbon negative.
Conclusion
The intersection of cryptocurrency and sustainability presents a complex landscape marked by challenges. The undeniable environmental impact of energy-intensive mining methods, particularly Proof-of-Work, has sparked debates about the carbon footprint of the cryptocurrency industry. While traditional financial systems also contribute to environmental degradation, it is imperative for the crypto community to take proactive measures in reducing and eventually eliminating their own carbon footprint.
The ongoing pursuit of green innovations, such as the adoption of Proof-of-Stake, eco-friendly blockchain projects, and the exploration of renewable energy sources, reflects a commitment to building a greener crypto ecosystem. To achieve true sustainability, a holistic approach combining energy consumption reduction, renewable energy adoption, and carbon offset strategies may pave the way forward for a more environmentally responsible cryptocurrency industry. As the crypto community continues to innovate, the path to a sustainable and eco-friendly future for digital currencies becomes clearer, with the potential to redefine the financial landscape for the better.
Disclaimers
We understand that investing in cryptocurrency can be a risky proposition, and we always encourage our investors to do their own research and consult with a financial advisor before making any investment decisions.
Bitcoin is a highly volatile asset and historically has experienced significant value swings (+100% or – 50%) over short periods of time. There is no guarantee that assets will recover after a significant fall or that historical returns will continue. The volatile nature of the asset may result in the value of the fund falling significantly in value or even going to zero. Investors will be significantly disadvantaged if they need to withdraw funds during a Bitcoin downturn.
The majority of crypto currencies exist outside of the traditional regulatory environment. The lack of regulation and ability to hide transactions has meant that crypto currencies have and are being used by criminals to launder and transfer the proceeds of crime around the world. Some countries have banned their citizens from investing in or using crypto currencies as a result of these concerns. Some financial institutions refuse to interact with companies or individuals who operate in the crypto currency space due to Money Laundering concerns.
There is a risk that crypto currencies become subject to increased regulation or financial institutions refuse to process transactions that originate from crypto currencies. This will result in the value of cryptocurrencies falling due to investors being unable to convert their currencies into traditional currencies.
Members can only allocate a maximum of 10% of their portfolio to our Carbon Neutral Cryptocurrency Fund.
Kōura Wealth is the issuer of the koura KiwiSaver Scheme. View our PDS at kourawealth.co.nz/documents