Fintech isn’t often associated with environmental concerns, but cryptocurrencies like Bitcoin are already using more energy than the whole country of Sweden, raising concerns about their carbon impact. According to a study conducted by the University of Cambridge, the Bitcoin network consumes more than 145 terawatt-hours (TWh) each year, putting it in the top 30 global energy users.
Crypto mining (the process of validating transactions) requires a tremendous amount of computer power, which is why cryptocurrencies use so much electricity. China accounts for more than 75% of Bitcoin Blockchain operations as of April 2020, with over half of miners living in regions with coal-fired power plants.
Cryptocurrency’s present exponential growth leading to an exponential increase in its carbon footprint. But, in the long run, are there any viable alternatives? What does this mean for the reputation of cryptocurrencies? Isn’t it past time for cryptocurrencies to prioritize sustainability in the year of the UN Climate Change Conference in Glasgow?
Not all crypto currencies are created equal
The underlying reason for the high energy usage, according to experts, is the Bitcoin consensus process known as “Proof of Work,” which requires miners to create the cryptocurrency while receiving coins. If left unaltered, this carbon-intensive procedure may jeopardize the widespread adoption of this revolutionary technology in the long run.
New kinds of algorithms, on the other hand, are developing that may offer a foundation for more long-term working methods. One of these is ‘Proof of Stake,’ which verifies transactions based on how many coins a network member has rather than their computer processing capacity.
As a consequence, Proof of Stake consumes less electricity and energy. Cardano, Polkadot, and Algorand are examples of cryptocurrencies that use this protocol, with Ethereum also proposing a shift to Proof of Stake, claiming that it aims to “make Ethereum more scalable, secure, and sustainable.”
There are other efforts to decrease the mining industry’s dependence on fossil fuels, in addition to the move away from the computational power-intensive Proof of Work method. Companies like Pow.re, for example, use hydropower to operate green Bitcoin mining facilities in the Canadian subarctic.
Green reputation and investment
If cryptocurrencies are to thrive in the long run and continue to provide the advantages of accessibility, security, and transparency, it will be necessary to include sustainability into their ethos and design.
Mainstream, environmentally aware investors will be more interested in crypto companies with a good reputation in the field of sustainability. Financial institutions that are concerned about environmental, social, and corporate governance (ESG) will want to check the ESG credentials of cryptocurrency companies before investing to make sure they are in line with their own goals and customer expectations.
Sustainability is also gaining traction as a platform for cryptocurrencies to develop new and distinctive value propositions that set them apart in the market. For instance, the Eco Coin is backed by ecological assets, with each ECO Coin representing one tree. This currency allows businesses to incentivize, monitor, and reward environmentally responsible employee behavior that helps them achieve their overall sustainability objectives.
Governments across the globe are enacting stronger climate change legislation, and ESG investment is pushing change in many sectors, including finance. Although cryptocurrencies are still a new and unpredictable market, their environmental credentials will be scrutinized more closely. This shift is providing businesses with new possibilities to strengthen their brand reputations via sustainable initiatives, as well as a strong new source of distinction.
Blockchain is the technology that underpins Bitcoin and a growing number of financial and non-financial use-cases — has the potential to reshape how we assign, protect, and transfer many assets and services, including in the natural environment, by putting trust and authority in a decentralized network rather than a powerful central institution.
Several pilots and a few larger-scale initiatives have attempted to adapt block chain to different global problems in the decade since it was created as the technology underlying Bitcoin. Blockchain and UNDP, 2018; Pisa, 2018.
A recent study found over 65 current projects in the area of environmental sustainability, most of which are still in the idea or pilot stage. While there is currently no concrete proof that Blockchain can solve environmental issues on a large scale, its passionate adoption indicates wide promise on a conceptual level.
The following questions are addressed in this briefing note:
• What kind of environmental sustainability issues could Blockchain be able to solve?
• How is harness Blockchain seen as a good factor for environmental sustainability?
• What measures should be taken to help realize the potential?
The briefing acknowledges the breadth of Blockchain’s disruptive potential, as well as significant obstacles to effectiveness, adoption, and scalability and, when feasible, offers solutions to these problems. We concentrate on environmental issues and Blockchain concerns that are important to low- and middle-income nations, while also putting them in a global perspective.
This briefing blog is designed for the wide audience interested in development, environmental sustainability, and technology. It is based on interviews with experts, discussions from a consultative roundtable, and a desk review (see Acknowledgements).
We provide our primary suggestions to governments of low- and middle-income countries who want to use Blockchain, as well as supplementary ideas for governments of richer nations and other stakeholders.
Companies and start-ups that may be working on Blockchain applications.
Blockchain technology has the potential to solve a variety of environmental sustainability issues.
We propose that Blockchain may promote environmental sustainability via three fundamental underlying processes related to resource rights, product origins, and behavioral incentives, based on Chaperon’s review (2017). These processes represent three fundamental difficulties in human interactions that have ramifications for natural resource and environmental management.
Other publications (e.g., Herweijer et al., 2018) offer more in-depth reviews of existing instances, but few have been thoroughly assessed or scaled. We’ve chosen a few examples from low- and middle-income nations to illustrate our point:
A number of obstacles must be overcome for Blockchain technologies to reach their full potential and provide the promised advantages for environmental sustainability. It’s easy to draw comparisons with the internet, another decentralizing digital technology that has changed human civilization in many ways but has “failed to provide the good, constructive society many of us had hoped for,” according to the World Wide Web’s creator (Siegele, 2018).
The difficulties for Blockchain are both technological and political, and although substantial, they are not insurmountable. They are particularly important to environmental sustainability in low- and middle-income countries, but they are also relevant to efforts to utilize Blockchain for socially beneficial results in general.
A solution in search of a problem
The greatest tool for the task isn’t always Blockchain. Where most parties are known to each other, distributed and consensus-based verification systems, for example, may be superfluous in tracking product origins; current supply-chain management systems and centralized databases may already sufficient (Alicke, 2017).
There are certainly numerous supply chains in which the participants are unfamiliar with one another, such as those for agricultural commodities sourced from a network of out-growers in low- and middle-income nations. However, the higher the cost that is, the processing power and energy needed to authenticate transactions — the bigger the network.
A significant environmental impact
‘Proof of Work’ is the original method for validating transactions in a Blockchain network, and it is energy expensive since it depends on many computers doing complicated cryptographic computations to achieve agreement on ledger changes (Hasse et al., 2016).
The Bitcoin network’s total energy usage, which utilizes the protocol, is currently projected to be greater than that of Austria in 2015. (de Vries, 2018). The source of energy utilized by the big data centers that currently conduct the bulk of computations is unknown, although most are in China, where coal-fired power accounts for 58 percent of installed capacity (IEA, 2017).
Proof-of-high work’s computational and energy requirements limit the scalability of Blockchain applications: the Bitcoin Blockchain can presently accommodate just 7 transactions per second, whereas the Visa network can handle over 50,000. (Hasse et al., 2016).
Finding methods to decrease the energy intensity of the system, which is mostly dependent on creating alternate consensus procedures, is as essential as the energy source (Truby, 2018).
2 The energy consumption of Blockchain does not rule out a net positive contribution to environmental sustainability. The environmental utility, on the other hand, must be assessed in terms of the quantity and kind of energy used by the application, as well as opportunity costs (alternative ways to derive utility from the energy). Assessing the trade-offs is difficult, and anyone exploring Blockchain for environmental reasons will almost certainly have to rely on expert judgement rather than hard research in the near future.
Governments of donors and industrialized countries should
Incentivize Blockchain innovators to reduce the environmental footprint of the technology. Although authorities’ primary concern with Blockchain is the fiduciary risk connected with cryptocurrencies, the environmental impact of Blockchain technologies must also be considered.
To promote a transition to renewable energy and innovation in less energy-intensive consensus procedures, governments may employ a variety of economic levers, including taxes on transactions depending on polluting Blockchain technology.
Support impoverished nations’ attempts to take use of Blockchain technology.
Aid programs may invest in digital infrastructure and technical assistance to help policymakers and people better understand and use technology to their needs. Given that companies that are pioneering applications are concentrated in wealthy nations, policy and regulation have a role, and this may have global implications — for example, via transnational natural resource supply chains.