Cryptocurrencies have faced widespread criticism for their environmental impact at a time when traditional investments are increasingly aligning with environmental, social, and governance (ESG) values. o how long will it be until crypto earns its green credentials?
Green investments like bonds that fund renewable energy projects, contribute to cuts in greenhouse gas emissions, or clean transport infrastructures have gained popularity for their potential to reduce greenhouse gas emissions.
In contrast, many cryptocurrencies, particularly Bitcoin, are viewed as environmentally damaging mainly because of crypto mining and the huge energy it demands. Agencies and organisations like the International Energy Agency and the United Nations have raised concerns.
The environmental footprint of cryptocurrencies
The United Nations University Institute for Water, Environment and Health estimated that in 2020-2021, Bitcoin networks had significant carbon, water and land footprints. Bitcoin’s carbon footprint was equivalent to burning 38 billion tonnes of coal, while its water footprint (mainly used for cooling systems) would have met the domestic water needs of more than 300 million people in sub-Saharan Africa.
The Cambridge Blockchain Network Sustainability Index estimates the electricity consumption of Bitcoin networks surpasses those of several developed countries, including Norway and Sweden.
Crypto mining, specifically the “proof of work” (PoW) mechanism, is the primary source of concern. PoW requires powerful computers to solve complex mathematical problems, a process that secures transactions and creates new coins. This mechanism is energy-intensive, contributing to substantial carbon emissions and other environmental impacts.
The path toward sustainable cryptocurrencies
Despite these challenges, the crypto industry is starting to address its environmental concerns and take meaningful steps toward sustainability. In 2021, a significant number of crypto players signed the Crypto Climate Accord (CCA), modeled after the Paris Agreement, with the goal of decarbonizing the global crypto industry by 2040. This initiative set two key interim targets:
- Achieving 100% renewable-powered blockchains by 2025.
- Reaching net-zero emissions from electricity consumption by 2030.
Several companies such as Mara and Argo, are also developing energy-efficient cooling systems that significantly reduce mining’s energy demands and innovations that allow waste heat from data centers to be recycled for local communities’ energy needs.
A shift to less energy-intensive processes
Another major development in making crypto greener is the adoption of less energy-intensive consensus mechanisms. One such mechanism is proof of stake (PoS), which replaces the energy-draining PoW process. In PoS, miners (or validators) must “stake” their crypto holdings as collateral when verifying transactions. This reduces the need for complex computational processes, cutting energy consumption dramatically.
In 2022, Ethereum, the second-largest cryptocurrency by market capitalization, made headlines when it transitioned from PoW to PoS. This shift slashed Ethereum’s energy use by nearly 100%, making it significantly more eco-friendly than its PoW counterparts.
Other environmentally focused cryptocurrencies, such as Cardano and Powerledger, are also using PoS or other energy-efficient mechanisms to reduce their environmental impact.
The role of regulatory bodies
The path towards green crypto is being eased by institutions like the Financial Stability Board, which is taking steps to provide frameworks for understanding, compliance and achievements of ESG goals and values.
The road ahead: challenges and opportunities
While the crypto industry is making strides toward decarbonization, significant challenges remain. This said, the combination of industry initiatives, new technologies, and regulatory support could pave the way for a more sustainable future for cryptocurrencies.
Opinion by: The Conversation, Jean Bessala, Lecturer in Finance, Salford Business School, University of Salford, September 2024
