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Wherever you stand on the crypto scale – diehard, sceptic, blissfully ignorant – it really is worth reading up on the hidden impact it’s having on our planet, and what is being done to clean up the act.
At the heart of the cryptocurrency industry – outside of the money-grabbing, scam-creating, meme coin-endorsing aspects of crypto – a lot of crypto-folk are just trying to change the world for the better; the environment included.
If cryptocurrencies have a reputation as the ‘wild west’ of finance then, here we’ll focus on the good (and less on the bad or the ugly). But to do so, we do need to look at why crypto has its bad reputation, and how projects are looking to change the record.
So, the largest, most used, most valuable, and original cryptocurrency is Bitcoin. You may have heard of it. But, environmentally, Bitcoin is a bit of a travesty.
People who are fans of Bitcoin only really have one sustainability argument: If we didn’t use fiat currencies (such as the U.S. Dollar, the Euro, Sterling) Bitcoin might be environmentally viable.
The logic being it’s not necessarily far worse than making physical cash. But we’re not getting rid of fiat currencies any time soon, and Bitcoin is the driving force for bad reputation when it comes to all things crypto and carbon footprint. Bitcoin’s carbon emissions are around the same as Sri Lanka’s, a country with a population of around 22 million.
It’s useful to look at why Bitcoin isn’t getting green flags anytime soon as it’ll inform us on how newer cryptocoins have been able to create sustainable solutions based on the issues Bitcoin has. The reason why a cryptocurrency can go from being a seemingly harmless digital currency to all-out environment ruiner, is to do with how blockchains generate (or mine) new coins, and processes transactions.
You can think of a blockchain as a sort of network, and typically they all have a ‘native cryptocoin’. Bitcoin – the blockchain – has Bitcoin (BTC) – the cryptocurrency. Ethereum has Ether (ETH), and so on. These currencies are used to operate the network in a variety of ways, and different blockchains have different processes which allow them to run. Technically, these are called ‘consensus mechanisms’.
A consensus mechanism is the operation system that allows these blockchains to be decentralised. With centralised currencies, we have people working in banks who ‘yay and nay’ transactions, flag up any errors, and oversee our accounts. The latter is among the reasons why people want decentralisation: people with access to our information could in theory manipulate that account however they wanted, and the pro-decentralisation belief is that nobody should be able to control our money but us.
But transactions still need processing and so, crypto uses a consensus mechanism which simplistically works as follows. Say someone sends someone one Bitcoin, a bunch of nodes (computers connected to the blockchain) will scramble to verify that transaction. If everyone agrees it’s all good, the transaction goes through; if something seems off it gets flagged and the transaction doesn’t go through.
The computers doing the work tend to get some crypto for their efforts (in the same way as a transaction fee works when you’re buying tickets for something). Given it’s all anonymous and self-governed, there has to be a way for certain computers to be given the task at hand.
There are three common ways in which computers are selected to perform tasks on the blockchain. Proof of Work (PoW), Proof of Stake (PoS), and Proof of History (PoH). This is where the sustainability question rings loudest. Essentially, Proof of Work is the worst of the bunch.
The way Proof of Work works is that computers all compete with each other to solve a very complex cryptography equation first (not dissimilar to the start of Who Wants To Be A Millionaire where the fastest person gets to play for the prize). It’s incredibly inefficient, as thousands of computers all work at full pace with only one computer getting anything from it (processing a transaction or perhaps mining some cryptocurrency). The rest is literally wasted energy.
Bitcoin uses Proof of Work, which is why it is often slated as bad for the environment. Even more so given Bitcoin is, at the time of writing, roughly fifteen times bigger by market capital than the second biggest cryptocoin – Ethereum.
Proof of Stake meanwhile, is considered far less wasteful. The way proof of stake works, is simply whoever has a stake in Ethereum (a stake is where you essentially isolate part of your funds in Ethereum for a temporary period of time, like a deposit) is entered into a draw, and the blockchain randomly selects who gets to process the transaction. The more you stake, the higher the probability you’re chosen. This means only one computer has to then expend energy doing the work.
Ethereum actually moved from Proof of Work to Proof of Stake with the Ethereum 2.0 merge (which you can think of as sort of like a big software upgrade that Ethereum completed in September 2022).
Proof of History is also better than Proof of Work, and probably better than Proof of Stake too (though less thorough). Solana is the most popular blockchain that uses it. The way Proof of History works is that nobody has to do anything. It instead uses a series of timestamps so that everyone knows what’s happening, and these are generally just unanimously approved by everyone on the blockchain. If someone’s timestamp is off by a microsecond it’ll be invalidated. Quick, easy, and low-energy.
The reason we’re going on about consensus mechanisms is that given how bad things like proof of work are, sustainability efforts in the industry are mostly concerned with using responsible consensus mechanisms. So, like the endorphins after a workout, let’s get into the coins doing good.
As mentioned, considering the consensus any coin uses is a good start when considering sustainable cryptocurrency options, but some blockchains, cryptocurrencies and crypto-tokens go further. NANO is an example of a blockchain with a unique consensus mechanism that is very low in energy. It also doesn't use transaction fees and focuses on being very scalable.
Other sustainability efforts are concerned with offsetting – Algorand is a blockchain that sets examples in this realm. Algorand has engineered itself to make sure that the carbon footprint of every transaction is offset automatically, without any action needed on the user's part. This is done by using part of the transaction fee to buy carbon credits through ClimateTrade.
Tezos is another established blockchain that uses a slightly atypical consensus mechanism. If you want something even more sustainable than Ethereum, this might be the answer. According to their website, the network has an average energy footprint of just 17 global citizens. The trading volume is around $50 million, so we can assume far more than 17 people use it.
New projects are also cropping up all the time. IMPT is the latest and possibly most eco-friendly of all. It is a crypto token which allows you to purchase carbon credits that their technology packages as an NFT. Regardless of your opinion of NFTs, the benefit here is that it makes the carbon credit easy to trade and very secure. There are a lot of scams around carbon credits, and IMPT is a viable solution to those scams. It’s very new, so it’s worth keeping some caution in case things go south, but the idea, and so far, the execution are very promising.
While Bitcoin is still considerably more used than the more sustainable alternatives, all that can change. Societal pressures could also force Bitcoin to evolve. Either way, there’s some cause for optimism.
Words: Rhys Thomas
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