Cryptocurrencies and sustainability: Let’s get into the reality
Did you know that the estimated annual electricity consumption of the cryptocurrency Bitcoin is greater than the entire annual electricity consumption of the Netherlands? (As of June 2021) One blockchain consumes as much electricity as an entire country with over 17 million inhabitants.
This electricity consumption is mainly due to mining. Mining, simply put, is the process by which cryptocurrency is virtually manufactured. Sounds simpler than it is. It is a very complex process that requires the computer to solve sophisticated computational tasks. The most common process is called proof-of-work, which is used for Bitcoin, for example. Accordingly, to be able to “mine” Bitcoins, incredibly high computing power is required, which in turn is the part that leads to the high-power consumption.
This power consumption during mining is strongly influenced by two aspects mainly. One is the hype that cryptocurrencies are currently experiencing. The greater the interest, the more currency is “mined,” the higher the energy consumption. Secondly, the desired security of this asset is a key influencing factor. To be able to guarantee greater security, it needs more computing power. Roughly speaking, this means that the greater the energy consumption, the more secure the system.
However, power is not only consumed by mining but additionally by every single transaction. This amount is considerable. It is estimated that the transaction of a single Bitcoin consumes as much electricity as 695,000 Visa card payments.
No wonder cryptocurrencies are so controversial. Especially now that the issue of sustainability is gaining such immense importance.
Sustainability is more present in the media than ever before and is discussed up and down in all sectors. The megatrend does not stop at the financial sector either. Banks are not only facing increasing regulatory requirements but must also not ignore the opportunity that the topic presents. The demand for sustainable solutions and services in the financial sector is increasing, which brings with it a major potential competitive advantage.
Do sustainability and cryptocurrencies even go together?
There are various approaches to making cryptocurrencies more sustainable. Experts say that bitcoins can also be produced and operated sustainably. Research from the “3rd Global Crypto asset Benchmarking Study” by the “Cambridge Centre for Alternative Finance” (CCAF) showed that 76% of miners already use renewable energy in their power mix.
Some miners say they primarily use “surplus electricity” for mining. For example, in the Sichuan region of China, hydropower plants generate more electricity than can be consumed during the rainy season. This can then in turn be used for the “mining” of cryptocurrencies. However, according to the above-mentioned study, it is estimated that only 36% of the electricity used for Bitcoins is sourced from renewable energy sources.
One-way cryptocurrencies can become greener is shown by the company “Genesis Mining”. They have started a pilot project in Sweden, whereby the generated heat from the servers that are produced during crypto mining is used to heat greenhouses, for example.
Nonetheless, the dilemma remains that even at its best, using renewable energy is not as sustainable as not using energy in the first place. Because of this, environmentally conscious tech geeks are working on competing cryptocurrencies using alternative consensus methods with far lower energy requirements.
Sustainable alternatives to traditional mining
Probably the most well-known alternative to save computing power is the proof-of-stake (Pos) method. Rather than relying on computers racing to generate the appropriate hash, PoS generates growth by inverting the incentive structure. The idea is that participation is determined by possession of a coin supply, rather than pure computing power. Large miners are thus encouraged to make the system more efficient rather than deliberately inefficient. Cryptocurrencies such as Cardano and Polkadot, for example, already rely on this concept. Ethereum, as one of the most important cryptocurrencies, is also expected to switch to PoS before the end of 2021 with Ethereum 2.0, reducing energy consumption by 99%.
Another example is Signum, which is based on decentralized Proof of Commitment (PoC+). This innovative consensus provides a new way for miners to increase their effective storage capacity by adding a Signa credit (stake) to their accounts. This helps secure the network and improve their chances of mining rewards. PoC+ is thus a greener option, as effective capacity can be increased without buying more equipment. As a result, Signum uses less than 0.002% of Bitcoin’s energy to power the blockchain and its currency, Signa, and has been called the world’s first truly sustainable blockchain. In addition to Ethereum, Cardano, Signum, and Polkadot, numerous other initiatives are working on sustainable alternatives to traditional mining. Examples include Solarcoin, Nano and Chia, among others.
Sustainability is the future — also for cryptocurrencies?
The future of cryptocurrencies is still very controversial. Where some see limitless potential, others see nothing but risks. So, one simply does not yet know what the future will bring. This is reflected in all areas that go hand in hand with cryptocurrencies, precisely including sustainability. Since the future of cryptocurrencies alone is uncertain per se, it is also not yet possible to say specifically how the topic of sustainability will develop here. There are tendencies and trends, but how sustainable cryptocurrencies will ultimately really be is still written in the stars. So, we can be curious and look forward to the developments. It is certainly a topic that will not lose its importance anytime soon and that holds many surprises in store.
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