Cryptocurrencies have been a topic for discussion for a while now, and it’s not surprising why. Many see Bitcoin as a measure of tech progress and a glimpse into a decentralized financial future that is free from institutional control. Such an invention could only spark optimism, especially if you consider btc price prediction. However, not everyone sees Bitcoin in a positive light, and this is especially true due to the environmental impact of crypto assets. According to the data available, cryptocurrencies consumed 110 TWh of electricity in 2022 alone, representing 0.4% of the global demand yearly. This isn’t anything new, as cryptocurrencies have long been criticized for their environmental record, which is particularly an issue in an era when traditional investments have also become more sustainable.
While there are now options for green cryptocurrencies, the question is whether crypto mining can ever go green. Before exploring this question, let’s first examine cryptocurrencies' environmental footprint.
Cryptocurrencies and ESG: A clash of two titans?
Bitcoin had a substantial water, land and carbon footprint between 2020 and 2021 – in fact, its carbon footprint could translate into burning 38 billion tonnes of coal. Furthermore, Bitcoin's electricity consumption is significantly higher than that of many developed countries such as Norway and Sweden. Unfortunately, this is an aspect of cryptocurrencies that can be a dealbreaker for investors looking to meet their ESG goals. No matter the popularity of cryptocurrencies and their unique characteristics, their carbon footprint prevents adoption among those who are eco-conscious.
The lack of regulations around crypto activities also adds fuel to the fire. For a long time, cryptocurrencies have been considered “get-rich-quick” ventures, and due to this reason, they have been sitting on the sidelines of the financial system. While things have changed tremendously in recent years, and crypto investments have become mainstream, there’s still little regulation to ensure that investors embrace practices aligned with ESG values.
There was a time when crypto was untouched by the government and regulators’ hands. However, there are so many people nowadays using cryptocurrencies, and as their popularity continues to grow, the risks become greater for investors, customers, and asset managers. The noise around ESG has, in fact, increased significantly with the wider adoption of cryptocurrencies, leading to a clash of two titans rather than a friendly intersection between the two, If society immerses itself entirely in the crypto realm, it should be regulated in a way that is beneficial for both the crypto provider and the user. For a greener, fairly governed and socially friendly financial system, regulators need to implement regulations that encompass the three ESG pillars. This is how financial systems can enjoy growth and reduced regulatory repercussions.
Can crypto mining be sustainable?
Just because there are challenges on the path towards green crypto mining, this doesn’t make it an unachievable goal. However, to understand the picture of sustainable crypto mining, it’s essential to look at how a crypto mining operation communicates its energy-sourcing practices. Some ways to do so include stating that the process of mining cryptocurrency is zero carbon or carbon-neutral, but it’s important to know that the two concepts are different. While zero-carbon means that the created service or product led to no carbon emissions when being produced, carbon neutral refers to the removal of as much carbon as was generated from the atmosphere after its creation. This can happen either via carbon offsets or payments for supporting activities such as preserving forests or planting, which are meant to help eliminate carbon from the atmosphere.
The concept of being carbon neutral has been criticized because carbon offset and credit activities may not be effective in the long term when it comes to carbon reduction. For example, deforestation may happen somewhere else, offsetting the benefits of protecting another forested area. With that said, crypto mining organizations buy carbon credits from other organizations to help offset the overall amount of emissions. Another option is to combine renewable energy sources like wind, hydroelectric and solar power for mining operations, which can further decrease the carbon footprint.
One of the greatest approaches towards sustainability is the implementation of more energy-efficient consensus mechanisms used for transaction validation on the blockchain. The PoS(Proof-of-Stake) consensus mechanism involves advancing a small crypto amount to enter a lottery where miners can be assigned transactions that need to be verified. This helps decrease the risk of fraudulent transactions while also reducing the intense computational element of the Proof-of-Work mechanism, which is very widely used.
Are cryptocurrencies making any progress towards embracing new consensus mechanisms?
They are actually making quite a progress, as veteran digital assets are now making the switch towards a greener consensus mechanism. Ethereum is an excellent example to this end, as in 2022, it switched from POW to POS with its Ethereum 2.0 upgrade, decreasing its energy consumption by 99.5%. Cardano also relies on a PoS model, and it isn’t the only one that embraces the shift. At the same time, Bitcoin mining operations in locations such as Iceland and Canada are increasingly using renewable energy sources, such as geothermal or abundant hydroelectric ones.
But there is more: technological innovations such as Layer 2 solutions and sharding have also emerged as a way to make crypto greener. For example, Bitcoin’s and Ethereum’s Optimistic Rollups and Lighting Network – which are Layer 2 solutions- play a huge role in decreasing energy consumption by processing off-chain transactions. Furthermore, Ethereum 2.0 even uses sharding, which means breaking the blockchain into smaller sections and enabling transactions to be processed simultaneously, which decreases energy use further.
And let’s not forget about the Pi Network, which is the rising star of the cryptocurrency universe. This network uses an eco-friendly mining approach, enabling users to mine digital assets without effort on their smartphones – which is quite a unique aspect of the industry. Simply put, there is no energy-guzzling setup, no draining of the batteries of a device, and no huge electricity bills. So, it’s not surprising why the Pi Network has been raising so much interest and appealing to eco-conscious crypto enthusiasts all over the world. All these changes and upgrades are only proof that it is possible for cryptocurrencies to become greener, although there is a long way to go until there is a significant transformation.
The bottom line
Cryptocurrencies have come a long way since their inception, and their journey has been anything but easy. Over the years, numerous obstacles stood in the way of widespread crypto adoption. Although these assets have been heavily criticized due to their carbon footprint, the latest upgrades show that things can change. Looking forward, it will be exciting to see how the challenges around cryptos’ sustainability will be addressed to ensure they can align with ESG values.
