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Issues Archive » FundsTech Autumn 2021

Cryptocurrencies: Solving crypto’s sustainability problem

CpryptocurrenciesCryptocurrencies like bitcoin have a huge carbon footprint but, as Nicholas Pratt discovers, environmentally friendly alternatives exist.

In February, Tesla CEO Elon Musk announced that the electric carmaker would invest US$1.5 billion in bitcoin and would accept it as payment for its vehicles. The news sent the price of the cryptocurrency soaring. Then, weeks later, he changed his mind, stating misgivings over bitcoin’s sustainability.

‘’We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel,” tweeted Musk. Just 24 hours later, bitcoin’s price plummeted by 17%.

When cryptocurrencies were first introduced, little was known about their environmental impact. But Musk was not the first person to remark on the eco-unfriendliness of bitcoin. US treasury secretary Janet Yellen had warned in February about its environmental impact and the “staggering” amount of power required to generate new coins.

The Musk tweet then brought more attention to the sustainability problem at the heart of crypto-mining. Since then, work has been done to assess the relative sustainability of different currencies and to encourage greater use of renewable energy for the mining process.

What remains to be seen is whether the environmental impact will affect investors’ view of certain cryptocurrencies and the asset class itself, or if a meaningful solution can be found to reduce the energy consumption involved in the mining process

In May, a report from US-based colocation firm TRGDatacenters assessed the environmental impact of seven cryptocurrencies. It found that XRP was the most environmentally friendly, using only 0.0079 KWh per transaction. Dogecoin, the cryptocurrency cited by Musk which then overtook the market cap of Apple, was the second-most environmentally conscious, using only 0.12 KWh per transaction (see figure 1).

In contrast, bitcoin and ethereum had the largest environmental footprint, which is likely down to their dominance and popularity within the market. Bitcoins have a considerable environmental footprint, given the energy required to power the algorithms behind them.

While this could theoretically be done using renewable energy, it usually isn’t. China is a leading player in mining for bitcoin, and 60% of the energy it uses to do so is powered by coal.

“As it stands, we do not see the environmental effects having a big impact on the ‘investability’ of cryptocurrencies and the asset class in general,” says Chris Hinkle, chief technology officer at TRGDatacenters.

“Whilst Musk brought the issue to the forefront, solutions do not yet seem to have been imposed. For example, China is a leading player in mining for bitcoin and 60% of the energy it uses is powered by coal – although this could theoretically be done using renewable energy, in reality, it usually isn’t due to high and fast demand,” says Hinkle.

So, what can or should be done to reduce the impact? “Cryptocurrencies rely on blockchain technology, so this is ultimately where resolving the issue of environmental impact needs to start,” says Hinkle.

An alternative to blockchain
There are more eco-friendly digital currencies on the horizon, he adds. For example, IOTA is an open-source cryptocurrency that uses Tangle, an alternative to blockchain, which has removed the need for miners.

With concern growing over the ecological impact of blockchain-based currencies, developers are turning their attention to new ways of offering all the benefits of digital currencies, without the hefty carbon footprint.

The new wave of eco-friendly cryptocurrencies uses sustainable energy sources to limit the impact of transactions. A prime example of this new focus on sustainability is Nano, a digital currency network that shuns traditional mining practices in favour of an eco-friendlier solution.

Nano seeks to eliminate the waste that’s usually associated with cryptocurrency transactions, using a more lightweight consensus protocol. Known as Open Representative Voting (ORV), the protocol promises minimal energy consumption and maximum efficiency.

However, says Hinkle, the popularity of the power-hungry cryptocurrencies continues to grow, which means people will keep investing. “So, until they can resolve this with a sustainable but effective alternative, the impact will continue,” he says.

The environmental impact of cryptocurrencies is a concern for many investors, says Marcus Sotiriou, sales trader at UK-based digital asset trading firm GlobalBlock. However, like Hinkle, he does not believe it will affect the cryptocurrency industry as a whole because of the wide range of alternative blockchains with more energy-efficient protocols.

“Furthermore, the total energy consumption of the cryptocurrency industry is around half that of gold mining, which has never been a consideration when investing in gold. Lastly, the push from governments to implement renewable energy for bitcoin mining can give investors comfort that bitcoin mining is moving towards a more environmentally friendly future,” says Sotiriou.

Renewable energy is the main way in which this environmental impact can be reduced, he adds. “Bitcoin mining in China was a huge contributor to mining using non-renewable energy like coal. However, due to the mining ban in China, there has been a mass influx into the US, where there is an effort to convert to 100% renewable energy usage.

“Mega-mines in Texas are using renewable energy from wind and solar. South American miners are also encouraging renewable energy mining. After making bitcoin legal tender, El Salvador announced that it would use energy from volcanoes to mine bitcoin.”

Getting out of China
While the environmental debate around crypto has been going on for years, the industry is actively becoming greener and more sustainable, says Steve Ehrlich, co-founder and CEO of Voyager Digital, a US-based, publicly traded crypto platform. “What most don’t know is that over 50% of bitcoin mining is already powered by a sustainable electricity mix, based on Q2 data from the Bitcoin Mining Council, making it greener than people assume.”

Like Sotiriou, he cites the huge migration of miners out of China earlier this year, which reduced bitcoin mining’s dependency on dirty coal plants and helped the move towards a cleaner alternative. The public scrutiny over cryptocurrencies’ environmental record has also led to an acceleration of renewable initiatives and sustainability goals in the industry, says Ehrlich.

“While institutions are positioning themselves at the forefront of renewable bitcoin, other projects are actively offsetting their carbon footprint through credits. Investors are also actively pursuing greener blockchain projects such as Tezos, another open source blockchain network. More and more companies and investors are turning toward greener alternatives, making the future of crypto increasingly sustainable,” says Ehrlich.

Bitcoin mining can also be successfully done using renewables like solar, wind, hydro, and other sustainable energies, he says. It can also incentivise energy producers to use by-products of the power they’re already generating to create cryptocurrencies with real-world use.

Environmental_impact_of_crypocurrenciesFor example, says Ehrlich, oil fields that used to burn off excess methane gas into the atmosphere can now utilise that methane by-product to power bitcoin mining operations. “There are actually many inefficiencies in the production of energy, and bitcoin and crypto mining are creating a solution to put that power to good use.”

Another way of reducing the environmental impact of crypto mining is by moving to the more energy-efficient proof-of-stake (PoS) model, which reduces the mining component, says Ehrlich: “Whereas bitcoin uses a proof-of-work (PoW) model in which miners compete to solve energy-intensive maths calculations, a growing number of altcoins, such as Cardano, Tezos, Polkadot and Algorand, use a PoS protocol where there is no mining involved.

“Instead, validators of a PoS system are chosen by an algorithm that accounts for how much cryptocurrency or stake has been deposited in order to add blocks to the blockchain and securely verify transactions.”

If the environmental impact of cryptocurrencies is left unaddressed, it will start to impact the investability of the asset class negatively, says Matteo Dante Perruccio, president international at Wave Financial, an SEC-regulated digital asset manager. However, he says, it is a complex issue with degrees of nuance.

“The issue of environmental impact has certainly become an important consideration for institutional investors, but it is not black and white,” he says. “For example, institutional investors have continued to invest in gold, platinum and silver, despite the enormous environmental impact of mining these minerals. Also, how does one fully factor in the impact of producing, transporting, storing not only gold, but also sovereign currency banknotes?”

Different footprints
Like other digital asset managers have stated, it is important to distinguish between PoS and PoW protocols, which have vastly different environmental footprints, says Perruccio. “The expected migration of ethereum from PoW to PoS has undoubtedly contributed to the latter’s rise. Cardano, now the third-largest protocol by market cap at approximately $80 billlion, is also a reflection of the increasing popularity of PoS.”

It is also important to appreciate the enormous growth of bitcoin’s market cap over the past two years to approximately $900 billion, which is more than that of Visa and Mastercard combined, says Perruccio. “Bitcoin is now here to stay as an important part of the financial landscape. That being said, there has been much attention to the carbon footprint of bitcoin in the press.”

After Beijing decided to expel its miners in May, more than 50% of the hashrate – the collective computing power of miners worldwide – fell off the network, says Perruccio “Since then, many miners have migrated west, especially to the US, the new hotspot for the world’s global crypto miners. Over the last six months, the US has catapulted from fifth to second place, accounting for nearly 17% of all global bitcoin miners.

“As this exodus continues, increasingly using excess energy capacity which would normally go to waste, as well as increasingly using renewable energy sources, I believe the perception of bitcoin will improve dramatically.”

He adds: “The bitcoin network is relentless in searching for the lowest-cost energy and that is increasingly stranded power that is renewable. Over time, this will result in a significantly lower carbon footprint for bitcoin.”

© 2021 fundsTech

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