This November, The Fintech Times is looking to broaden the understanding of digital currencies, ranging from blockchain’s use outside of crypto to CBDCs, in an attempt to replace the notion that digital currencies are a synonym for crypto.
The final article in our digital currency focus is on a very prevalent and important topic: sustainability, namely in cryptocurrencies.
Read on to hear views from the industry, like Rafik Signatulin, the CEO of DeNet‘s view, who claims, “the electricity spent on one transaction in the Bitcoin network is enough for a family of three to comfortably exist for a whole week.”
And Karan Kapoor, Head of Regulatory Solutions and RegTech at Delta Capita, who suggests that, “Given the amount of energy required to mine and exchange cryptocurrencies, they have been largely portraited as unsustainable and non-eco-friendly by the international press. This argument might have been true in and around 2009 when they first started circulating, however nowadays this is far from the truth.”
Change is Necessary
Blockchain technology has the possibility to be used in countless ways that will benefit society. However, the way it has been utilised by Bitcoin, the cryptocurrency it was originally created for, is not good for the environment. Bitcoin and many other cryptos have used proof-of-work (PoW) to mine coins, which involves computers solving complicated mathematical questions in order to create a coin. Each transaction takes an extremely high amount of energy, with Forex Suggest claiming each transaction uses 707kWh, whilst United Nations News suggests this figure is just under 1000kWh. Either way, compared to the 0.0006kWh used in a Mastercard transaction, an extortionate amount of energy is used in PoW mining.
So as crypto grows in popularity, what is being done to ensure eco-friendliness? Aatash Amir, CEO of StarLaunch says, “Not enough is the simplest answer. PoW is still a major issue in blockchain technology, and many projects have demonstrated that it is not a viable or necessary step. The real solutions lie with the source of electric consumption as a whole. Financial technologies will move forward regardless of the source of electricity. Ideally, the most energy-efficient chains will rise, but even then we will need to invest in nuclear power and other non-CO2 emitting sources of energy.”
Amir suggests one solution could be introducing regulation. “While regulation is a controversial word in blockchain, positive feedback via offering tax incentives to chains and companies that utilise zero-carbon emission sources of energy would be the simplest way.”
Alternatives to Proof-of-Work
The outcry about PoW’s lack of sustainability has not gone unheard. The second-largest crypto, Ethereum, has announced that it will be using a new way to mine coins: proof-of-stake. According to Investopedia, the proof-of-stake (PoS) concept states that a person can mine or validate block transactions according to how many coins they hold. This means that the more coins owned by a miner, the more mining power they have. PoS blockchains don’t require miners to spend electricity on duplicative processes (competing to solve the same puzzle), which allows PoS networks to operate with substantially lower resource consumption.
Robbie Heeger, CEO and president of Endaoment has praised Ethereum’s announcement saying, “Moving from Proof of Work (like the Bitcoin Blockchain) to PoS represents a paradigm shift in terms of the amount of power the Ethereum blockchain will consume, reducing the environmental impact by over 99%. In addition, this shift towards a more eco-friendly approach is likely to increase the decentralised nature of the Ethereum blockchain as barriers to entry are reduced.”
While PoS is the recognised alternative to PoW, there are other blockchains experimenting with innovative ways to create coins. Forex Suggest found that Stellar utilises a method of transaction verification outside of the usual PoW/PoS routes called Consensus Protocol, which allows Stellar servers to sync with each other to validate transactions and add them to the global ledger. The Stellar Consensus Protocol is so much more efficient than PoW or PoS that Stellar produced by far the least CO2 in 2020 and 2021, despite having the highest number of transactions. Stellar only uses 0.00003kWh per transaction, even less than a Mastercard transaction.
Another innovative crypto provided by Forex Suggest is Nano, as it does not use mining nor a traditional blockchain, which results in it only using 0.000112kWH per transaction. Instead it uses block-lattice technology, which allows asynchronous updates that are more energy and time-efficient. This makes Nano able to process up to 125 transactions per second, without creating vast quantities of waste CO2.
Eco-friendliness will drive crypto adoption
The positive outcome from this change in mining could have knock-on effects in the fintech industry. Michael Ourabah, CEO of BSO told The Fintech Times:
“In the case of crypto mining, miners will always seek to use renewable energy to power their operations because it is inherently the cheapest form of energy. This will help encourage crypto companies to sustain heavy investment in new renewable production sources and drive up the sustainability of crypto in the long run.
“For investors, however, at the regulatory level mandates such as the European Union’s Sustainable Finance Disclosure Regulation (SFDR), which comes into force in January 2022, is adding to the sense of urgency for investors to build better portfolios now – ones that not only deliver great returns but are also more socially responsible.
“Digital currencies is an exciting area of growth for institutional investors, but so far investors have hesitated due to the criticism of digital currencies’ energy consumption and because there wasn’t any way to ensure the sustainability of their digital currency portfolios. But that’s becoming less of a problem because exchanges, wallet operators and connectivity providers are starting to build solutions that help digital currency stakeholders monitor and reduce their carbon footprint and meet their regulatory obligations.”
This is further supported by QuickSwap‘s Roc Zacharias who said “Sustainable crypto is appealing to investors. Blockchains like Cosmos and Persistence, some shining examples of entirely-PoS blockchains, already have major institutional backing, and current studies have demonstrated that ordinary, retail investors are driving crypto’s recent price appreciation.”
As cryptocurrencies start being mined in different ways, the fintech industry will start to invest in eco-friendly solutions. Instead of using enough energy to power a house to mine a single coin, cryptocurrencies using less energy than what we currently use to pay for things (like Mastercard) will be adopted as they will not only benefit the environment but be cheaper for companies too. The association many make is that all cryptocurrencies are the same as Bitcoin and are mined in the same way. This is an outdated school of thought and as more begin to realise the technology is eco-friendly and isn’t damaging the planet, the more likely it is that these cryptocurrencies will be adopted.