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Sustainability & Cryptocurrencies

When it comes to sustainability, cryptocurrencies have repeatedly faced criticism for having a poor carbon footprint, especially when it comes to energy consumption. Headlines on the subject include: “Bitcoin consumes more power than the Netherlands” or even “Energy guzzler Bitcoin”. Cryptocurrency exchanges will have to address this issue. The debates over it distract people from seeing how cryptocurrencies do help provide sustainable solutions, particularly to significant social and economic challenges. Bitcoin, Ethereum, and the like represent much more than just some “environmental evil” that a few IT nerds dreamed up on a whim. In the financial services sector, for example, they provide a decentralized platform that can be accessed by people who, in the past, have been excluded from such services.

 

In this article, we’ll explain how sustainability and cryptocurrencies actually align, where there’s still some room for improvement, and what BISON’s thoughts on Bitcoin’s environmental impact are.

How do cryptocurrencies contribute to sustainability?

To understand how cryptocurrencies contribute to sustainability, let’s take a brief look at the different aspects of sustainability. Though environmental sustainability is the most common association with sustainability that’s talked about, the term “sustainable” doesn’t just refer to environmental impacts. Sustainability can’t be assessed without also looking at economic and social sustainability – all three aspects intertwine.

 

If a company’s business activities are focused on pursuing a long-term business strategy rather than a short-term profit, it can be considered economically sustainable. A sustainable society, in turn, is dedicated to goals such as the fight against poverty, a well-functioning healthcare system, providing access to education, or preventing social conflicts.

Cryptocurrencies provide access to the financial system

In many developing and emerging countries, financial services are only available to a portion of society. The hurdles to access them are high, and the costs associated with holding accounts are steep. These exclusive structures hinder economic and social development. Small farmers, craftsmen, or traders often rely on bank transfers, but they struggle with the banking structure in their societies. Only those who have access to the financial system have the privilege to transfer money to buy and sell goods, pay for insurance, invest in education, etc. – opportunities that would bring about sustainable improvements in a society’s quality of life.1

 

This is where cryptocurrencies could provide a low-threshold, cost-effective alternative. Apart from that, no central authority or middleman with personal interests is required for people to invest in Bitcoin, Ethereum, and other cryptocurrencies. This is how cryptocurrencies strengthen social sustainability; minorities who need – but have not had access to – the financial system, will finally have the chance to participate.

Cryptocurrencies in the fight against discrimination

Cryptocurrencies don’t detect or recognize different skin colors, genders, or sexual preferences. Anyone who makes a transaction on the blockchain is merely registered as an entry in a database. The wallet address and the transaction amount are entered, and this entry cannot be changed. There is no need for anyone to disclose their identity or origin. Sure, crypto-trading platforms require individuals to verify their identity when registering in order to comply with legal requirements – but transactions are still largely kept pseudonymous.

 

A 2020 study revealed that, among different ethnic groups in the United States, access to financial services is limited as a result of racial bias. Nearly half of all black Americans in the survey confirmed that they were at a disadvantage within the traditional financial sector because of their race. By comparison, only 24% of white Americans felt the same. As a result, black respondents were more interested in cryptocurrencies, given that they don’t need to document their identity in order to participate in the crypto market and benefit from what it has to offer.2

Cryptocurrencies create transparency

The technology behind cryptocurrencies is decentralized. No banks or other similar institutions are involved, and other factors like the artificially low interest rates in traditional financial systems do not apply.3 The network manages itself by storing data in a distributed way. The transaction history of a cryptocurrency is maintained on each computer connected to the network. Because an entry on the blockchain is unchangeable, transactions are traceable and tamper-proof.

 

Thanks to smart contracts that enable agreements to be mapped on the blockchain, processes can be designed and optimized more effectively. For example, if a flight is delayed and a passenger is entitled to receive compensation for the inconvenience, that compensation can be paid automatically through a smart contract. Time-consuming business transactions become a thing of the past4 – and this also reduces energy consumption.

What can cryptocurrencies improve on?

There’s no denying that cryptocurrencies need to improve their energy consumption. There are a number of approaches and adjustments that are already in the works to make mining, i.e. how the blockchain network is operated, greener. The European Commission is also working on this goal. The crypto infrastructure is expected to be climate-neutral and energy-efficient by 2030.5 That said, not every cryptocurrency is environmentally harmful! We’ll share three innovative approaches with you.

Proof-of-Stake instead of Proof-of-Work

An important aspect of cryptocurrencies’ energy consumption is whether mining is based on Proof-of-Stake or Proof-of-Work. With Proof-of-Work, miners prove that they are authorized to verify an transaction in the blockchain through their computing power. In other words, miners solve cryptographic problems, but these problems require a lot of energy. They can’t simply be calculated; to reach the correct answer, miners need to execute different combinations, every second – billions of times. The miners are also competing against each other, putting even more pressure on speed and, by extension, power. And this leads to a significant increase in energy consumption.

 

With Proof-of-Stake, on the other hand, miners prove that they are authorized to add a new block to the blockchain by placing a deposit. Only those who own cryptocurrencies are allowed to make a new entry in the blockchain. The idea behind this is that everyone who has already invested in a cryptocurrency is interested in validating transactions. This process is more energy-efficient than Proof-of-Work, due to the fact that less computing power is required to create a new block. A current project to switch from Proof-of-Work to Proof-of-Stake is Ethereum 2.0, which aims to reduce the energy consumption of the Ethereum blockchain by 99%.6

Using renewable energy to generate electricity

Where does the energy to run mining computers come from? This is an important question to ask before casting cryptocurrencies as “polluters”. These days, about 75% of miners use renewable energy as a power source or supply their computers with “excess” energy to validate blocks. Excess energy cannot be stored and would otherwise not be put to any further use. Take, for example, the largest crypto mining farm in Paraguay. It sources its energy demand from the third largest hydroelectric power plant in the world, both because the region consumes less electricity than is generated by hydroelectric power and because electricity is particularly cheap. A December 2019 bitcoin mining report states that “(…) bitcoin mining is supported more by renewable energy than almost any other large-scale industry in the world.”7 One major reason for this is that renewable energy has become cheaper than that from conventional power plants, and crypto mining is an extremely cost-sensitive business.

Investing in sustainable projects

Nevertheless, Bitcoin, Ethereum, and the like should become greener. To achieve this, crypto companies could invest in sustainable projects. This is what Ripple Labs, the company behind XRP, is doing. Within 35 years, Ripple wants to offset 1.5 million tons of CO2 through solar energy projects.8 There’s also the potential for crypto trading platforms to offer CO2 certificates. Through these, users can commit to sustainable projects when buying or selling their cryptocurrencies. Airlines have a somewhat similar model in place. At the moment, however, implementing this kind of compensation is challenged by the fact that there is still little transparency when it comes to the CO2 footprint generated by cryptocurrency trading.9

What does the BISON herd think?

We set up a poll about Bitcoin’s environmental impact – here’s what the results showed. According to our social media poll (as of May 11th, 2021), more than 50% of BISON users feel that sustainability is important and think trading bitcoin is relatively sustainable. Slightly under half of BISON users express interest in compensating the CO2 consumption generated by their trades by supporting climate protection projects. A fifth of the respondents would be willing to pay a few cents, and slightly fewer would be willing to pay a contribution of up to 3 EUR.   Our website (as of 15/12/21) poll was similar. In addition to those results, it also showed that 87% think it’s time to do something to improve Bitcoin’s carbon footprint. Users believe this should be primarily implemented by Bitcoin miners, but also by trading platforms and traders/investors. The BISON herd also came up with quite a few constructive suggestions on how such improvements can be implemented, including: “Making mining be CO2 neutral”, “Switch to Proof-of-Stake”, or “Plant a sufficient amount of trees”.

Conclusion

Cryptocurrencies already make a significant contribution to sustainability in terms of their social and economic impact on society. Though, there is still room for improvement in their environmental sustainability. Using more renewable energies for mining, such as wind, water, or solar energy, could support climate protection. Awareness seems to be spreading, given that more and more environmentally friendly coins are being developed and a growing number of crypto companies are committed to sustainable projects. Even a large percentage of the BISON herd is keen on offsetting the CO2 consumption that results from buying or selling cryptocurrencies.

Sources

  • 1 The World Bank (2018). Gains in Financial Inclusion, Gains for a Sustainable World. Online: https://www.worldbank.org/en/news/immersive-story/2018/05/18/gains-in-financial-inclusion-gains-for-a-sustainable-world (last view 16.12.21).
  • 2 Haig, S. (2021). Flucht vor Finanzdiskriminierung: Minderheiten investieren in Krypto. Online: https://de.cointelegraph.com/news/minority-communities-are-investing-in-crypto-to-escape-financial-discrimination (last view 16.12.21) and Coinbase (2020). Coinbase Reports: Black Americans & Crypto. Online: https://blog.coinbase.com/coinbase-reports-black-americans-crypto-97e54cc89f84 (last view 16.12.21).
  • 3 Reinberg, M. (2021). Marcus Reinberg gibt Einschätzung zur Zukunft von Kryptowährungen. Online: https://www.presseportal.de/pm/156927/5042590 (last view 16.12.21).
  • 4 Bundesamt für Sicherheit in der Informationstechnik (o. D.). Blockchain macht Daten praktisch unveränderbar. Online: https://www.bsi.bund.de/DE/Themen/Verbraucherinnen-und-Verbraucher/Informationen-und-Empfehlungen/Technologien_sicher_gestalten/Blockchain-Kryptowaehrung/blockchain-kryptowaehrung_node.html (last view 16.12.21).
  • 5 EU-Commission, Strategy for Financing the Transition to a Sustainable Economy, 6.7.2021, COM(2021) 390, final.
  • 6 Leising, M. (2021). Ethereum Closes In on Long-Sought Fix to Cut Energy Use Over 99%. Online: https://www.bloomberg.com/news/articles/2021-05-23/ethereum-closes-in-on-long-sought-fix-to-cut-energy-use-over-99 (last view 16.12.21).
  • 7 Fidor Bank (o. D.). Krypto und Nachhaltigkeit: Passt!? Online: https://www.fidor.de/blog/krypto-nachhaltigkeit (last view 16.12.21).
  • 8 t3n.de (2021). Ripple mit Partnerschaft für grünere Kryptobranche. Online: https://t3n.de/news/ripple-partnerschaft-fuer-1416208/ (last view 16.12.21).
  • 9 Börse Stuttgart/Vereinigung Baden-Württembergische Wertpapier-börse e.V. (2021). Heiß diskutiert: Energieverbrauch von Kryptowährungen – Gestaltungsmöglichkeiten für Klimaneutralität und Energieeffizienz in der aktuellen politischen Diskussion.