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Cryptocurrencies have garnered a reputation for being environmentally unfriendly. This is due to the vast amounts of electricity consumption required. Bitcoin, for instance, needs 2,264Kwh (Kilowatt-hours) of electricity to power just a single transaction – i.e. enough to boil 1,500 kettles. Indeed, any cryptocurrency using a “proof of work” blockchain-based algorithm to secure itself is likely to involve large energy consumption – much of it powered, ultimately, by fossil fuels.
This raises some important questions. What role can blockchain-based digital currencies play in the global push to “go green” (move towards renewable energy)? Are cryptocurrencies fated to merely undermine this effort, or could they be a positive force? Below, we offer some answers.
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Why is crypto so power hungry?
Cryptocurrencies like Bitcoin are “decentralised”, meaning that no central body (or authority) is watching over the transactions to help prevent fraud, theft or simple mistakes in moving money. Instead, every computer in the cryptocurrency network holds a full list of the transactions on a “public ledger” called the blockchain.
When a buyer and a seller make a Bitcoin transaction, for instance, most of the computers in the network must work to confirm it. This makes for a highly secure network, since the system helps prevent people from spending fake cryptocurrency. Every ten minutes, global transactions are added to the ledger (blockchain) in groups called “blocks”.
A particular computer will add the block to the blockchain if it can first find a unique “key” (i.e. the solution to a mathematical equation involved in a transaction). This process is called crypto mining, and whoever “solves” the problem is rewarded with some of the cryptocurrency.
The keys are difficult to decipher, however. With Bitcoin, for example, the key is referred to as a “hash” and represents a 64-digit hexadecimal number. When a new block is added to the ledger, this validates every subsequent block – thus growing the “blockchain”.
Using large numbers of computers like this rather than a central one, however, is a huge drain on power. This is where the “green credentials” of cryptocurrency come into play.
Crypto and the “green shift”
Bitcoin remains hugely popular with retail investors – especially younger people attracted by the potential for high, quick returns. Cryptocurrencies also have appeal due to their “anti authority” nature, being decentralised and outside of direct government control. However, the high power consumption of Bitcoin is also more recognised in 2022, creating tension with these appealing traits. In May 2021, for instance, Elon Musk announced that Tesla would be ceasing payments using Bitcoin due to environmental concerns.
Countries like China have also cracked down on cryptocurrencies – partly due to concerns about their environmental impact, although likely also because they threaten government-controlled “cryptocurrencies” like the digital Yuan. In response, many blockchain projects – both new and existing – are exploring ways to improve their carbon footprint. Some are focusing on developing less energy-intensive validation systems (for the blockchain), whilst others putting more efforts into basing crypto mining more upon renewable energy sources.
The cryptocurrency with the greatest public attention in this regard, at the moment, is Ethereum. Here, the Ethereum Foundation is moving the cryptocurrency towards Ethereum 2.0 which will change the “proof of work” system to a “proof of stake” (PoS) one. Developers claim that this will reduce energy consumption of Ethereum by over 99.95%. The PoS system works by selecting “validators” who have a staking smart contract – where the project’s native tokens are “locked away”. If someone has more tokens, therefore, then they have a better chance of being chosen by the protocol to add additional data to the blockchain.
For participating, the miners will get an amount of cryptocurrency (similar to the proof of work system, in this regard). Naturally, this whole approach involves less computer hardware – thus decreasing the cryptocurrency’s power needs. It also has the potential to enhance the security of the overall network. Two great wins!
Ethereum is not the only cryptocurrency making positive strides in the green revolution. Indeed, organisations like the Crypto Climate Accord have emerged to help coordinate the world’s 1,000s of cryptocurrencies towards decarbonisation and “net-zero greenhouse gas emissions by 2040”. More immediately, their goal is for all blockchains to be powered by renewable energy come 2025. Newer cryptocurrencies have also emerged with a greater focus on environmental sustainability. Examples include Cardano, Stellar and Nano. The latter, for instance, does not use mining at all. Rather, it uses “blockchain lattice” technology and Open Representative Voting (ORV) to validate transactions. Innovations like this put cryptocurrency on strong footing to move this exciting investment sphere towards greater participation in the green revolution.
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