If Bitcoin was a country, it would be the 27th largest consumer of electricity on the planet.
This fact has caused a lot of black PR for cryptocurrencies and until recently "green cryptos" sounded like an idealistic dream.
But if cryptocurrencies — already worth $2 trillion — are the future of money, their impact on the environment can’t be ignored as climate change and sustainability are becoming key factors for most global businesses.
The problem with Bitcoin lies in its DNA. Satoshi Nakamoto, the creator of the Bitcoin concept, sought a solution independent of a central stakeholder. This led to a blockchain consensus based on a computational race between miners in a distributed network supporting the system (proof of work), which causes high energy requirements.
Bitcoin has become an icon of irrational energy consumption, but all cryptocurrencies create some environmental impact. This is challenging to estimate, as it depends on the amount and type of energy resources used, the infrastructure, cooling systems, etc. Another environmental cost comes from the disposal of hardware and e-waste. According to economist Alex de Vries, the computing power of mining hardware doubles every year and a half, which means that large amounts of hardware that are considered "old" are disposed of.
Can cryptos be greener?
Does it mean that eco-friendly cryptos are a song of the future? Experts claim that there are ways to make them more sustainable and that the mining process is already outdated.
"No cryptocurrency that has come to market in the last four or five years has used proof of work, and that's because it's an obsolete technology,"
Alex de Vries said in an interview with The New York Times.
So how can cryptos go green? And how can sustainability change them? Here are the most important factors:
1. Alternative sources of energy
One way to make bitcoin mining more sustainable is to use non-carbon resources such as hydro, wind, and solar power. There are already examples of hydroelectric plants powering bitcoin mines in the US and Costa Rica, and the financial services company Block (previously Square ) is planning to build a solar-powered bitcoin mining facility. An Iceland-based company, Genesis Mining, enables mining for bitcoin and ether in the cloud and uses 100% renewable energy.
In addition, some experts argue that bitcoin mines could use wasted or "stranded" energy that would not be used anyway.
"Some are considering using stranded natural gas that would otherwise have been flared, which would make using the natural gas for Bitcoin carbon neutral at best if there were no regulations on dumping methane and flaring," Paul Prager, CEO and founder of bitcoin mining company Terawulf, told The New York Times.
2. Proof of stake
While Bitcoin and Ethereum rely on the energy-intensive, problem-solving protocol known as “proof of work” (PoW), newer cryptocurrencies use a different way of reaching consensus called “proof of stake” (PoS). These systems settle transactions not through a computational race, but by proving ownership of enough coins. Instead of miners competing with each other, PoS system validators are selected by an algorithm that takes into account their "stake," which can save energy.
Cardano, for example, is a PoS cryptocurrency developed by the co-founder of Ethereum, the second-largest cryptocurrency after Bitcoin. People buy units of Cardano to become members of the network instead of mining new coins. This means that Cardano uses orders of magnitude less energy than Bitcoin.
Nano is another low-energy cryptocurrency that does not rely on mining, but instead uses "blockchain lattice" technology that creates user blockchains for all members of the Nano network. Other already functioning cryptocurrencies that use PoS are Polygon, Tezos, Polkadot, and EOS.
Ethereum is said to be working on switching to proof of stake.
Unfortunately, the proof of stake protocol also has some disadvantages for the system as it can undermine the decentralization if a narrow group of validators has a large stake.
Legislation usually lags behind reality, and Bitcoin is still a relatively new technology — but lawmakers in some countries are already working to bring the carbon footprint of cryptocurrencies under control.
There will likely be two forms of regulation that can affect virtual currencies.
The first will require crypto companies to be more transparent about their carbon costs. The other could introduce some form of carbon tax.
Environmental organizations are pushing for these types of policies, and the European Parliament has proposed regulation of crypto asset markets that includes some "green" principles. Crypto Climate Accord, an organization that unites over 250 entities from the crypto, finance, and technology sectors, calls on crypto market participants to commit to achieving net-zero emissions by 2030.
Some countries have taken even more drastic measures and banned bitcoin mining: China, Bangladesh, Egypt, Iraq, Morocco, Qatar, and Tunisia. Although environmental issues are probably not the key factor here.
4. Growing pressure from environmentally conscious consumers
Social and environmental responsibility is becoming increasingly important, especially for younger generations, and ESG has become a growing trend in financial markets.
Customers are interested in "greener" crypto alternatives, such as Chia, IOTA, Solarcoin, and Bitgreen.
They do not require mining and encourage positive environmental behavior by rewarding users for actions such as drinking sustainable coffee, carpooling, and volunteering.
The growing awareness of cryptocurrencies' energy consumption is supported by highly influential people — last year Elon Musk stopped bitcoin payments at Tesla, which some believe may have drawn attention to Bitcoin's carbon footprint and sparked the race to make cryptocurrencies more environmentally friendly.
The path to greener cryptocurrencies requires major changes in the system that has worked undisturbed for over a decade. Moving from "traditional" mining to a less computationally-intensive blockchain approach would require consensus within the mining community and could result in a decline in the value of the currency.
However, for many crypto enthusiasts, blockchain is seen as a "mindset" and tool to drive technological innovation. And perhaps crypto industry players are drawing a lesson from automotive history: car makers reluctant to introduce emissions standards for themselves years ago, are now paying the price in additional fees and taxes on their products Some experts believe that the crypto industry is at a similar point — and the question is whether long-term benefits and sustainability trends take precedence over immediate profits.
On the other hand, war in Ukraine and sanctions against Russia are likely to raise new challenges for the crypto industry. This may put efforts toward making crypto green on hold.