Article by Joe Zietman
Barely a day goes by without some self-professed expert declaring cryptocurrencies as the future of money, putting an end to the monopoly of central banks and governments, and their ability to inflate away our purchasing power through endless monetary expansion.
Back in the real world, however, the future of cryptocurrencies is not assured. Aside from the concerns over government regulation, the environmental impact of cryptocurrencies cannot be ignored in the context of our current climate emergency. This problem alone is a significant barrier standing in the way of their wholesale institutional adoption. Given the gargantuan task of reforming our global economy towards being carbon-neutral, big corporates do not want to champion cryptocurrencies if they are undeniably contributing to our climate woes.
Of course, I could not write an article about cryptocurrencies without considering the views of the ‘Dogefather’ himself, Elon Musk. The Tesla and SpaceX CEO recently tweeted his concern “about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emission of fuel” before stating that he believes “it has a promising future, but this cannot come at a great cost to the environment”. This tweet alone sent the price of Bitcoin plummeting. Musk also stated that Tesla would no longer accept Bitcoin as payment for their cars
Of all the thousands of cryptocurrencies, Bitcoin is the biggest culprit in terms of its energy use. Analysis from Cambridge University suggests that Bitcoin uses more electricity annually than Argentina. This is because the process of mining Bitcoin, the ‘proof of work’ mechanism, in which miners compete to solve increasingly complex mathematical puzzles to propose a block to the blockchain and gain a reward, requires an extortionate amount of electricity. This problem is made even worse because China, home to the greatest number of miners, sources most of its electricity from coal which, as Musk rightly points out, is the dirtiest of all fossil fuels.
As many will know, although Bitcoin is the largest cryptocurrency by market capitalisation, it is certainly not the only player in town. Of particular interest when discussing possible environmental solutions are so-called ‘green’ cryptocurrencies, which avoid the energy-intensive ‘proof of work’ mining mechanism that plagues Bitcoin.
With the fifth biggest market capitalisation, Cardano can probably lay claim to being the largest ‘green’ cryptocurrency. It utilises a ‘proof of stake’ mechanism, whereby users stake their cryptocurrency in order to validate transactions and help propose a block to the blockchain, unlocking their reward. As a result, Cardano uses a fraction of the amount of electricity that Bitcoin uses. Further analysis from Cambridge University found that Cardano uses 6GWh of electricity annually, which amounts to less than 0.01% than that used by Bitcoin.
Other smaller ‘green’ cryptocurrencies have embraced this environmental cause in a more creative fashion. SolarCoin, which also operates a ‘proof of stake’ mechanism, rewards those who, rather than consuming electricity, generate it, though only through solar technology. It currently rewards users with one SolarCoin for every 1 MWh of electricity generated.
BitGreen is a more accessible cryptocurrency than SolarCoin for the environmentally conscious amongst us. It rewards users with coins by engaging in environmentally positive actions such as using a car-pooling app or buying sustainable food and drink items.
Then we have Chia, which utilises an altogether different mining mechanism, dubbed ‘proof of space’. This mechanism rewards users who allocate unused hard drive space for storage. Rather than using ever more electricity to alter the potential solution to the computational problem, ‘proof of space’ allows users to store possible solutions before the mining has even commenced. The greater the hard drive space, the greater chance miners have of possessing the solution and obtaining the reward.
However, it is not all plain sailing for these ‘green’ cryptocurrencies. If any of them want to replace the likes of Bitcoin and Ethereum as the market leaders in the crypto space, they have plenty of catching up to do. This is even true for the developers of Cardano. Whilst numerous decentralised applications already run on the Ethereum blockchain, no popular application is currently running on the Cardano blockchain. As for Chia and its ‘proof of space’ mechanism, this faces environmental problems itself, given the massive waste resulting from miners churning through hardware, with some countries such as Vietnam reportedly facing hard drive shortages.
Ultimately, it is anyone’s guess as to whether one, if any, of these ‘green’ cryptocurrencies can replace Bitcoin as the pre-eminent coin and whether the cryptocurrency community as a whole can overcome this pressing environmental challenge. Perhaps the ‘Dogefather’ himself will soon give us some indication as to what lies in store for the rapidly changing world of cryptocurrency.