The climate dilemma haunting crypto: Securing a sustainable future for decentralised finance

The climate dilemma haunting crypto: Securing a sustainable future for decentralised finance

by David E Rutter, Founder and Chief Executive at R3

Crypto may be in the midst of a cold winter, but the rest of the world is sweltering. Record-breaking temperatures have wreaked havoc across Europe and the US, causing serious infrastructural and humanitarian damage. A year after the UN dubbed global warming a “code red” emergency, scenes of wildfires, evacuations and destroyed homes have provided a sobering reality to these warnings.

Companies are subsequently under mounting pressure to find more environmentally friendly ways of doing business. Crypto is not immune to this pressure, and as an industry with a notoriously large carbon footprint, must also begin adopting greener technology and operational practices.

For crypto to fulfil its aspirations of transforming finance for the better, the industry must proactively begin to engineer this transition itself before today’s environmental challenges outstrip the impact of the solutions we are implementing.

Power hungry

Crypto is, quite literally, power hungry. A recent report from the European Central Bank (ECB) found that the energy consumption of some crypto assets is similar to that of some mid-sized countries. The annual energy consumption of Bitcoin, for example, is comparable to the carbon footprint of Columbia and the electrical power consumption of Argentina.

Crypto’s high energy consumption stems from its reliance on Proof-of-Work (PoW) consensus mechanisms. PoW – in short – uses specialised hardware that validates transactions and ensures that all data entries into the blockchain are synchronised with each other, in the absence of a centralised body. This procedure, the ECB report points out, is “computationally expensive and translates directly into high energy consumption.”

This is far from breaking news. For years, crypto companies and communities have been aware of their large carbon footprint, meaning we would be wrong to assume that these alarming comparisons and statistics will provide the impetus for change.

So, why should crypto adopt more environmentally friendly practices – and more importantly – why now? There are fundamentally two main reasons.

Firstly, it is the right and responsible thing to do. If crypto wants to play a role in the financial system, then it must adapt to the standards and best-practice of that very infrastructure. The combined yearly emissions of Bitcoin and Ethereum negate past and target greenhouse gas emissions for most European countries individually. Crypto should not be exempt from meeting these types of goals, and should take responsibility to find more energy-efficient technologies.

Secondly, it is in the self-interest of the crypto community to adopt greener practices. With ESG criteria now a top priority for investors, crypto efforts that fail to use greener technologies risk losing out on funding and could potentially fall behind in what we expect to be an increasingly competitive field once the industry emerges from the current downturn. And, the longer the industry fails to act when it comes to reducing energy consumption, the more likely it is that government bodies take matters into their own hands with potentially heavy-handed regulation that could restrict innovation.

Get your house in order

The industry has been slow to move the needle on the green transition. Ethereum is currently preparing to move away from PoW to a Proof of Stake (PoS) model, whereby blockchains rely on miners pledging crypto-asset collateral instead of computing power, leading to substantially less energy consumption. However, the process is complex, taking years to develop, and it remains to be seen whether this transition actually happens. Even if it does, it is far from clear that PoS will be adopted by others that currently rely on PoW, and without mass adoption, it cannot offer a viable industry-wide solution.

Instead, crypto platform providers must search for more viable alternatives. These alternatives primarily exist in the form of private blockchains where – in contrast to public blockchains – the ledger is controlled by a centralised authority.

The peer-to-peer architecture of private blockchains means that consensus only requires parties to the transaction as opposed to the entire network, as is the case with public blockchains. This avoids the high computing resources that public blockchain consensus requires, which serves as a serious drain on electrical consumption. These types of private blockchains are emerging as the most energy-efficient choice that crypto companies can make.

Crypto can no longer hide from the harm it’s doing to the environment and must begin to implement more eco-friendly policies and technologies. This does not include linking mining machines to wind, solar or hydro power, which of course only redirects it from more productive uses like lighting or heating people’s homes. Doing so will allow the crypto industry to demonstrate the integrity needed to play a meaningful role in our financial system and change finance for the better. Private blockchains that use far more energy efficient peer-to-peer frameworks offer the most viable option in making this possible.

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