Cryptocurrencies are coming under fire for their environmental record as traditional investments rapidly shift towards greener environmental, social and governance (ESG) values. So how long will it take for cryptocurrencies to achieve green certification?
Green investments are bond-like assets that pay for projects that have positive environmental and social outcomes. For example, green bonds can help reduce greenhouse gas emissions, increase renewable energy capacity, and promote clean transportation infrastructure.
On the other hand, investing in cryptocurrencies is widely considered to be environmentally unfriendly, mainly due to crypto mining and the huge amount of energy it requires. Mining in the context of cryptocurrencies is referred to as “proof of work” (POW), where cryptocurrency “miners” use specialized computers to solve complex mathematical formulas to secure transactions and create new coins. refers to the mechanism. This is where energy use comes into play.
Agencies and organizations such as the International Energy Agency and the United Nations have expressed concern about the impact of cryptocurrency mining, especially the most famous crypto asset, Bitcoin.
Environmental impact of cryptocurrencies
The United Nations University Institute for Water, Environment and Health estimated that the Bitcoin network caused significant carbon, water and land emissions from 2020 to 2021. Bitcoin’s carbon footprint is equivalent to burning 38 billion tons of coal, and its water footprint (mainly used for cooling systems) could meet the domestic water needs of more than 300 million people in sub-Saharan Africa. It will be.
According to the Cambridge Blockchain Network Sustainability Index, the Bitcoin network’s electricity consumption exceeds that of several developed countries, including Norway and Sweden. For investors serious about achieving ESG goals, this aspect of cryptocurrencies is likely to be a deal breaker.
The lack of regulation regarding cryptocurrency activity also makes it difficult. After years of being on the fringes of financial markets and seen as a get-rich-quick venture, crypto investing is becoming mainstream. However, there is still little regulation to protect investors and ensure participants adopt practices consistent with ESG values.
Skeptics point to major issues plaguing these markets, including money laundering, fraud, and the use of cryptocurrencies and platforms to manipulate prices.
Therefore, it is certainly difficult to make green claims against cryptocurrencies. But at the same time, it would be misleading to look at only one side of the coin. The truth is that cryptocurrencies are on a difficult but achievable path to widespread acceptance as environmentally friendly.
Decarbonizing the cryptocurrency industry
First and foremost, the industry itself recognizes the need to change its practices and processes to become more sustainable. In 2021, a significant number of companies in the crypto industry signed the Cryptocurrency Climate Agreement (CCA), which has a long-term goal of decarbonizing the global crypto industry by 2040.
CCA has set two interim goals. The first was the development of standards and technologies to enable blockchain to be powered by 100% renewable energy by as early as 2025. The second goal stipulates that signatories must achieve net-zero emissions from electricity consumption by 2030.
Recent technological developments suggest that the industry is beginning to put plans into action with the advent of sustainable tools and infrastructure.
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Several companies, such as Mara and Argo, are working on technologies such as energy-efficient immersion cooling systems that will significantly reduce the energy consumption required for mining.
These companies are also developing systems that can recycle the heat generated by digital assets and data centers and redirect it to provide energy to communities. The implementation of these technologies will be facilitated by the relative liquidity of crypto miners and the opportunities that some governments and regions offer to crypto miners.
Additionally, the cryptocurrency industry has seen the emergence of cryptocurrencies that claim to be environmentally friendly, such as the Cardano public blockchain and Powerledger. These currencies use a less energy-intensive mechanism called “proof of stake” (POS) rather than POW.
Unlike POW, POS miners must stake their holdings (amount of cryptocurrency) when validating and validating transactions and records. Therefore, if a miner attempts to falsify the records, they could potentially lose their stake. This process significantly reduces energy usage by eliminating the need for complex computer calculations. In fact, in 2022, the cryptocurrency Ethereum transitioned from POW to POS, reducing energy consumption by almost 100%.
The path to green crypto is being eased by institutions like the Financial Stability Board, which are taking steps to provide a framework for understanding, adhering to, and achieving ESG goals and values.
Combining these factors could open the door to a future where conscious investors can take a chance on cryptocurrencies.
Jean Bessala is a Lecturer in Finance at Salford Business School, University of Salford.
This story originally appeared on The Conversation. Read the original article here.
