Which crypto technology is better for the environment?
There’s been a lot of discussion lately about whether cryptocurrencies are good or bad for the environment. Tesla cited the energy consumption of Bitcoin as the reason they would stop accepting it as payment for cars. Greenpeace has said the same with regards to donations.
And on the other side, supporters of Bitcoin say that it incentivizes the migration to green energy sources. Bitcoin uses a Proof-of-Work (POW) system, which incentives using up as much energy as possible at the cheapest price possible. Two things happen as a result of this: The hardware required to mine new Bitcoin efficiently becomes specialized, expensive, and in the hands of a handful of big mining operators, the majority of whom are currently based in China. And the energy source used to mine Bitcoin gravitates towards cheap and often green sources. This leads to a world where you have a handful of big Bitcoin mining companies, with superior hardware, using green energy to bring new Bitcoin into the world.
POW as an alternative to Carbon credits?
An economic based incentive for green energy is not new. Carbon credits encourage businesses to use green energy:
Companies or nations are allotted a certain number of credits and may trade them to help balance total worldwide emissions…The intention is to reduce the number of credits over time, thus incentivizing companies to find innovative ways to reduce greenhouse gas emissions. [4]
By permitting allowances to be bought and sold, an operator can seek out the most cost-effective way of reducing its emissions, either by investing in ‘cleaner’ machinery and practices or by purchasing emissions from another operator who already has excess ‘capacity’. [5]
Carbon credits however have a number of criticism stemming from the fact they require human involvement to manage. Firstly the total number of carbon credits per year have to be agreed – too many and it will result in an increase in carbon, too little and you will stifle economic growth and favoring some industries over others. Then the credits have to be allocated to individual nations, which can lead to some countries objecting. And lastly the carbon credits themselves which ought to incentivize the shift to green energy is open to miscalculation [6] or outright fraud [7].
In this way we can view Bitcoin as a much more efficient incentive for the production of green energy provided of course green energy is cheaper than fossil fuels to begin with. China is estimated to make up 55-66% of the Bitcoin mining energy consumption [8], but it still largely dependent on fossil fuels:
“About 75 per cent of miners use some kind of renewable energy, Cambridge studies show, but renewables still account for less than 40 per cent of the total energy used.” [9]
Consider for a moment however, if it were possible to trace the Bitcoin through its supply chain and identify the energy source used to mine it (I have not heard of such a scheme but I’m sure brighter than minds than mine can figure it out), then could Bitcoin be an embodiment of Carbon credits? It would solve the problem of carbon credit fraud and companies could buy “green Bitcoin” as a way of meeting their Carbon commitments. Similar to Carbon credits, companies would face a choice between lowering their carbon footprint, buying Bitcoin based Carbon credits, or mining their own green Bitcoin which could help alleviate concerns over centralization.
POS as an alternative to POW?
POW networks like Bitcoin are however just one type of method used to secure a cryptocurrency blockchain however. Another type, is Proof-of-Stake (POS).
POS networks use considerably less energy than POW networks. Cardano, a leading POS coin, is cited to theoretically be 4 million times more energy efficient than Bitcoin while maintaining the same level of security:
“At the same level of decentralization – for example, 100 pools, which exceeds bitcoin’s current network – Cardano could consume as little as 0.01567GWh (gigawatt-hours) per year. Bitcoin, meanwhile, would require 67,000 GWh per year (according to current statistics). This is based on Ouroboros’ ability to run on a Raspberry Pi, which has a power consumption of 15 to 18W (watts). In theory, this equates to more than four-million times the energy efficiency. ” [1]
However not many stake pool operators run their operations on a Raspberry Pi (a super low cost computer used by hobbyists). A more accurate assessment of the Cardano network might be from Cylonix Pool [2] who estimates the Cardano network to be 37,500 times more energy efficient Bitcoins. Not as great as 4 million, but still pretty impressive. Note that there are other POS networks out there [3] and although I could not find credible sources of how much energy the networks consume, they are likely to be similar to the estimate for Cardano.
Proof-Of-Stake does still require electricity to run, but thanks to the fundamental way they operate, they consume much less power – they are not a race between computers to mine the next block using as much energy as possible as in the case of POW. Instead the randomly select a computer to mine the next block, and each computer has to just remain switched on in case it is called. Using sophisticated hardware such as GPUs does not give one an advantage than using low power processors.
Conclusion
So is POS better for the environment than POW? Well it depends on your point of view. If you believe that the world needs to develop new green energy sources then a POW network like Bitcoin provides one hell of a motivation in countries where green energy is cheap, or where green energy sources were too remote to make it practical to transport otherwise. If Bitcoins energy source could be traced then we could have “Green Bitcoin” which opens up all sorts of interesting questions or carbon credit economists to ponder over.
If however you think the world needs to use up less energy and make green energy cheaper, then Proof of Stake networks like Cardano are a clear winner.
Either way, the cryptocurrencies present a highly efficient market-based mechanism for tackling climate change if managed right.
Sources:
[1] From Classic to Hydra: the implementations of Ouroboros explained – IOHK Blog
[2] Cardano vs Bitcoin – An Energy Consumption Comparison
[3] Digital Asset Ranking, Yields and Dividends | Staking Rewards
[4] Carbon Credit Definition (investopedia.com)
[6] A Top U.S. Seller of Carbon Offsets Starts Investigating Its Own Projects – Bloomberg
[7] Alert: You Need to Avoid These Carbon Credit Scams – Carbon Credit Capital
ReddSparks Crypto Blog 
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