A sustainable future for cryptocurrencies?
One wouldn’t normally associate fintech with issues of environmental sustainability, but with cryptocurrencies such as bitcoin now consuming more electricity than the whole of Sweden, their carbon footprint is becoming a growing concern. Analysis by the University of Cambridge has shown that the bitcoin network uses more than 145 terawatt-hours (TWh) annually, which ranks it in the top 30 electricity consumers worldwide if it were a country.The reason cryptocurrencies consume so much energy is because crypto mining (the process of verifying transactions) requires vast amounts of computing power. As of April 2020, China accounts for more than 75% of bitcoin blockchain operation where almost half of miners live in areas with coal-based electricity generation.The exponential growth of cryptocurrencies we are currently witnessing is resulting in an exponential rise in their carbon footprint. But are there any sustainable alternatives on the horizon? What are the implications for cryptocurrencies and their brand reputation? In the year of the UN Climate Change Conference in Glasgow, is it time cryptocurrencies put sustainability firmly on their agenda too?
Not all cryptocurrencies are created equal
Experts note that the root cause for the heavy electricity consumption is the bitcoin consensus algorithm called ‘proof of work’ where miners are required to develop the cryptocurrency while earning coins. This carbon-intensive protocol, if remaining unchanged, could potentially undermine the wide implementation of this disruptive technology in the long term.However, new types of algorithms are emerging that could provide a basis for more sustainable ways of working. One of them is ‘proof of stake’, which validates transactions based on how many coins are held by a network participant rather than the amount of computational processing power they possess. As a result, proof of stake uses less energy and computing power. Examples of cryptocurrencies using this protocol include Cardano, Polkadot and Algorand, with Ethereum also announcing a move to proof of stake, saying it wants to “make Ethereum more scalable, secure, and sustainable”.In addition to the shift away from the computing power-intensive proof of work mechanism, there are also attempts to reduce the industry’s reliance on fossil fuels for mining. Companies such as Pow.re, for example, are running green bitcoin mining operations in the Canadian subarctic using hydropower.
Green reputation and investment
Building sustainability into the ethos and design of cryptocurrencies will be important if the industry is to succeed in the long term and continue to deliver the benefits of accessibility, security and transparency.Crypto brands with a strong reputation in the area of sustainability will be more attractive to mainstream, environmentally conscious investors. Environmental, social and corporate governance (ESG)-conscious financial institutions looking to invest will want to review cryptocurrency firms’ ESG credentials to ensure they are aligned with their own objectives and client expectations.Sustainability is also emerging as a platform for cryptocurrencies to create new and unique propositions that differentiate them in the marketplace. The Eco Coin, for example, is underpinned by ecological assets where every ECO Coin is backed by one tree. This coin enables organisations to incentivise, track and reward ecologically sound employee behaviour that contributes to their overall sustainability goals.Stronger climate change policies by governments around the world and ESG investing are driving change in all industries, including financial services. While cryptocurrencies are still a relatively nascent and volatile segment, their eco credentials will come under greater scrutiny too. This change is opening up new opportunities for cryptocurrencies to build their brand reputations through sustainability strategies and create a powerful new source of differentiation.If you wish to learn more about Wildfire’s fintech credentials, get in touch.