Dear sustainable investor, Investing in crypto is interesting and exciting. It has a high risk/return profile. That is, the chance of losing money is high, but in return there may be a higher profit. However, in this article we are not going to talk about investing. This article is about sustainable crypto currencies. How sustainable is crypto, and what are examples of sustainable crypto coins.
Bitcoin and Ethereum are far from sustainable. They consume unprecedented amounts of energy. But a "new generation" of sustainable cryptocurrencies are more energy efficient. There is hope.
Below we explain the relationship between crypto and sustainability. We also provide examples of "ecological" cryptocurrencies.
Sustainable cryptocurrencies: Proof-of-Work (PoW) vs. Proof-of-Stake (PoS)
The debate on sustainability and crypto currencies is heated. In general, we can say that most of crypto are not sustainable. On the other hand, we would like to mention directly that many studies compare apples to oranges. It is also true that there are many assumptions, as there is no fully transparent data on the exact energy consumption of crypto.
After a lot of research, to date I come to the conclusion that many cryptocurrencies such as Bitcoin and Ethereum are far from sustainable. This has mainly to do with energy consumption. More details below. However, cryptocurrency does have some sustainable advantages over current payment methods. So there is definitely potential.
In a nutshell, cryptocurrency can be sustainable. A prerequisite at the moment is that such crypto-currencies operate on the basis of Proof-of-Stake (PoS) or similar consensus mechanisms. The explanation of PoS is beyond the scope of this article. A brief summary is that new crypto-currencies (blockchain units) are created based on a "stake" consensus mechanism. The more crypto-currencies you own (stake), the more you can create (validate). This means that the "algorithm" is more or less self-expanding.
PoS is a relatively new development. Especially older crypto coins work on the basis of Proof-of-Work (PoW). New crypto coins can only be created based on computational power. This is called mining. A miner deploys heavy computers 24/7 to create new crypto coins.
Proof-of-Work slurps enormous amounts of energy and are not sustainable products at all.
Bitcoin is not sustainable
Bitcoin is not sustainable. Bitcoin is created on the basis of Proof-of-Work. It has entire data centers with thousands of computers. Its only function is to solve "math" problems 24/7. The necessary computing power increases over time. Bitcoin has a limited number of coins that can be mined. The fewer that remain, the more computing power is required to create a new Bitcoin.
The exact energy consumption is not known. The Cambridge Bitcoin Electricity Consumption Index estimates that Bitcoin alone consumes 136.38 Terawatt-hours each year (source: University of Cambridge, Cambridge Centre for Alternative Finance. "Cambridge Bitcoin Electricity Consumption Index").
This is more energy consumption than the Netherlands, Argentina, Sweden, et cetera.
And by now, according to the Bitcoin Energy Consumption Index, this consumption would have increased to >200 Terawatt-hours!
Bitcoin is not sustainable. In fact, it is currently disastrous for nature and the environment. And Bitcoin energy is currently mainly consumed on non-renewable energy.
Moreover, more sustainable alternatives to Bitcoin exist. These are the new generation of crypto-currencies that work on the basis of Proof-of-Stake and/or improved mechanisms.
Ethereum is unsustainable as well
The well-known Ethereum is the leading blockchain platform today. Unlike Bitcoin, Ethereum's long-term potential seems strong in my opinion. Especially since many crypto projects are built on the Ethereum network.
Unfortunately, Ethereum is also not sustainable.
Its exact energy consumption is not known. The Cambridge Bitcoin Electricity Consumption Index estimates that Ethereum consumes 112.6 Terawatt-hours each year (source: University of Cambridge, Cambridge Centre for Alternative Finance. "Cambridge Bitcoin Electricity Consumption Index").
The total energy consumption of Bitcoin + Ethereum is as much as the total energy consumption of Italy and, almost, the United Kingdom. You can follow the development via the Ethereum Energy Consumption Index.
Currently, Ethereum is working on Proof-of-Work. Hence, the energy consumption is detrimental and leads to a lot of CO2 emissions. Within the community there are plans to switch to Proof-of-Stake. For now, it remains just plans. Let's hope that one can be implemented. At least it would make Ethereum more sustainable.
Although I personally believe in the technological utility of Ethereum, it cannot be categorized as sustainable investing at this time.
How sustainable can crypto be?
As indicated, PoW-based crypto currencies are not sustainable. They consume unprecedented amounts of energy. Energy that is produced mainly from non-sustainable energy sources. Based purely on sustainability, the future of crypto lies on the PoS consensus mechanism. Of course, there are advantages and disadvantages to PoS vs. PoW.
One partial solution is to mine crypto coins based on clean energy. For example, data centers for blockchain mining can operate partly on solar power. In the New York Times' interesting article Can Crypto Go Green, several experts talk about this topic. A simplistic summary is that it is partly possible, but there are also issues.
Moreover, energy consumption of crypto comes at the expense of other energy consumers. Think of the "normal" household. Crypto proponents come up with counterarguments. For example, author Rhian Lewis states that "In the US alone, the energy consumed by inactive households devices left on standby every year would power the entire Bitcoin network for 1.9 years." But the other way around is also true: stop Bitcoin and there is a lot of energy left over.
Of course, the truth lies in the middle. Certain crypto projects are useful for future innovation. For the sake of technological progress, it is logical to encourage this. The redundant crypto projects, and that is perhaps >95%, should be stopped. And so should other ways of wasting energy. Non-energy efficient appliances left on standby, driving the car around because it's fun, showering too long, and so on.
Energy use is often inefficient because we humans are inefficient. We are humans. Not robots. We forget. We act from emotions. We waste unconsciously.
From our reasoning, we as a society should fully commit to sustainable energy. This can also make crypto more sustainable with the right deployment.
3 Examples of sustainable crypto currencies
Whether crypto currencies are truly sustainable we honestly do not know. This is difficult to determine. Take online payments as an example. A transaction with a credit card, such as Visa, is more sustainable than paying with a money coin or bill. But whether online payments are so sustainable. After all, this is only possible with a global network on which providers like Visa and Paypal operate.
We can say that it is a more sustainable option compared to physical money. Know that crypto currency has the potential to perform transactions much faster than current online payment systems. This is a strong argument for crypto as a new digital payment system.
And similarly, we can also argue that there are sustainable crypto currencies compared to unsustainable crypto currencies like Bitcoin and Ethereum. Below we provide three examples.
Note: potentially, ecological crypto currencies are an example of sustainable investing. We are not there yet, but blockchain technology can make this possible.
Solarcoin is one of the best examples of sustainable crypto currencies. This is a crypto currency that promotes solar energy. This project distributes solarcoins based on solar power installations. For this, you can sign up as a household. The algorithm sends 1 solarcoin per 1 MWh of verified energy production. These solarcoins can then be used to buy other crypto coins.
Whether solarcoin will have much value now, and in the future, we do not know. The idea behind this project can be called sustainable though. A good example of how crypto technology can stimulate sustainability.
Cardano is a more sustainable alternative to Ethereum. And in contrast, Cardano does operate on a Proof-of-Stake basis. The energy consumption is significantly lower. How high this actually is, we unfortunately cannot indicate. There are many sources that give estimates. All are below the (far) consumption of Ethereum (and Bitcoin). But there is no unequivocal consensus on the actual energy consumption of Cardano.
Cardano is an example of a blockchain network based on Proof-of-Stake. Contemporary, there are dozens of similar projects being developed on PoS. Some of them are more sustainable than Cardano. One example is Nano.
Besides Solarcoin, Nano is also a good example of an ecological crypto currency. On the website, the founders state the following:
Nano was created to perform efficiently without the need for mining, an energy-intensive mechanism to process transactions. Instead, nano uses an innovative voting system where no mining is required.
They indicate that one Nano transaction currently consumes 0.111Wh. This is bizarrely lower than a Bitcoin transaction which consumes 2188.59 kWh (!) (source: digiconomist.net). Of course, the question is how this will develop if Nano grows to the size of Bitcoin. Will one Nano transaction still be so energy efficient?
It is not easy to determine whether crypto currencies are sustainable or not. At least we can draw the conclusion that Bitcoin and Ethereum are not currently sustainable. Another conclusion is that there are positive prospects for blockchain technology. People are extremely smart. The Proof-of-Stake mechanism is already more sustainable than Proof-of-Work. And there are already new improvements on PoS. Moreover, crypto has useful applications for technological developments. Therefore, it is necessary for developers to look for ecological ways to initiate useful crypto projects.