This is the second part of our blog series "Sustainable Investments" - conceived and written by our partners Asset Management Switzerland.
Worldwide more than 40 million people trade 20.000 different crypto currencies back and forth. It is no secret that these daily transactions account for a high energy consumption, leading to even higher environmental issues. Even though the topic of sustainability is increasingly hot, there is still much potential to go even greener. So why not making the blockchain universe green as well?
In the second part of our blog series «smart invest,» we would like to focus on the green power of the crypto universe. Yes, you heard right, decentralized finance and tokens are not as harmful to the environment as you might think (or at least not all of them). Allow us to illustrate this in more detail by looking at the downsides and upsides of decentralized products and services concerning environmental issues.
The Mining of Cryptos
It cannot be denied that the mining of cryptocurrencies involves lots of energy due to its complex structure, and increases the carbon emission footprint. To be more precise every year more than 130 terawatt-hours of electricity is needed to mine bitcoins alone. In comparison, Switzerland's energy consumption as a country is roughly 30% less per year! Of course, Bitcoin is not the only « electric burden» in our world but in contrast to other big cryptocurrencies, it is more likely to have a high energy consumption.
Mining new coins require a lot of computer power, which is the reason why entire data centers are needed, eating up a lot of electricity. Particularly bitcoin's decentralized structure currently causes huge carbon emissions. But the real cue here, boosting consumption is the so-called proof of work. Proof of work is a system that is used to verify new crypto transactions that are added to a blockchain. The work creates a new hash which is supposed to match the consisting hash of the current block. In simple words, the technique helps to verify new transactions to keep the network safe.
Environmental friendly(ier) Alternatives
Now that you know that the blockchain is a sophisticated but complex system, you might ask yourself if blockchain participants aren't clever enough to mine in a more environmentally friendly way. The answer is yes and no. No, because based on the established structures as it is the case with bitcoin for example, it is almost impossible to implement an alternative mining system. But for some cryptos it is indeed possible to switch from the proof of work approach to the proof of stake approach.
Miners promise a stake in the digital currency before validating transactions with a proof of stake. To verify blocks, miners must place a stake in the form of their current coins. Participants are required to show how long they have held the transaction. After a miner verifies a block, it is added to the chain, and the miner receives a new fee along with their old coin.
Adoption of Proof of Stake
After several months of waiting, Ethereum was converted from proof of work to proof of stake on September 15 2022. But to be fair, finding the proof of stake in the Ethereum network is not as new was most people think. The so-called beacon chain, which uses a proof-of-stake procedure, has already existed in the Ethereum network since 2020. This is now to be gradually combined with the main network. The underlying reason for mining new coins via the proof-of-stake method is that transactions on the blockchain can be carried out more quickly in this way. And that saves a lot of energy. To be more precise, it is expected that new transactions will save 99.95% of energy in the future. Also Bitcoin tries to improve its energy consumption, by using a lightening network for example. The lightening network was designed to enable offchain Bitcoin transactions that are not recorded in the blockchain. Since this second layer protocol does not require mining activities, payment transactions are not only cheaper but more energy efficient as well.
Klima Dao: Klima Dao is a decentralized organization focused on raising the cost of carbon emissions to cause the emission markets to falter. The goal is to increase the cost of carbon to encourage companies to create more emission-friendly work processes. The tokenized version of carbon credits base carbon tonnes can be purchased by market participants and tied to the coin KLIMA. Following a staking period of at least 5 days, participants receive the climate coins at a lower price and can sell them for a profit, which can be incorporated into the protocol to purchase additional coins.
Solarcoin: Another interesting cryptocurrency that does not only try to mine sustainably but mines for sustainability is called Solarcoin. Just like most other crypto coins, Solarcoin is transparent, decentralized, and independent of governments. The difference between Bitcoin, Ethereum, Ripple, and Co is, that it aims to verifiably generate solar energy. The concept behind this revolutionary concept is quite simple: The monitoring system broadcasts the created electricity to the SolarCoin Foundation, which in turn sends SolarCoins to the applicant's wallet in the amount of 1 SolarCoin per 1 MWh of verified energy generation. Petitioners can collect or spend SolarCoins according to their needs a receive ongoing subsidies over the next 20-30 years they produce energy.
Of course there is still a lot of potential upside for all coins, irrespective of whether they are already considered sustainable or not. We think especially energy-friendly coins that are committed to the environment and climate protection will have a bright future. Asset Management Switzerland AG offers both individual mandates and savings plans with the topic of cryptocurrencies. Together with the expertise of our CIO Torsten Dennin, you too can benefit from the digital world. So, what are you waiting for?
Questions? Asset Management Switzerland AG, Christina Lemm