Whether you believe in the future of cryptocurrencies or not, the popularity of decentralized finance (DeFi) is skyrocketing. The arguments in favor of crypto promise various advantages over the established financial system we currently depend upon, such as increased transparency, greater privacy, and inflation protection (to name a few).
In light of the growing DeFi market, critics of the movement often point to one alleged flaw: that crypto is bad for the environment.
How much truth is there to this condemning argument? Read on to learn about how bad crypto really is for the climate…
Are All Cryptocurrencies Bad for the Climate?
Many people equate cryptocurrency with Bitcoin, and project all of Bitcoin’s issues on the entire DeFi space. In the discussion about the sustainability of crypto, it is of paramount importance to distinguish between the different currencies.
Besides slow transaction speed and limited scalability, one of Bitcoin’s most prominent problems is its high energy use. This gives crypto the infamous reputation of being harmful to the environment.
Related: Who Invented the Carbon Footprint? The Shocking Origins
Why Does Bitcoin Use So Much Energy?
To understand Bitcoin’s energy requirements, there are two aspects worth looking at: Bitcoin transactions and Bitcoin mining.
A single Bitcoin transaction requires the same amount of energy that an average U.S. household uses in about 77 days (1). With 200,000 – 300,000 Bitcoin transactions per day (2), the energy bill of the transaction sector alone is hefty.
But Bitcoin’s real sustainability problem is its “mining” mechanism (called “proof-of-work”), which is incredibly energy-intensive.
In simple terms, you can think of mining as the “creation” or “unearthing” of new coins. It involves the validation of the cryptocurrency on a so-called “blockchain” ( a decentralized, public digital ledger). Think of crypto miners as real-world miners, but instead of digging up precious metals, such as platinum or gold, they unearth coins instead. In short, miners “dig up” new crypto by solving complex mathematical equations.
Why is Proof-of-Work Problematic?
The proof-of-work algorithm is the culprit of Bitcoin’s bad environmental reputation. In order to solve the complex mathematical equations and add new Bitcoin to the blockchain, miners use powerful supercomputers. Because Bitcoin’s popularity has increased drastically over the past few years, its mining process has become increasingly commercialized, with huge data centers working day and night to mine new crypto.
Over time, the equations that miners have to solve to generate new Bitcoin increase in difficulty. As a result, the computers they use become more sophisticated (and demand more energy, especially for cooling-purposes).
According to the New York Times, Bitcoin mining alone uses 91 TwH of electricity each year. This amounts to 0.5% of the global electricity consumption, and is more energy than Austria, Finland, or Venezuela consume annually (3).
The exact carbon footprint of the mining process heavily depends on the geographical location of the Bitcoin farms. In countries which rely primarily on renewable energy sources, mining is more sustainable than in those that rely on fossil fuels.
The Benefits of Proof-of-Stake
Bitcoin’s environmental impact isn’t representative of all cryptocurrencies, many of which are inherently more sustainable. A popular alternative to the proof-of-work mechanism Bitcoin uses is “proof-of-stake”.
Proof-of-stake is inherently more energy efficient because it reduces the amount of computation necessary to validate crypto transactions. With this method, owners of coins can “stake” (or set aside) cryptocurrency which will then be used for verifying transactions on the blockchain.
Sustainable Alternatives to Bitcoin
A prime example of a more sustainable blockchain is DeFiChain. Because it uses a decentralized proof-of-stake mechanism, DeFiChain allows for a “massive scalable and energy conserving consensus” (4).
DeFiChain is a secure blockchain specifically tailored to decentralized finance. It builds upon and is anchored to the Bitcoin blockchain, but implements innovative characteristics that Bitcoin doesn’t inherently have (such as faster and cheaper transactions).
The $DFI cryptocurrency is central to the project. It can be used for all payments in the DeFiChain ecosystem, such as transaction fees and interest payments. The $DFI coin is capped at 1.2 billion, with its supply gradually reducing over time.
Besides fostering innovation in the DeFi space, DeFiChain can boast a powerful community of supporters.
Another innovative crypto project that takes sustainability to the next level is SolarCoin (SLR).
In stark contrast to other cryptocurrencies, SolarCoin actually incentivizes direct environmental action by rewarding 1 SLR for every Megawatt hour generated from solar energy.
This system encourages and benefits those who install solar panels with the motive of furthering renewable energies. Users must simply prove their solar energy production by uploading the relevant documentation.
References
(1) https://digiconomist.net/bitcoin-energy-consumption
(2) https://data.nasdaq.com/data/BCHAIN/NTRAN-bitcoin-number-of-transactions
(3) https://www.fairplanet.org/story/is-cryptocurrency-bad-for-the-environment/
(4) https://defichain.com/white-paper/#executive-summary
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