Sugi’s Josh Gregory argues that crypto getting really green – for now – may be wishful thinking.
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Many consider crypto’s environmental footprint to be one of its biggest flaws. But changes are afoot. Last week, the crypto world was in turmoil as Ethereum, the second-largest cryptocurrency by market value, transitioned to a more environmentally friendly mode of production (known as “merger”). ), which should mean 99.99% less carbon emissions.
So some are starting to wonder if crypto is now really “green”?
As a background, the original encryption algorithm, “proof of work”, is incredibly power-hungry. Ethereum, which is also used by other blockchains and decentralized applications, has moved to “proof of stake,” which works in a much more energy-efficient way. At first glance, this should result in a substantial decrease in overall emissions from the crypto ecosystem.
But not so fast. There are two major issues that mean crypto will struggle to rebrand itself as green.
First, bitcoin, by far the largest cryptocurrency, is still created and processed using the power-intensive proof-of-work algorithm. This is part of bitcoin’s main function; it’s not going to change. And bitcoin mining has a massive footprint. Some estimates put it at 191 tons of carbon per bitcoin, the equivalent of cutting down 13,000 trees. Every day, the bitcoin network uses as much energy as Norway.
For the environmentally conscious bitcoin investor, there are a few options to lessen that footprint. The Crypto Climate Accord, an industry body founded in 2021, encourages mining operations to use more renewable energy, and soon one will be able to search for bitcoins labeled as such. It is also possible to purchase carbon credits to offset the footprint of your bitcoin wallet, either separately or as part of the bitcoin purchase itself.
This brings us to the second, more systemic problem. The environmental footprint of crypto is calculated in a limited way that does not take into account the large indirect emissions that are increasingly included in the calculation of the impact of other types of investment.
What does that mean? A company’s carbon emissions are traditionally considered according to three different “scopes”, or to put it another way, according to three increasingly large circles. These are Scope 1 (the emissions a company creates when it produces things); Scope 2 (emissions from its electricity suppliers); and Scope 3 (the emissions of all its suppliers and all potential users of its products). Scope 3 is often by far the largest proportion.
Although no one is claiming that cryptography is a business, its production and use have significant indirect impacts, which should not be ruled out. Indeed, the Crypto Climate Accord suggests treating crypto like a business when considering its impact.
Take the example of bitcoin. Its scope 1 emissions are negligible because bitcoin is not physically “mined” in the same way as other commodities. On the other hand, its scope 2 emissions can be enormous, covering the vast amount of electricity used by a mining company’s servers and air conditioning units.
And then there’s Scope 3, most of which is never accounted for.
Who are the bitcoin “providers”?
Well, the computers that mining groups use, for starters. Such equipment can have long and complex supply chains, with components assembled across the globe, including rare earths mined in hard-to-reach places. And because bitcoin, by design, requires miners to solve increasingly difficult mathematical problems, computers and their components must be frequently disposed of and upgraded.
What about downstream use? Bitcoin is not “spent” like a conventional commodity or product, but it certainly has a future life, possibly being part of thousands of subsequent transactions validated by the mining network, each of which can emit up to 500 kg of carbon.
Finally, we can look at centralized exchanges, like Coinbase, where many crypto enthusiasts hold their wallets. These have their own carbon footprints from servers, electricity, air conditioning, etc. They are an important part of the cryptonet and ignoring their fingerprints would be negligent.
In the world of traditional investment, we talk about greenwashing. There is potential for that here too.
Of course, bitcoin’s glaring and very public carbon footprint shouldn’t obscure the fact that ordinary banking has a footprint too: all those draughty bank branches, rooms full of servers to handle online banking line, and even metal mining to produce coins.
Due to Ethereum’s central position within crypto and the broader blockchain ecosystem, the merger will likely make a difference to crypto issuances. And that may be enough to persuade some institutions to come out of the fence when it comes to investing.
But talking about truly green crypto may be – for now – wishful thinking.
The views and opinions expressed are not necessarily those of AltFi.