Cryptocurrencies in The Balance : Will Their Impact on The Environment Win Over Their Positive Impact?

Published on: 24 May 2022
by KnowESG

Cryptocurrencies are dreaded by environmentalists. In fact, the electricity consumption required by Bitcoin in a year exceeds that of Sweden, Norway, or the United Arab Emirates.

The blockchain is based on the concept of a decentralized system where cryptocurrencies are mined, or simply put, "created." They are supposed to store and transfer ownership through a cryptographic process.

The process itself requires more or less capacity on a computer. They can be enormous for the Blockchain cryptocurrency, for example, which is based on what is called the Proof of Work (PoW).

Since the blockchain ledger where the transactions are recorded is decentralized, anonymous miners with powerful computers around the world have to solve the complex Proof of Work in order to be able to update that ledger. The miners are rewarded with cryptocurrencies.

Other cryptocurrencies require less energy, and this is because they are based on proof of stake (PoS). The participants are then chosen by the network according to how many of these cryptocurrencies they own, how long they have held them added to an element of randomness. While potentially less secure, the PoS approach is substantially more energy-efficient and also delivers faster transaction volume and hence operational excellence.

The problem with cryptocurrencies is the one referred to right above; the climate is affected by a rising trend. A debate considers the fact of substituting Proof of Work with Proof of Stake for the reason that the bitcoin’s carbon footprint would be decreased by 99%. In the case of Ethereum, another prominent cryptocurrency attempt to transition from PoW to PoS has been ongoing for six years.

Another alternative could be the use of more sustainable energy since many industries are going through an energy transition. The percentage of renewable energy that has been used until now is hard to define. ; according to CoinShares, renewables generated less than 30 percent of bitcoin mining in December 2021, but the Bitcoin Mining Council estimates a ratio closer to 60 percent.

However, more than one positive element is emerging from the use of cryptocurrencies and their worldwide expansion. In terms of societal effects, the case for cryptocurrency is more solid.

Cryptocurrencies can promote financial inclusion by stimulating innovation in financial services, such as peer-to-peer micropayments, allowing possible access to anybody with an internet connection, and decreasing costs by automating financial services on a large scale.

According to the World Bank, the use of cryptocurrencies could allow 1.7 billion people in the world today to overcome the problem of being unbanked. The McKinsey Global Institute estimated that the collective adoption of digital finance could contribute up to 3.7 trillion by 2025 to the GDP of emerging nations and create around 95 million jobs, all industries concerned.

According to a survey by Oliver Wyman and J.P. Morgan, there is also the possibility of saving multinational firms $120 billion per year in transaction fees for cross-border payments, since cryptocurrencies might permit low-cost international transfers for small amounts.

Source : WeForum