Is Blockchain Solving its Sustainability Problem? (2024)

In 2022, Ethereum made a significant change from Proof of Work (PoW) to Proof of Stake (PoS), known as “The Merge,” reducing its energy consumption.

This shift, where validators are chosen based on their cryptocurrency stake rather than computational power, not only made Ethereum more energy-efficient but also set a new standard for scalability and sustainability in blockchain technology.

The energy consumption of blockchain mainly stems from the Proof of Work (PoW) system, where miners solve complex puzzles using computers to add new blocks to the chain. This process, while essential, consumes a considerable amount of power.

Energy Consumption in Blockchain

Bitcoin and Ether, the cryptocurrencies of Bitcoin and Ethereum networks, account for over 60% of the total market value of cryptocurrencies. By August 2022, Bitcoin alone used 60% to 77% of the electricity for cryptocurrencies globally. Ethereum followed closely, using 20% to 39%. This mirrored the debate on blockchain energy sustainability.

In September 2022, Ethereum's transition to Proof of Stake (PoS) drastically reduced its energy consumption by 99.95% to 0.01 TWh. Known as 'The Merge,' this switch replaced energy-intensive mining with a more efficient and environmentally friendly validation process using virtualized servers.

Addressing the Sustainability Challenges in Blockchain Technology

Concerns about blockchain's energy consumption arise from two main factors, both contributing to climate change:

1. Substantial carbon emissions

2. Reliance on non-renewable energy

At the same time, regulators worldwide are actively creating incentives for the sustainable development of digital assets with minimal energy use and environmental impact.

In 2022, President Biden issued an Executive Order on the Responsible Development of Digital Assets, emphasizing the U.S.'s commitment to evolving digital assets in environmentally friendly ways. The White House also released a white paper examining the role of blockchain in domestic and international climate change efforts.

Implications of the Transition on Sustainability and Investments

The shift to Proof of Stake (PoS) by Ethereum is seen as a significant move towards environmental sustainability.

PoS drastically reduces the blockchain's carbon footprint and promotes wider participation in network maintenance by eliminating the need for massive computational power and specialized hardware.

This transition may prompt a reassessment of blockchain assets in investment portfolios. If PoS and similar protocols can address climate and energy concerns, blockchain technology could see increased adoption across sectors, potentially attracting more investments from institutions meeting ESG criteria.

Investors are also considering the long-term implications of regulatory compliance. Platforms that proactively address climate and clean energy concerns may be better equipped to navigate future regulations as governments focus more on these issues.

Regulatory Landscape: What We Need to Know

Regulatory attitudes towards blockchain technology vary globally, reflecting its diverse potential applications.

Some countries embrace blockchain, offering clear frameworks to encourage innovation.

Others are more cautious, imposing strict rules or outright bans due to concerns about volatility, security, or control.

The following are key regulations to be considered:

In the United States, the Securities and Exchange Commission (SEC) closely monitors cryptocurrencies and Initial Coin Offerings (ICOs) within the framework of traditional securities law.

• The IRS treats digital currencies as property for tax purposes, which adds another layer of complexity for investors as carbon taxation is increasingly considered among the legislative circles.
• Executive Order on Climate-Related Financial Risk: It directs federal agencies to assess and mitigate climate-related financial risks to government programs, assets, and liabilities. This also extends to investments in blockchain technologies with high environmental impact.

The European Union is striving for a standardized approach to cryptocurrency regulation. The proposed Markets in Crypto-Assets (MiCA) framework aims to establish a consistent regulatory environment across member states, potentially impacting investment strategies significantly.

Asia presents a mixed picture, with countries like Japan having a relatively open regulatory stance, whereas China has taken a more restrictive approach, especially concerning cryptocurrency transactions and mining activities

Blockchain for Sustainable Practices

Blockchain's potential to reduce carbon emissions is being explored in various use cases.

The technology is positioned to enhance the use of renewable energy and offer more precise carbon tracking.

Additionally, it could facilitate the development of platforms for trading carbon credits, improve supply chain efficiency, strengthen ESG reporting, and manage environmental assets through smart contracts.

These initiatives underscore blockchain's role in promoting environmental sustainability.

1. Carbon Footprint Tracking: Leveraging blockchain for accurate tracking and verification of carbon footprints and emissions reductions.
2. Decentralized Energy Trading: Using blockchain to enable peer-to-peer energy trading, thus incentivizing renewable energy production.
3. Offset and Credit Platforms: Developing blockchain platforms to trade carbon credits and offset.
4. Supply Chain Optimization: Leveraging blockchain for more efficient supply chain management, reducing waste, and unnecessary transport.
5. ESG Reporting Transparency: Utilizing blockchain for transparent and immutable ESG reporting.
6. Smart Contracts for Environmental Assets: Smart contracts can automate the execution of transactions involving environmental assets or services, like renewable energy certificates or reforestation efforts.

Strategic Recommendations

1. Adopt Scalable Solutions: Investors and companies in blockchain should prioritize scalable solutions that are efficient in processing transactions and environmentally sustainable. This means supporting platforms that can handle large transaction volumes without a significant increase in energy consumption or carbon footprint.
2. Tapping into Greener Energy Sources: Due to blockchain's high energy consumption, particularly in Proof of Work (PoW) systems, there's a need to transition to sustainable energy sources. Users should prioritize blockchain infrastructure powered by renewable sources like solar, wind, and hydropower. Encouraging Use of Hydropower: Recognizing hydropower as a key energy source for many miners, there's an opportunity to enhance and expand its use for blockchain operations. This may entail investing in regions abundant in hydropower and incentivizing miners to utilize this renewable resource. Diversifying Renewable Sources: While hydropower is prevalent, diversifying into other renewables such as solar and wind can enhance stability and sustainability. Supporting blockchain operations in areas with high solar or wind potential is crucial for this diversification.
3. Developing Partnerships: Forming partnerships with organizations that focus on environmental sustainability can help mitigate the negative impacts of blockchain technology. These partnerships can take various forms:

Carbon Offset Programs: Collaborating with carbon offset initiatives can help counterbalance the carbon footprint of blockchain operations. Blockchain companies can offset their environmental impact by investing in projects that reduce emissions elsewhere, such as reforestation or renewable energy projects.

Collaborating with Green Tech Companies: Partnering with green technology companies can drive the development of energy-efficient mining hardware and data centers. These collaborations can also spur innovation in using renewable energy in the blockchain industry.

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Not any type of advice. Conflicts of interest may exist. For informational purposes only. Not an offering or solicitation. Always perform independent research and due diligence.