How sustainable is blockchain?
Ross Thompson, Accountancy and Finance Lecturer at Arden University
Blockchain technology has great potential to take a plethora of industries to the next level by streamlining processes, making them more secure and time efficient.
It allows records to be kept on numerous computers, which as a result,enhances data security, meaning the risk of data loss from theft, fires and catastrophes is greatly reduced. It is also virtually impossible to delete or tamper with the records once they have been implemented, reducing the chances of fraud. Additionally, by pushing transparency, with participants being able to have relatively unfettered access to their records, blockchain has the power to cut the time and effort that is usually wasted on endless to-ing and fro-ing, and this also builds trust, for example within supply chains.
On top of this, blockchain also removes the need for intermediaries, with it being a true peer-to-peer system. This, again, can reduce costs and access delays. The transparency and speed of blockchain can make transactions more efficient, safer and easier. But does this come at a cost?
The environmental strain
Last year, a shocking statistic revealed that Bitcoin, which relies on blockchain technology, consumes an estimated 150 terawatt-hours of electricity annually. The report stated that this is more energy than the entire country of Argentina uses in a year.
The usage of electricity for crypto has increased tenfold over the past five years. This should not really be surprising, given the traction it has gained and the sheer amount of computing power a digital currency needs in order to run successfully. In the current crypto age, you need highly specialized machines, a big enough space to operate them, and energy to keep them cool to prevent overheating as they run constantly, 24/7.
In fact, according to research, the mining of Bitcoin has almost the same climate impact as cattle farming or burning gasoline when calculated as a percentage of market value.
So, while blockchain has many potential benefits, it is not without its environmental drawbacks. A big concern is the amount of energy that is required to power the decentralized network of computers that make up the blockchain. The process of verifying and adding transactions to the blockchain, known as mining, demands a significant amount of power.
The process that takes the most energy for blockchain is known as ‘proof of work’, where machines compete with others around the world to find the answer to a complex math puzzle, which grows in difficulty as more and more computers, known as miners, join the network. The aim here is to ensure the security of the system and prevent fraud when crypto transactions take place.
As well as using lots of electricity, proof of work also results in increased CO2 emissions. It generates significant computer waste, due to miners constantly upgrading equipment to remain competitive and therefore dumping older hardware.
Removing this process poses risks to the security behind transactions, so adopting cleaner energy and renewables is the preferred option. With blockchain technology evolving at a rapid pace, we are seeing more innovative solutions.
The bright side
On the other hand, some experts believe that blockchain could play a key part when it comes to sustainability. The technology could be useful in pollution monitoring and tracking the sustainability of products, and it could quite possibly accelerate the shift to a low-carbon economy.
The transparency, efficiency, and accountability associated with blockchain processes may help with regulating carbon emissions and encouraging sustainable practices. For example, smart contracts – programs that are stored on a blockchain that automatically run when predetermined conditions are met – can help companies to automate the process of tracking carbon emissions throughout their business operations.
Another way blockchain can contribute to sustainability is via the tokenization and digital distribution of environmental assets. The rise of carbon credits is one way to do this. Carbon credits, also known as carbon offsets, are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases. This can create a monetary incentive for companies to reduce their carbon emissions. For instance, those that cannot easily reduce emissions can still operate, but at a higher financial cost. Companies (or nations) would be given a certain number of credits and are able to trade these in order to help balance total worldwide emissions.
Tokenization of carbon credits means that the information and functionality of the credit is moved onto a blockchain, which means the credit will become a token. This will create a more efficient carbon trading market that is publicly visible and transparent.
The same issues outlined above will remain, however. Blockchain technology uses a lot of energy, and until companies can find a more sustainable way to manage the mining process, we may see tokenization being too impactful to help toward a sustainable cause. Nonetheless, we are seeing more innovative solutions, such as Ethereum’s (ETH) ‘proof of stake’ (PoS) system replacing ‘proof of work’. This is where individuals and companies act as validators, pledging or ‘staking’ their own ether, as a form of guarantee, to win newly-created tokens.
ETH moving to proof of stake has been long anticipated, and it is expected that other cryptos and blockchain applications will soon follow and should continue to safeguard transaction accuracy and actor integrity. Instead of miners, PoS nodes verify transactions by pledging a stake of crypto. The Blockchain then randomly selects one of them to agree the transactions’ block, and the recipient is then rewarded with a ‘prize’, comprising all the stake money pledged. Any evidence of ‘bad acting’ on behalf of validators can result in disbarment. Validators, therefore, have two incentives to behave properly: they do not wish to lose their stake or be barred from future bidding.
What is vital to note here, however, is that the key benefit of adopting proof of stake is its speed; it is quicker to validate transactions compared to proof of work. Therefore, it is not just about being greener. Nonetheless, its three green credentials are that it produces less power, less CO2 and less computer wastage.
Moving to PoS does not remove all of the social responsibility challenges associated with blockchain, however. For simple business applications outside of crypto transactions, validation processes look set to increase disintermediation and therefore potentially increase job losses in banks, insurance brokers, government admin, and so on.
Needless to say, this could be a big factor in the gradual acceptance of cryptocurrencies over time. There are big benefits to be reaped when it comes to adopting crypto and blockchain technology for businesses in all industries. By tackling someof the many concerns regulatory and governmental bodies have around blockchain technology, we may slowly see a better use for it as consumer and business needs develop.
Uma Rajagopal has been managing the posting of content for multiple platforms since 2021, including Global Banking & Finance Review, Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune. Her role ensures that content is published accurately and efficiently across these diverse publications.