In the past, blockchain technology has often been criticized for its negative impact on the environment. The main argument for this: The process of mining cryptocurrency requires a significant amount of energy — maintaining the functionality of blockchain networks across the world consumes roughly 130 TWh annually, which is comparable to the power consumption of Argentina.
But there’s way more to blockchains and sustainability than this!
- First off, not all blockchains have the same impact on the environment. By now, most systems use energy-efficient algorithms to operate, and those require way less energy than “traditional” mining algorithms, like the one used by Bitcoin.
- Second, there’s a general movement towards promoting sustainability and reducing or compensating for cryptos carbon footprint.
- And third, the Regenerative Finance movement is built on blockchains, and aims to redesign our financial system to give back to communities and the environment.
Let’s look at each one of these points separately!
Cryptocurrency emissions and energy consumption
The idea that crypto is inherently bad for the climate has been long-standing. It argues that the process of mining cryptocurrencies requires a tremendous amount of energy, which contributes to carbon emissions and exacerbates climate change. But the reality is more complex than that: On the one hand, it is true that Bitcoin mining requires a lot of energy.
On the other hand, as this article in the Harvard Business Review highlighted, energy consumption and carbon emissions are not always the same. For example, one unit of hydro energy will have much less environmental impact than the same unit of coal-powered energy. Calculating carbon emissions requires deep knowledge of the energy sources used by miners. Reports have suggested that anywhere from 39% to 73% of Bitcoin mining is powered by renewable energy. This wide range highlights the unreliability of using energy consumption alone to determine carbon emissions.
In addition, most blockchains don’t rely on energy-intensive mining techniques like Proof-of-Work (PoW) anymore. Many have shifted to more energy-efficient alternatives, such as Proof-of-Stake (PoS). Ethereum, the second-largest cryptocurrencies by market capitalization, made the switch from PoW to PoS in mid-2022.
According to a report by the blockchain analytics firm Arcane Research, Ethereum's shift to PoS has led to a significant reduction in energy consumption. The report estimates that Ethereum's annual emissions have been reduced by 99.95% since the shift.
As the industry continues to grow and evolve, it is likely that we will see more and more sustainable practices being implemented, such as an even stronger move towards renewable energy sources for mining.
Movements to compensate for blockchain emissions
Over the last year, many movements formed to tackle ways to compensate for blockchain emissions. Let’s look at some of them:
- Leading Web3 companies joined forces with corporations like Microsoft, ERM Consulting and carbon registry Gold Standard to launch the Ethereum Climate Platform (ECP) during the world's biggest climate conference, COP27. ECP aims to compensate for Ethereum's historic carbon footprint, back to its launch in 2015, which is estimated to be over 11 million tons of carbon per year. As Ethereum's recent Merge has significantly reduced its energy needs, ECP focuses exclusively on tackling past emissions. ECP plans to complete a study to accurately estimate past Ethereum emissions before proceeding.
- The Crypto Climate Accord is an industry-led initiative that aims to decarbonize the cryptocurrency sector by 2040. Big names of the industry participate in the Crypto Climate Accord, including Ripple, CoinShares, and ConsenSys.
- Polygon is one of the most promising scaling solutions for Ethereum, and they heavily focus on sustainability. Polygon went carbon-neutral in 2022. As part of its Green Manifesto, the platform pledged $20 million for a series of community initiatives aimed at utilizing Web3 to create a more sustainable future for all, which includes new solutions for on-chain carbon credit retirement.
- Celo is another blockchain with an user-friendly mobile-first approach and a carbon-negative status. Celo is heavily focussed on supporting the development of products and applications that accelerate climate action, and gives out grants to founders and developers. Celo is also a member of the Crypto Climate Accord.
- Blockchain Hedera is yet another example. Hedera also has made environmental sustainability a key value and is committed to achieving carbon-negative network operations by purchasing quarterly carbon offsets based on assessments by third-party provider Terrapass. The decision was made by the Hedera Governing Council members in August 2021.
Environmental regeneration with the help of blockchain technology
Cryptocurrencies are often portrayed as hyper-financialized tools of capitalism that negatively impact the environment and local communities. But that’s not true — on the contrary, the decentralized nature of blockchain networks promotes inclusivity and diversity, and allows everyone to build systems and products that make local environments better. The emerging Regenerative Finance (ReFi) movement is focussed on building and linking systems that regenerate and reward planet-positive actions.
ReFi uses money as a tool to solve systemic problems, from the protection of natural resources to incentivizing communities and land stewards to do good. Monetary profits are not the end goal, but rather a means to further progress. Circulation replaces accumulation of value. While the ReFi system is built with the help of blockchain technology, its outcomes are tangible and directly impact life in the real world.
Natural capital backed assets (like carbon credits), Universal Basic Income, the funding of public goods, and more are part of the emerging ReFi movement.
In conclusion, blockchain technology impacts the environment in multiple ways — and almost all of them are positive. Not all blockchains have the same impact on the environment, and where they source their energy plays a big role as well. There also is a growing awareness among users and founders in the blockchain space towards sustainability. Many movements are springing up to promote the use of green energy and to compensate for emissions. Various initiatives aim to account for past and future emissions. And lastly, supporting regeneration and aiding systemic change towards a more sustainable future is a key focus for many actors in the space. It's very likely that we will see even more sustainable practices being implemented in the future!
Toucan is building technology to unlock climate action at scale. Our digital infrastructure is helping to grow the voluntary carbon market (VCM) in a transparent and high-integrity way. It increases the flow of revenue to the most effective climate impact projects, by bringing established and nascent environmental assets on the blockchain.