Everybody probably recalls when Tesla boss Elon Musk announced to accept Bitcoin as a means of payment for the electric car manufacturer a few months ago. As a consequence, the price of the cryptocurrency skyrocketed. However, after a short period, the price plummeted again - Musk had changed his mind for environmental reasons. More organizations followed this decision: In the same month Greenpeace stated it would stop accepting bitcoin payments as donations, which was possible since 2014.
The mining process to generate crypto currencies is highly complex and requires a global network of computers to keep the blockchains running. This procedure is called “Proof of Work” – while the mining requirements are very safe and prevent currency inflation on the one hand, they are extremely energy-intensive on the other hand. According to the Digiconomist’s Ethereum Energy Consumption Index, the combined network of Bitcoin and Ethereum consumes more energy than the entire country of Thailand. Especially the increasing popularity of NFTs (Non-Fungible-Tokens), which are mostly traded via Ethereum, put the topic back on the table. Nowadays, a single Ethereum transaction is equivalent to the electricity consumption of an average U.S. household in a workweek. The “Proof of Work” concept is based on the logic that the higher the price per bitcoin, the higher the incentive to participate in the mining process. Due to the increase of the computing intensity, larger server farms are required. So far, the high-power consumption functioned as a gatekeeper to prevent individuals to add coins and keep the value of the currency stable.
The potential solution: “Proof of Stake” in which the energy-wasting mining process is replaced with “staking”. Compared to the conventional procedure, there is no longer a pit of multitude servers against each other, but a single user that is randomly selected. This consumes only a fraction of the energy. The selection is made from among those users who deposit a considerable portion of their crypto assets as collateral. In simplified terms, the power is given to the users with the most crypto assets and not with the most computing power. These users have an interest in the stability of the currency as they do not want to devalue their existing assets through inflationary mining. The downside of the new procedure is the increasing decentralization of the crypto system. Even today, some few “whales” owning large amounts of cryptos are influencing whole markets by buying and selling in bulk. The new approach would favor wealthy crypto owners and move the system aways from its decentral and alternative roots.
The success of the “Proof o Stake” approach is mainly depending on Ethereum, which is a technical pioneer in the crypto universe. According to the Ethereum inventor Buterin, the switch to “Proof of Stake” has become an urgent matter. However, like many projects to improve the Ethereum network the switch to “Proof of Stake” and the resulting “Ethereum 2.0” was already postponed several times. Experts estimate the launch in the first half of 2022. Apart from that, the public pressure is constantly increasing as environmental awareness is at the top of mind of private and institutional investors who observe more and more ESG friendly conditions. To conclude, it will remain interesting to see the latest developments in the crypto systems and which paths and innovations will get through. One thing is for sure: Not only the traditional finance sector discusses the future ESG conformity, but also blockchain and crypto have the topic on their desk and focus on environmental protection.