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Crypto sustainability: How to identify the right eco-friendly coins

In this week’s Crypto Knight column, we answer how cryptocurrencies can become eco-friendly, and how to identify such coins.

Written by Mehab Qureshi | Pune |
Updated: May 14, 2022 12:09:01 pm
Investors are now betting big on crypto coins that focus on environmental, social and governance principles. (File Photo)

As cryptocurrency goes mainstream, everyone is talking about its impact on the environment. A single Bitcoin transaction has a bigger carbon footprint than 100,000 hours of YouTube videos. This is not just Bitcoin’s problem. Almost every other crypto coin that works on the Proof-of-Work (PoW) consensus mechanism faces the same issue—it is more energy-intensive.

But there are ways to make cryptocurrency and NFTs more sustainable. Some, like Ethereum, have plans to shift toward a more environmentally-friendly model in the future, while others are taking serious measures to drift to greener modes. Investors are now betting big on crypto coins that focus on environmental, social and governance principles – making eco-friendly coins a lucrative investment.

In this week’s column, we answer how cryptocurrencies can become eco-friendly, and how to identify such coins.

Mining: An energy-intensive operation

Before we delve into the topic, it’s important to understand how cryptocurrency mining consumes energy.

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Cryptocurrencies use enormous amounts of electricity to secure their networks. This is done via something called crypto mining. Mining cryptocurrency is not just a way of adding or creating new coins. Crypto mining also involves validating cryptocurrency transactions on a blockchain network and adding them to a distributed ledger.

Mining consumes a lot of computing power and resources because of the proof-of-work (PoW) algorithm. To mine crypto, specialised mining computers compete to solve complex math equations that unlock small amounts of new currency. These computers, located around the world, typically operate nonstop and require enormous amounts of electricity to stay running and cool.

According to Digiconomist, Ethereum consumes about 112 terawatt-hours of electricity per year, comparable to that of the Netherlands and more than what the Philippines or Pakistan use during the same period. A single transaction on Ethereum is equivalent to the power consumption of an average US household for over nine days. A single Ethereum transaction also equals the energy consumption of more than 1,50,000 Visa card transactions.

In the case of Bitcoin, it’s even higher — 137 terawatt-hours of electricity per year.

As the popularity of coins rises, so does the number of miners required to maintain the cryptocurrency network, ultimately increasing carbon footprint and affecting the environment.

Identifying a sustainable crypto

To choose a sustainable coin for investment, the first and foremost rule is to be mindful of how a particular coin is mined. Every crypto coin runs on a blockchain. Identify the nature of the blockchain used—whether it is Proof of Stake (PoS) or PoW.

Bitcoin, Ethereum, and Dogecoin, all work on a PoW consensus mechanism, meaning that crypto miners compete with each other to solve an algorithmic puzzle, using high-end specialised computers, designed for mining. The more computational power one has, the easier it becomes to mine a coin. This computational power is also referred to as hash rate. To increase their chances to win further, miners can come together in what’s called mining pools, they combine their hashing power and distribute the rewards evenly across everyone in the pool, ultimately causing miners to use massive amounts of electricity.

Meanwhile, the PoS consensus mechanism terminates the competition element and replaces it with a randomised process called —staking. This means mining machines are not required, thereby, reducing energy consumption by up to 99 per cent.

But there is plenty of reason to be sceptical about these claims. So, it is important to do your research about the coin, before investing in it. A quick glance at the company’s white page and website could help. It usually briefs about the energy consumed by the digital coin.

You can also check for the carbon footprint released by a crypto project. This is usually listed on the community’s blog page. There are specialised websites that can check this for you. Also, check whether the company is running any greenwashing efforts, but don’t be fooled by it.

How can crypto become more sustainable?

Several factors have to be considered to monitor the impact of a cryptocurrency—energy use is one of the most frequently spoken about. However, it isn’t about which cryptocurrency depletes the most power. It is also about where the power is coming from.

Some mining operations like Equinor and Crusoe Energy have repurposed unused traditional power plants and utilise the excess gas discharged from these plants to power mining operations. Solar and wind farms are also being used for powering crypto-mining plants.

It isn’t probably the best idea to construct renewable plants to power a cryptocurrency plant because of the volatile nature of crypto coins. The simple reason for this is Bitcoin’s value inclines to stay high even as it swings, but other cryptos might not be able to justify the cost of entirely new energy plants simply to mine them.

Meanwhile, several developers and crypto advocates are making efforts toward sustainability for the blockchain and crypto ecosystem.

Environmental friendly cryptos

New crypto developers are looking for more energy-efficient designs that use a lot less energy than their predecessors.

Some of the most environment favourable cryptocurrencies are:

Developed by one of the co-founders of Ethereum, Cardano is a PoS cryptocurrency considered one of the most environmentally sustainable blockchains.

According to Cardano, it uses only 6 GWh of power, hence it is a “balanced and sustainable ecosystem”. It is also said that Cardano might be 37,500 times more energy-efficient than Bitcoin.

Another coin is Stellar, it is also considered one of the most energy-efficient. Stellars’ Blockchain Network uses its cryptocurrency lumen (XLM) to facilitate global payments. It is even faster than PoS. The blockchain network permits people to even trade fiat through its network, without high transaction fees or longer transaction times.

Lastly, the Solana blockchain is the most widely adopted coin and is extremely energy efficient. One transaction on the Solana blockchain network consumes less energy than two Google searches and 24 times less energy than charging your phone.

On Solana, there is no need for energy-intensive mining, meaning the network is extremely environmentally efficient. Activities on Solana take much less energy than you might think. In total, the entire Solana network — with 1,196 validator nodes and an estimated 20,000,000 transactions — uses an estimated 3,186,000 kWh per year. This is the equivalent of the average electricity usage of 986 American households.

Last word

As a matter of fact, pointing out that any cryptocurrency is greener than others is an incredibly complicated task since several parameters are to be considered. Many smaller cryptocurrencies inherently have a far lower energy footprint because they involve far fewer daily transactions compared to Bitcoin or any other major crypto. When scaled, they could prove just as disastrous for the environment.

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