Has crypto really solved the carbon problem?

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Cryptocurrencies have long been fairy tales climate villains wield ever-increasing amounts of power, seemingly just to make a few people rich. Now the story has taken a new turn. The world’s second largest cryptocurrency, Ethereum, has announced a change to its multi-billion dollar business which should reduce its overall energy use by over 99%. Could this mean crypto is becoming what its proponents have always promised: a decentralized system that will revolutionize finance, economics, and possibly environmental policy? Or will everything return to normal when the clock strikes twelve?

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Crypto sprouts Some green shoots

1. Fewer calculations, fewer emissions. Traditional crypto could have been designed by the fossil fuel industry; in order to mine new coins, users must solve increasingly difficult mathematical problems, which require ever larger server farms. Ethereum stops the runaway train of horribly complex math that relies on far fewer computers constantly crunching numbers. That means that instead of consuming as much electricity annually as the entire Netherlands, Ethereum should use less than a thousand typical American homes, worldwide.

2. A more sustainable ecosystem? Ethereum is not just a cryptocurrency, it is a blockchain system that also underpins digital artwork NFTs worth hundreds of millions of dollars, and potentially smart contracts that offer security and transparency. Academics have long argued that blockchain technologies can make it cheaper and smarter allowance trading schemes, tracking of recycled goods and green finance – if only their energy use could be controlled. This Financial Times podcast have a good discussion about the possibilities.

3. Less carbon, more coins. There are more carbon-backed currencies (only a small fraction of the size of Ethereum or Bitcoin so far) that explicitly aim to tackle climate change, often by linking new coins to the issuance of carbon credits. So, for example, each coin you buy represents real carbon values, such as forests. The World Economic Forum recently launched a Crypto Impact and Sustainability Accelerator to explore their potential benefits.

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It’s no less bad Same as good

1. Still an energy hog. Ethereum may use less energy than it did before, but each transaction still uses nearly 20 times the energy of a centralized system like Mastercard, according to Digital economist. “Since this work is essentially extra and wasteful compared to functional alternatives, it is an opportunity cost,” writes Maximilian Holland in CleanTechnica. “This is the abandoned opportunity to use such energy for the well-being of households and for other basic economic tasks.”

2. The Bitcoin big elephant in the room. Crypto miners are in it for the quick bucks, not the smart contracts. The BBC reports that some Ethereum miners already are re-gearing to mine Bitcoin. Bitcoin is the largest and most energy-intensive cryptocurrency, consuming about half a percent of all electricity produced in the world. A new paper in Nature from the University of New Mexico puts this into perspective. Researchers calculate that every $1 created in Bitcoin is responsible for $0.35 in global climate damage – similar to beef production or gasoline use.

3. A symphony of fraud. Hardly a day goes by without a scandal involving stolen crypto wallets, fake coins or hacked blockchains. Decentralization is great when the technology and social systems around it are truly bulletproof, not so attractive when your savings – or carbon credits – are constantly at stake.

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What to keep an eye on

1. Will Bitcoin Follow Ethereum’s Lead? The odds of Bitcoin moving to more energy-efficient operations currently appear slimbut a smooth Ethereum transition – and historically high energy prices this winter – could revive discussions to curb the massive energy use.

2. Chip prices. The average price of the super fast GPUs that crypto miners use has halved since the turn of the year. Some of this slowdown is due to Ethereum’s changes, but regulators are also looking at limits on highly energy-intensive crypto mining. In August, the White House issued a report on climate and energy implications of crypto-assets which tasked the US government with monitoring and monitoring the carbon footprint of cryptocurrencies. Coin miners could eventually find their data farms stranded, not unlike offshore oil reserves.

3. The silver lining of the crypto crash. Many cryptocurrencies lost a lot of value over the summer. As crypto loses its luster as a speculative asset, there is an opportunity for some of the more socially useful aspects of blockchain technology to take center stage.

Photo: ©Anthropocene Magazine