Climate change has become an important issue in recent years due to concerns about environmental changes caused by greenhouse gas emissions into the atmosphere. A single BTC transaction consumes over 2,264 Kilowatt-hours (kWh) of electricity. This is enough power to heat 1,500 kettles. This scenario is not unique to Bitcoin. Other cryptocurrencies that use the same proof of work (PoW) consensus mechanism are also affected.
Energy and the Environment
As an increasing number of investors place a premium on companies that emphasize environmental, social, and governance principles (ESG), cryptocurrency developers are forced to seek ways to go green. Emphasis is particularly on the environmental component.
Increasing awareness of cryptocurrency’s energy consumption and pressure from highly influential people such as Elon Musk (who halted bitcoin payments at Tesla due to the cryptocurrency’s environmental impact) are forcing the crypto industry to adapt. As a result of these events, new and existing blockchain projects are investigating everything from less energy-intensive validation systems to renewable energy-based mining.
Ethereum is perhaps the most visible example of a leading cryptocurrency project that is transitioning from a proof-of-work (PoW) system to a proof-of-stake (PoS) system, with the goal of reducing its overall energy consumption by 99.95%. Unlike PoW, PoS selects validators based on how many of the project’s native tokens they lock away in a staking smart contract. The more tokens a person locks away, the greater the chance they have of being picked by the protocol to add new data to the blockchain.
As with mining, selected validators are rewarded with a number of newly minted tokens as a reward for their participation. One of the most significant benefits of this method over crypto mining is that the hardware requirements are significantly lower. This allows more people to become validators. This, in turn, increases project decentralization and strengthens network security. It also has the advantage of lowering the amount of energy needed to power the network.
A carbon credit allows a company to emit a certain amount of greenhouse gases based on the number of credits it owns. One carbon credit equals one ton of CO2 or other greenhouse gases. Organizations are given a set number of credits, which means they can only emit a certain amount of greenhouse gases.
Entities that emit more than the limit must purchase more credits, whereas entities that emit less than the limit can sell any leftover credits. The strategy works by providing polluting entities with a financial incentive to produce fewer greenhouse gases. They can save or make money (by selling credits) if their emissions stay below the limit, but they lose money if they exceed the limit.