Cryptocurrencies and sustainability: How will that work?

Cryptocurrencies have been experiencing an enormous boom for a long time now. Once upon a time, only a few computer scientists and investors were concerned with the new digital possibilities behind them. Cryptographically encrypted codes that could be sent around the globe – that simply sounded intangible to many people. Moreover, bitcoin, as the first digital currency, had a very bad reputation for a long time. After all, it was used for questionable transactions on the darknet for a good while. So interest remained low at first. It wasn’t until people started to do some really serious trading with it that the first brave private individuals got involved. However, as prices rose and fell around the clock, the whole thing was far too windy and risky for the vast majority. Bitcoin thus took its time to establish itself and gain widespread recognition across the population.

Today, on the other hand, it is impossible to imagine life without it. Moreover, Bitcoin has become the model for many other cryptocurrencies. There are more than 12,000 different digital currencies on the market today. Cryptocurrencies are also playing an increasingly important role as a real means of payment. Whether in online trading, in restaurants or when gambling in crypto casinos – the acceptance points are becoming more and more numerous and processing is becoming easier and easier thanks to user-friendly apps for cell phones.

However, cryptocurrencies have also been heavily criticized for years regarding their enormous energy consumption. Now the industry is in the process of finding more economical alternatives for some processes. There is even talk of sustainability. But how does this work together?

How does the high energy consumption come about?

Every cryptocurrency exists on the basis of a blockchain. In this, every single transaction is irrevocably recorded via cryptographic encryption. Consequently, a blockchain keeps growing. Countless computer systems around the world are actively involved in its construction, permanent control and maintenance. Huge server systems have to run day and night, consuming a huge amount of electricity. But cryptocurrency must first come from somewhere. In order to mine it, i.e. to create it digitally, specialized computing systems are also used to solve complex tasks.

This process is also called mining. This means that horrendous amounts of energy are consumed during the mining process. And this energy must of course be generated in some way. This produces emissions, and the Co2 pollution inevitably increases. In addition, resources are of course consumed, so all in all it’s a huge environmental burden.

The more activity that takes place on the blockchain, the more energy it ultimately requires. The enormous increase in the value of bitcoin, for example, and the hype it has triggered have led to even more massive mining. In addition, transactions are taking place non-stop, of course. People are buying and selling on an ongoing basis. That, too, increases demand. Finally, there is the fact that different numbers of security elements can be built in for the function of each cryptocurrency. These, too, suck additional energy. So, roughly speaking, a much-traded, secure digital currency with high demand has the highest energy consumption.

How should cryptocurrencies become greener?

Since all these correlations became known, many people have strongly condemned the crypto market. The industry has therefore had to react and has already come up with solutions in various places. Very different approaches are being taken.

The use of renewable energies

Most energy companies around the world still use conventional methods to generate electricity. This means that fossil fuels as well as nuclear power are used for this purpose. However, there is also an ever-increasing number of green energy plants. These generate electricity with the help of wind, hydropower, sunlight, geothermal energy or biomass. The key advantages here are easy to understand: These plants are safe from disasters, they have a better bio-balance and, above all, the raw materials used do not run out.

For the energy needs of cryptocurrencies, the focus is now on an energy mix that is as environmentally friendly as possible. Particularly in mining, attention is paid to covering a considerable percentage with green electricity. This is already a good contribution to reducing pollutant emissions. Cryptocurrencies that stand out particularly positively in the implementation of these measures are also called green cryptocurrencies. This is because compared to their competitors, they show significantly more sense of responsibility here. These include the currencies Tron, Signum, Cardano, Chia and Iota, among others.

The competition in the crypto market is immense and continuously getting stronger. As customers have become much more aware of the issue of sustainability in a wide range of areas of life, they are increasingly paying attention to it in their financial services as well. So green cryptocurrencies can gain a market advantage on top of that.

Accessing surplus electricity

Renewable energy systems such as wind turbines, hydroelectric plants at dams, or even solar and photovoltaic systems generate varying amounts of electricity depending on conditions. At peak times, this means there is excess production, as the electricity can only be fed into the local grids up to a certain limit. External storage can also only be implemented to a limited extent. So there are times when there is actually electricity that cannot be used elsewhere. In the Chinese province of Sichuan, for example, this occurs when the local hydropower plants run at full speed during the rainy season. The resulting overproduction of electricity can be perfectly used for mining.

The transmission of generated heat

The server facilities that mine new cryptocurrency and maintain the blockchain generate lots of heat. Since they are often clustered in huge factory buildings, we are talking about correspondingly extensive amounts of heat that radiate out. It is precisely these that need not simply be allowed to fizzle away unused. There are therefore many plans to put this heat to good use. In a Swedish pilot project, it is already being passed on to nearby greenhouses to heat them. In this way, the greenhouses can in turn significantly reduce their energy requirements. A successful win-win situation.

The application of technical innovations

Many clever minds have long been working intensively on finding forward-looking solutions in addition to the points mentioned above. The main aim here is to save the computing power required. The proof-of-stake (PoS) and proof-of-commitment (PoC+) methods are two good examples of how this is already being achieved. They aim to significantly increase mining efficiency. PoS is already being applied by Polkadot and Cardano. The new Ethereum 2.0 is also expected to work on this basis. PoC+, on the other hand, is already showing success with the Signum cryptocurrency. In addition, further technical alternatives are being worked on under high pressure in order to make mining more economical.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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