Remember when “Ethereum-killer” Polkadot
Climate change fears are not what’s taken these coins down by more than 50% this year (Polkadot down even more), but the excitement over Ethereum’s switch to proof-of-stake from energy intensive (and costly) proof-of-work is probably not going to suddenly turn environmental conscious crypto investors onto these coins.
Energy consumption has been an issue for Bitcoin for a few years now. But this summer, a Chinese court ruled that Bitcoin was bad for the environment. After blackouts in Texas last year, NBC thought it was wise to question whether all the new Bitcoin mining facilities setting up shop there would be a vampire on the state’s proven fragile utilities.
Market whispers suggest that some major crypto funds would avoid proof-of-work-based projects, like Bitcoin, due to the heavy environmental impact. This might just be investor drama. BlackRock set up a crypto trust for its high net worth investors earlier this month. Bitcoin was the mainstay, of course.
“The appetite for initiatives leveraging blockchain technology to solve climate change issues is extremely high,” says Jacopo Visetti, Project Lead and Co-founder at EFFORCE, a startup that helps investors match up with blockchain companies that are low on greenhouse gas emissions. Steve Wozniak, Apple’s
Energy consumption between proof-of-work and proof-of-stake blockchains differ significantly. When comparing the cost of a single transaction on each network, the Bitcoin network can manage roughly five transactions per second at an energy cost per transaction of an estimated 830 kilowatts per hour. Ethereum can do around 15 transactions per second for an energy cost per transaction of 50kWh.
Proof of work networks can use as much energy, and according to some estimates can have as much of a carbon footprint, as driving a gas-powered sedan 600 miles. If Bitcoin were a country, its annual energy consumption would equal Ukraine. Some estimates of Ethereum’s yearly energy consumption place it on par with that of Ecuador’s entire energy use.
“In the crypto space, we’re seeing a big swing towards closer interest and examination of tokens and projects that line up with ESG guidelines as a result of the bad press around Bitcoin’s carbon footprint,” says Adam Boalt, Co-Founder and Advisor at Earthfund.io. CNBC pundit and investor John Najarian is part of the Earthfund’s advisory team. They link crypto investors up with projects deemed sustainable and future-thinking, but not necessarily green-thinking, for start-ups looking to launch decentralized apps dedicated primarily to funding ESG projects.
“Crypto projects should be making the world a better place,” Boalt says. “This is shared by our retail investors too, who have asked questions about the Ethereum merge, how we’re reducing our footprint, etcetera, from day one. We think that with the news that the Ethereum merge could reduce its energy consumption by 99.5%, that we’re likely to see a new wave of crypto investors who see beyond the Bitcoin-dominated headlines.”
Brian David-Marshall, president and publisher of InterPop, part of the “digital fandom” market, is building his platform out on Tezos. Why? Carbon footprints actually came into play in their decision-making process.
“We were doing our research and looking into the environmental impact of proof-of-work,” he says. “Tezos has blazed a trail with proof-of-stake and it immediately allayed all of our concerns regarding energy consumption. Tezos was literally millions of times more efficient than anything using proof-of-work. It was an easy decision for us to make,” he says.
Proof-of-stake networks are less worried about electricity costs to power its daily activity of confirming transactions and thwarting hackers. Instead, it depends on direct economic incentives for users, whether through block rewards or a concept known as “slashing”, in which the stakeholders post bonds that can be seized if they misbehave.
In May 2021, Tezos described on its Medium page why its proof-of-stake is low energy. And while they admit that they cannot know the exact energy consumed by the transaction validators in their system (known as “bakers” in the Tezos universe) they claim they have a reasonable lower and upper bound estimate of the power used by the computers participating in the network of around 400 units.
Does it matter?
“Look, when I go to comic or gaming conventions and talk about all the cool projects that InterPop is building, the first question they always have is what they have read about the environmental impact of blockchain,” David-Marshall says.
Assuming that even the ESG aficionados at BlackRock are still invested in polluting nations like China, and that renewable energy is failing left and right at keeping the lights on in Europe (and last year, in Texas), there is no chance that serious crypto investors are going to turn away from Bitcoin and its proof-of-work blockchain and buy Ethereum instead.
But developers are interested primarily in speed, service and security. For this reason, advertising your green street cred won’t save your crypto project. At least not for long.
“It was an aspect for us in our decision making, but the other critical aspect is interoperability and composability,” says Kenny Li, a Core Contributor at Boston-based Manta Network, a universal privacy hub for Web3 built on Polkadot. Li, who resides in New York City, says he is most interested in the key benefits of a blockchain: speed, scalability, and security.
“An ESG policy is not directly the demand from most crypto communities,” Li says. “But I think it is a natural side-effect driven by other demands including cost-reduction and improved user experience.”
And less energy use means lower overhead costs for miners, and that means lower transaction costs for the real users of the coins and blockchains investors (who often use neither) are buying into as speculators.
“If reduced carbon footprints become a priority for major companies in the space, I see two benefits to the ecosystem developing,” Li says.
First, shifting to more energy-efficient mechanisms not only delivers energy use benefits, but users also get improvements including increased speed, scalability, and resiliency. This is what Ethereum’s merge is all about – transaction costs and speed.
“You will see decentralized applications building on top of these networks and those networks will be reaping the benefits of that,” Li says. “But you have to be able to deliver said benefits to the end user in the form of a better overall user experience.”
There are initiatives to make Bitcoin less carbon-heavy. One of them is the Bitcoin Mining Council led by Musk and Bitcoin bull Michael Saylor, to promote renewable energy to the big Bitcoin miners.
Green or not, the bitcoin miners are stuck deep in the snow in this latest cryptocurrency winter.
Canadian hydroelectric dams primarily power Bitfarms’ computers. And Riot became the subject of a cover story on Forbes.com in 2021, hyping its climate credentials.
Doesn’t matter. The stock is down over 60% this year, and water-powered Bitfarms is down even more.
For investors in these stocks, Polkadot and Tezos, hopefully these assets have no place to go but up.
Energy cost has to mean something to these companies, and if they are low on energy cost and users like everything else, then they have the wind at their backs.
Still, if Ethereum becomes a one size fits all blockchain, then the risk is to the downside for Polkadot, Solana
*The writer of this article owns Bitcoin, Polkadot and Bitfarms.