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How Can Cryptocurrencies Become More Eco-Friendly?
The environmental impact of cryptocurrencies has been a significant issue this year. While the problem has always been present, it came into the limelight in 2021.
Prominent critics of cryptocurrencies have pointed to the environmental impact they have had for years. Mining has been an incredibly challenging one. But, is there a way that digital assets can be good for the environment?
A Very nuanced Issue
As we said, it’s not a new issue for people to raise the problems with cryptocurrencies and the environment. Several top critics have always said that the impacts of mining will eventually be too much to bear. But, something happened in 2021 to grab the attention of everyone.
In May, Tesla CEO Elon Musk took to Twitter to announce that the company would no longer accept Bitcoin as a payment method. In a statement, Tesla said that it had considered Bitcoin’s environmental impacts. Being an eco-friendly company themselves, they decided not to accept it anymore.
It was an exciting twist because Tesla only started accepting Bitcoin for payments in February. It was the same time that the company invested $1.5 billion into Bitcoin. Then, just about two months later, it stopped.
Musk’s tweet set off a firestorm. The market interpreted it as Tesla abandoning Bitcoin entirely, and coin prices started to fall. Musk eventually confirmed that he and Tesla remained committed to investing in Bitcoin and hadn’t sold any. But, it did the damage. The market had bled, and everyone was angry at Tesla.
Despite the anger that many felt, this development sparked a broader conversation. Industry experts started to look into how to make cryptocurrencies more eco-friendly. Even Tesla and Musk chimed in.
As expected, the primary culprit is mining. Bitcoin uses a Proof of Work (PoW) mining algorithm, which consumes much energy and power. Unfortunately, several other cryptocurrencies use the same algorithm, posing significant threats to the environment. So, is there any way to make things better?
Transitioning to Better Mining Algorithms
One of the current solutions will be the use of better mining algorithms. We already see this with Ethereum. The blockchain’s Ethereum 2.0 upgrade will transition from PoW to Proof of Stake (PoS). The PoS mining algorithm operates differently, and many have heralded it for being just as efficient. At the same time, it uses less energy. Instead, coin holders stake their coins to get more while contributing to the network’s stability.
The only problem with transitioning is that it can be costly and time-consuming. The Ethereum Foundation proposed ETH 2.0 in 2018, and it has still not completed the transition. The London hard fork just launched in August. And, the estimates now suggest that the complete ETH 2.0 transition will happen sometime in 2022. This is if there are no delays that could stifle the process.
It’s worth noting that this is the Ethereum Foundation. Simply put, it is one of the most valuable and most popular companies in crypto. Unfortunately, smaller projects and companies that run on PoW can’t transition like this. So, they could lose out on this eco-friendly boom.
The Use of Greener Solutions Remains the Best
For now, the use of greener solutions appears to be our most viable hope. For example, instead of relying on energy-intensive mining components, we could engage their alternatives.
We already see this happen in several places. For instance, the government of El Salvador recently announced that it would be working on a project to use volcanic energy to mine Bitcoin. President Nayibb Bukele has yet to confirm any details about the project, but he has promoted it several times. The world will be looking to see how well it goes.
Also, Blockstream and Square recently partnered on a project to develop a green Bitcoin mining farm. Under the partnership, Square will commit $5 million to the project. On the other hand, Blockstream will manage the facility and maintain it.
Only Cash Can Offset the Growing Demand Problems
While all of these are viable projects, it is also worth noting that demand outpaces supply right now. For example, El Salvador has just two power plants, but it is launching two more. Even if those four get up and running, the country still won’t meet the demand for clean Bitcoin mining. It is significantly worse now that China is implementing a crackdown on all crypto activity.
Mining companies have started to leave China. They will most likely be looking to settle somewhere else – preferably with clean energy. If they set their sights on El Salvador, the country will have problems with meeting demand.
The same problem boggles the Square and Blockstream project. Both companies are only working on one farm for now. If it goes well and demand starts to rise, they might have issues with fulfilling it.
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Whatever the solution is, getting crypto to become green will require a significant financial commitment. So regardless of the approach, we won’t be able to turn this around without massive investments.
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