Investing in a sustainable cryptocurrency – NuWireInvestor
Over the past decade, cryptocurrency has grown from being a hobby to being the best asset class of the year, attracting large corporations and millions of independent investors to its cause. While fears of retaining fiat wealth amid the pandemic were arguably the catalysts for the recent bull run, the growing influence of blockchain technology can also be attributed to the success of crypto. In recent months, companies like Tesla, PayPal, Visa and many others have jumped into the crypto movement, offering services that encourage consumers to transact within the ecosystem.
However, less than two months after Elon Musk announced Tesla’s new Bitcoin payment feature (expected to be adopted worldwide within the year), the multi-billionaire stepped down and took to Twitter to express concerns about the play’s impact on the environment. Bitcoin has always been at the center of the sustainability debate, sparking criticism for its massive carbon footprint due to the energy-intensive process of mining new BTC. In the wake of the scandal, BTC prices fell by $ 20,000 in two weeks, silently urging the crypto space to focus on sustainability.
How energy is wasted thanks to proof of work
Bitcoin’s battle against sustainability stems from the Proof-of-Work (PoW) consensus model, a decentralized mining process that allows the community to participate in validating transactions on the network with the incentive to earn BTC. As one of the most expensive cryptocurrencies on the market, the minefield has naturally become saturated with millions of miners, more than the network needs to operate successfully without a central administrator. There are three main problems with this model.
- Rather than benefiting the blockchain, a very congested network slows it down, causing transactions to take longer than usual to process. A huge backlog of transactions has resulted in higher gas or processing charges, making PoW coins slow and expensive to process. This issue negates the goal of crypto, which originally aimed to become an instant, borderless peer-to-peer transaction ecosystem for the people.
- The PoW only rewards a minor, even though millions of people are vying for the bulk reward. However, the only way to gain an edge in the computing process is to rely on more powerful computers, which require high end graphics cards to elevate their functions. This has caused a demand for dedicated ASIC mining rigs, which consume massive amounts of power, and a global shortage of graphics cards.
- The tech and power giants benefit the most from the PoW model, which favors miners with access to the resources to run powerful and power-hungry computers. As a result, while BTC mining is theoretically decentralized, most operations center around a few large companies, from coal-fired power plants to graphics card makers.
A snapshot of unsustainability
The most popular mining rig available today uses thousands of watts per hour, while the average American household consumes about 1,130 kWh per year. As a result, Bitcoin mining cumulatively consumes more energy than Ireland and many other countries. But it’s not just the excessive consumption of fossil fuels that is causing outrage.
In particular, mining rigs, which help greedy miners gain an edge over the competition, are treated as cyclical resources. As technology continues to advance at lightning speed, hardware lifespan decreases, prompting miners to get rid of and replace old platforms on the same page as smartphones. It is estimated that each year Bitcoin generates around 8.4 kilotons of electronic waste. And it’s just Bitcoin. There are many other PoW-based coins on the market, from Ethereum to Litecoin.
Rejection of large institutions
Big institutions are now taking action against unsustainable cryptocurrencies, with Bitcoin at the forefront of their concerns. For example, El Salvador recently announced its intention to adopt BTC as legal tender within a few months, subsequently asking the World Bank for help in its offer. However, the latter flatly refused, citing environmental concerns and the speculative nature of the coin as unsustainable for widespread use.
There have been discussions about how the environmental footprint of crypto mining can be reduced. The Bitcoin Energy Consumption Index, for example, estimates that if bitcoin miners used renewable energy sources like solar or wind power in their operations instead of traditional coal and other fossil fuels, they could then reduce carbon emissions by around 33%.
However, many investors are taking matters into their own hands with alternative solutions – there is now an industry-wide hunt for sustainable cryptocurrencies, even as mining is taken off the table.
Search for alternatives using Proof of Stake (PoS)
The Proof-of-Stake (PoS) consensus model is an alternative to the Proof-of-Work system. It is a process in which investors must hand a number of coins back to the system, where they would then be used to power the blockchain, allowing it to validate transactions. Depending on the PoS model, some or all of the users can be assigned to nodes, allowing a fully decentralized system to operate without the commitment of expensive, high-end technology.
Often, the creator of the next block is chosen deterministically based on their stake: the one with more pieces is selected more often than the one with a smaller stake. As such, staking pools have been created to help small investors earn rewards without a massive financial commitment. This system guarantees all players an annual reward in the form of interest, much like a traditional bank account. Recent innovations have also enabled players like crypto TPR to offer wagering rewards without ceding any coins to the system by dialing the balance into a dedicated wallet daily.
Popular PoS coins include Cardano (ADA) and Algorand (ALGO), but Ethereum (ETH) is also making a notable switch to this algorithm when upgrading the blockchain.
Environmental concerns regarding new parts
Chia recently went viral for her wildly innovative approach to traditional ‘spotting’ consensus models, combining proof of space and proof of time with a process that doesn’t use as much computational effort as Bitcoin. Instead, the miners are called farmers, who “plot” land by storing data on hard drives. A bingo-type challenge is then broadcast by the network. Farmers’ computers must find a string of data that closely resembles the broadcast hash – and the owner of the most similar numbers wins.
In theory, Chia wonderfully removes all of Bitcoin’s drawbacks from its network while introducing a new way to build consensus among investors. Unfortunately, however, the network has gotten its fair share of criticism, mainly because it has brought another sink of e-waste to the planet. In particular, Chia has been attributed to the recent global shortage of hard drives, including the coveted SSDs used in gaming computers. As having more storage space will give “farmers” a greater chance of winning, the Situation is slowly worsening to levels similar to the graphics card dilemma caused by BTC miners.
Ultimately, investors are forced to swallow another layer of unsustainability by investing in Chia, which has been dubbed a “greener Bitcoin” despite its potential to create massive material waste.
Is achieving sustainability possible?
Enthusiasts have established that cryptocurrency will be the future of finance, but first it must prove to be a sustainable enough resource for widespread adoption and long-term use. While many sustainable coins have been introduced to the market, especially PoS coins, it is also important that new players take a more sustainable approach by laying the groundwork for the underlying blockchain technology.
Innovations, from the Hedera Hashgraph network to automated staking, have quietly solved the situation. However, getting leverage on investments is a problem: Smaller cryptos don’t come with price tags as high as Bitcoin’s or a name as popular as Ethereum. As a result, the industry is not only demanding effort from developers to alleviate sustainability issues associated with cryptocurrency. Investors should also increasingly examine coins before making a purchase or joining a network.
Trisha Renolds graduated in Accounting and Finance from the University of New South Wales, specializing in blockchain and cryptocurrencies.
See more from Trisha: https://thetopcoins.com/