Crypto vs. Climate Change - Crypto and a more sustainable global financial system
In a previous blog post titled “Crypto, blockchain, and the environment: the other side”, which is the first in a series, I highlighted some of the broader use cases of cryptocurrency and blockchain in combatting climate change. Since then, I’ve published follow-up posts doing more of a deep dive into the role blockchain can play in supporting vulnerable populations impacted by climate change, and how tokenizing carbon sequestering assets can help in the fight against climate change. In this blog post, the fourth in the series, I want to zero in on another exciting use case – creating a more environmentally sustainable financial system.
Despite the bad rap that blockchain gets when it comes to its environmental impacts, it has the potential to create a much more sustainable global financial system than the one that exists today by cutting down on the need for sprawling financial infrastructure, and by reducing the environmental impacts of cryptocurrency.
Financial Infrastructure
One area where blockchain can clearly help create a more sustainable financial system, is regarding financial infrastructure. The infrastructure behind the global financial system is immense. First, there of course the hundreds of thousands of bank branches and the estimated 3.5 million ATMs. Then there are the head offices in towering skyscrapers, and all the background infrastructure, such as data centres that keep the financial networks running. In a previous blog, I highlighted one study that estimated the electricity consumption of the global banking system to be a whopping 263 TWh per year, more than twice that of Bitcoin.
In a world without the need for so many physical bank branches and ATMs, and with a greater reliance on digital currencies, there will also be less of a need for individuals to travel to banks to do business and withdraw or deposit cash. This, in theory, could help reduce Carbon emissions by keeping cars off the road and reducing gridlock.
A financial system that doesn’t require all this physical infrastructure sounds great in theory, but one questions you may be asking yourself is, “what about the infrastructure behind cryptocurrency?” After all, the infrastructure behind Bitcoin, for example, is extensive, with large mining facilities and a high degree of energy consumption.
In fact, you may have heard terrifying stats such as the one released by the University of Cambridge Bitcoin Electricity Index, that found the energy consumption of Bitcoin to be more than 129.24 TWh per year, or more than some countries including Argentina or Ukraine. Another concerning statistic is that Bitcoin mining generates as much CO2 in 30 months as 1 million cars would in the same period. These are certainly alarming statistics, and steps need to be taken to ensure that Bitcoin, and cryptocurrency more generally, is as environmentally friendly as possible.
Improving the efficiency of blockchains
When it comes to Bitcoin, some miners are implementing new innovations that help reduce the environmental impact of mining. This includes using excess heat from Bitcoin mining to heat cities and greenhouses, uses mining facilities as a green energy “shock absorber”, and using excess natural gas that would have otherwise been burned off. I cover these in greater detail in my blog post on Bitcoin mining innovations HERE. These steps alone will not be enough to ensure Bitcoin mining is 100% renewable and carbon neutral, but are certainly a step in the right direction.
But of course, Bitcoin isn’t the only player in the game. Ethereum, the second largest cryptocurrency by market cap, is currently undergoing a transition to a Proof of Stake protocol, which is much less energy intensive. Beyond Bitcoin and Ethereum, there are many other cryptocurrencies and DeFi projects that are highly energy efficient, such as Algorand, Cardano, Solana, and Stellar, among others. These less energy intensive blockchains allow for individuals to seamlessly transfer funds at a low cost while reducing their environmental footprint.
We’ve also seen innovative layer 2 technologies built on top of blockchains to help make them more efficient and less energy intensive. A great example of this is Bitcoin’s Lightning Network, and the Polygon Network, a layer 2 solution for Ethereum, which both allow for transactions to take place at a much lower cost, and with less energy intensity.
In summary, although the biggest players in the game, Bitcoin and Ethereum, have some challenges as it pertains to energy consumption, efforts are being made across the crypto eco-system to create more environmentally sustainable blockchains and layer 2 solutions that allow for more efficiency when transacting on-chain.
Helping the unbanked, and keeping up with the growing financial needs of emerging economies
According to the latest report from the World Bank, there are nearly 1.7 billion people around the world that are unbanked. Being unbanked, in essence, means that one does not have access to or use banks or traditional financial services. Individuals who are unbanked typically live in extremely poor and rural regions, lack basic financial and telecommunications infrastructure, and lack necessary identification to open a bank account.
Being unbanked can put individuals and communities at a disadvantage, as it may prevent them from fully engaging with the economy, being able to take out a loan or purchase a house, or being unable to get insurance, among many other challenges.
As such, there is an urgent need to provide access to financial instruments and services to those who are unbanked, and to support the need for greater financial infrastructure for emerging economies.
However, doing so within the confines of the legacy financial system would involve thousands of more bank branches and ATMs being constructed, all at a large cost to the environment. Alternatively, Blockchain can help bridge the gap by providing financial services to the unbanked and emerging economies that require less physical infrastructure, and can work on legacy technologies, such as basic phones making use of USSD technology. At the same time, these blockchain-based solutions can be much more accessible to individuals who lack access to identification, or who lack the capital needed to open a bank account.
Conclusion
Cryptocurrency certainly has challenges when it comes to its environmental footprint. However, exciting innovations are being developed and steps are being taken everyday to reduce the energy intensity of cryptocurrency, and to provide low-cost alternatives to legacy banking.
If the world were to largely adopt a more decentralized financial system, it could drastically cut down on energy consumption, as well as the massive physical footprint of the global financial sector. It may be optimistic to think that DeFi will ultimately replace the legacy banking systems, but if it did, the environmental benefits could be immense.
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