Crypto Climate Accord: a green future for cryptocurrencies?

That mining cryptocurrencies is an energy intensive activity is now widespread knowledge, yet the reasons behind this undesired phenomenon are often unclear.

To explain this, it is key to understand that the success of Bitcoin is underpinned by the distributed ledger known as the blockchain, on which all the Bitcoin transactions are recorded and arranged in sequential blocks to prevent changes that would have irreversible effects on the trustworthiness of the system.

The immense crypto’s energetic consumption  is therefore the result of the “proof of work” system, that as of today is the most efficient and secure one for validating the transactions on the general ledger and mining new tokens.  It does not rely on trusted third parties, but on a global thread of computers, called in the jargon “miners”, that validate  the transactions adding a new block to the ledger.

To do so the miners must solve extremely complicated mathematical equations in the least time possible (as they compete globally with all the other computers involved in the process), but only the first one to solve the equation is remunerated with the just “extracted” bitcoins.

To add complexity to the whole process, it should be considered that the difficulty of the equations increases as more bitcoins are extracted and as more miners are employed.

In few words the success of the crypto firms depends entirely on the number and on the computational power of their computers, which is proportionally dependent on the amount of electric energy consumed: clearly the proof of work system is a vicious cycle in terms of energetic consumption, as it is destined to increase exponentially with a steady increase in the demand for cryptocurrencies.

The Cambridge Centre for Alternative Finance in its report shows that the total yearly electric consumption to produce Bitcoins amounts to 117.35 TWh, which they claim is comparable to that of countries like Argentina or Sweden.

The researchers also highlight that only 40% of the total energy used to mine Bitcoins and other cryptocurrencies comes from renewable resources.

Acknowledged the relevance of the problem, 150 companies and individuals spanning the crypto and finance, tech and NGOs  sectors earlier this year signed the Crypto Climate Accord (CCA). This is a private sector initiative for the entire crypto community aimed at transitioning all blockchains and related technologies to renewable energy by 2030, if not sooner.

What makes this initiative particularly interesting is that being a fast expanding and not yet established sector rooted in open source and agile technology the crypto industry is the best candidate to be a forerunner in full decarbonization. In fact, Supporters engaged in achieving Net Zero emissions from electricity consumption through the development of standards, tools and technologies that, as claimed on the CCA initiative website,  could create a blueprint on how to pursue the transition for other industries.

To understand what practically the Supporters of the Crypto Climate Accord are doing the  Wall Street Journal published a  video interview to Sam Tabar, Chief strategy officer of Bit Digital, a “sustainability focused generator of digital assets” listed on the Nasdaq.

The manager explained how the company’s mining facility is harnessing the power of water to cut down carbon emissions: the miners, he explained,  are stored in the buildings of a dismissed tires factory 5 miles from the Niagara Falls, and the energy to keep the computers in function is provided by the Robert Moses  Hydroelectric Power Plant. The video also highlights how other companies are decreasing their carbon footprint exploiting solar panel farms as well as nuclear power, whereas countries like Island are home to firms using geothermal power.

A slightly less ideological interpretation to the Crypto Climate Accord considers it as an answer to the evolving panorama in ESG related regulatory matters.

In fact the New York State senate is now considering a bill banning the fossil fuel to mine bitcoin and calling for miners to disclose their carbon footprint, while the Security and Exchange Commission is evaluating the introduction of more stringent measures requiring publicly traded companies to disclose climate data.

Tabar too outlines how the transition to renewable energy also has financial benefits, as investors are not keen to invest in crypto firms that rely on coal for ethical reasons but also because of the lower risk represented by green firms.

In conclusion, this initiative is another clear example of how regulations and the market can positively steer firms’ behavior and decisions, with the hope that the crypto industry will walk the talk.