How can digital currencies become more sustainable?

How can digital currencies become more sustainable?

“If Bitcoin were a country,” a recent Forbes Advisor article stated, “it would rank in the top 30 worldwide for energy use.” From its early days, Proof-of-Work, consensus-based blockchain technology has moved from being a disruptive alternative to institutional payment systems, to a global phenomenon and in the process, also a serious threat to sustainable energy usage.

Apart from that, with the considerable increase of energy prices that has impacted many parts of the planet lately, mining new coins and creating blocks for the blockchain now risk losing its economic incentive, as the cost of the energy needed for mining may be higher than the possible gain.

Proof-of-Work turns green energy into waste

It turns out, as more and more coins are mined, that Proof-of-Work-based blockchains is a solution that doesn’t scale well. Proponents of PoW claim that the effects can be mitigated by using green energy from renewable sources, but the use of PoW is still wasting most of the energy that is used in the consensus process itself, as only one participant in the computational competition gets awarded, while the rest of the work is used for nothing more than the competition.

In some countries there is concern that using green energy for crypto asset mining is preventing the climate transition. This concern prompted Sweden’s Finansinspektionen, the Swedish financial supervisory authority, to publish an open letter asking to prohibit crypto mining in the EU.

One alternative to using Proof-of-Work is the path selected by major DeFi platform Ethereum. They admit that “the underlying proof-of-work consensus algorithm that keeps Ethereum secure and decentralized has a big environmental impact”, so the vision of version 2.0 is to move away from Proof-of-Work and re-create the platform based on Proof-of-Stake.

Staking is still consensus-based, but instead of relying on miners to solve computing puzzles, Proof-of-Stake is based on validators staking part of their assets to keep the ledger entries secure. This means the method uses much less energy and is, in this sense, a much more sustainable choice than Proof-of-Work. The hardware requirements for taking part in Proof-of-Stake work is also much less demanding, resulting in much smaller amounts of electronic waste. (The average e-waste calculated for Bitcoin is 356.10 grams per transaction!)

Crypto sustainability has three dimensions

Sustainability, when it comes to digital currencies and transaction systems, is not only a question of energy consumption and carbon emission levels. Such systems must also be sustainable in terms of privacy and technology. It seems there are still some doubts as to whether Proof-of-Stake algorithms, however superior in energy consumption levels, are as secure as those based on Proof-of-Work.

Enter Proof-of-Trust.

Trust-based transactions, the technology used by Trust Anchor Group for the Paiwise suite of services, use cryptographic signatures in place of consensus for approving transactions. The only actors in a transaction are the sender and receiver. A trust provider approves the transaction, keeping it private and protected.

A Proof-of-Trust transaction is more like sending an e-mail than using a blockchain, and it uses about the same amount of energy. No high-end hardware needs to be purchased and maintained for participating in Trust-based transaction, and no currency needs to be staked for transactions to take place.

Proof-of-Work-based blockchains will probably prevail for some time still, having become the well-known standard for crypto transactions, but the question is if it will continue to be regarded as the disruptive, decentralized, democratized currency system it once was, when bans on crypto mining will start shutting out blockchain participation in parts of the world.

Environmental concerns might be challenge that make such architectures obsolete, or the risk of their fixed cryptographical algorithms being broken.