The Future of Sustainable Financial Infrastructure
As China’s State Council moves towards a ban on bitcoin mining, miners are potentially migrating operations to other countries. Combined with the upside of more decentralization, shifting from China's coal-fueled mining toward western renewables will drastically reduce the environmental impact of the industry, thus supporting greater adoption of Bitcoin (BTC) in the months ahead.
Sustainability, defined as meeting the needs of the present without compromising the ability of future generations to meet their needs, is one of the most important issues of our time. A vital mission long-neglected, sustainability is also an economic prerogative.
Enter Bitcoin: the original and the largest cryptocurrency by market capitalization. Bitcoin tends to monopolize discussion on digital currencies, with critics often losing sight that an entire industry exists beyond the confines of the original cryptocurrency. There are over 9,000 cryptocurrencies in existence today. Beyond Coinbase and Binance, more than 300 cryptocurrency exchanges are in operation across the globe in a market exceeding $1.6 trillion.
The issue of Bitcoin’s high energy consumption is well documented, from those both inside and outside the industry. Critics decry Bitcoin’s energy consumption: 133.65 terawatt-hours (TWh) a year according to The Cambridge Centre for Alternative Finance--more than the annual consumption of countries like Sweden or Ukraine. However, such an overly simplified view of Bitcoin overlooks its core value proposition. It makes a calculus that ignores the fundamental benefits which a peer-to-peer digital currency offers in terms of decentralization, efficiency, and fairness.
Sparked by the shortcomings of traditional finance, the rewiring of our financial infrastructure, currently underway, is an incredibly complex process that addresses multiple different priorities for our society in a ‘digital first’ era. In regards to Bitcoin, it is true, undoubtedly, that Bitcoin consumes a high degree of energy--yet the same can be said for any number of existing financial infrastructures from banking to high-velocity trading. Concern about intensive energy consumption is justified and must be encouraged, but special concessions for legacy infrastructure should be scrutinized.
The question is not whether Bitcoin consumes energy--indeed, its costly use of computational power is what powers the network--but whether the benefits to society from its existence outweigh these energy costs. While this calculus may differ among individuals, I believe that the advantages of a peer-to-peer digital currency represent a valid use of energy resources.
It is important to bear in mind what exactly this energy consumption entails. A considerable proportion of the energy-intensive part of Bitcoin, mining, is already backed by sustainable energy--with as much as 50% of Bitcoin mining backed by hydro energy during the wet season in regions of China. Following a miner exodus from China, this fraction will soar.
Particular features of Bitcoin make it inherently useful for incentivizing the development of green energy. Unlike other industries which require costly transportation from the site of production to a use site, Bitcoin miners can be based anywhere with an internet connection.
As outlined in a recent joint paper by Jack Dorsey’s Square and global asset management business ARK Invest, Bitcoin mining could actually incentivize the development of more renewable energy projects, given the unique feature set of mining, namely flexibility, paying in cryptocurrency, and locating mining facilities at energy production sites. The paper goes on to argue that by combining miners and renewable projects, there could be improvements in potential returns for projects, investors, and developers, thus incentivizing the development of green energy projects.
Beyond Bitcoin, relentless innovation in blockchain as a technology and other cryptocurrencies have sought to build on the work of Satoshi Nakamoto. One such innovation has been an alternative consensus mechanism to that of the high-energy cost of proof-of-work (PoW). Where PoW is underpinned by mining rigs and energy expenditure, proof-of-stake (PoS) grounds its effectiveness in the perceived value of cryptocurrency. Participation in the network is realized through validators rather than mining nodes. To participate in the network, one deposits (or stakes) a substantial sum of the native network token on a network validator. This stake gathers interest over time, providing an incentive for validators to join.
Its advantage from a green perspective is clear: there is no need for the energy-intensive mining process, which occurs on PoW blockchains such as Bitcoin. The significance of PoS has not been lost on blockchain developers, with Ethereum most notably transitioning from mining to staking and many of the industry’s leading protocols, including Cardano, Polkadot, and Uniswap, using some adapted form of PoS consensus.
Indeed, given stakeholder concern with ESG issues and energy consumption, it is likely in the near time that PoS blockchains such as Ethereum will outperform their PoW counterparts. The "flippening," Ethereum overtaking Bitcoin in market cap, once viewed with mirth by experts, now appears to be an increasing possibility. As the recent €100M bond issuance on Ethereum by the European Investment Bank (EIB) demonstrates, governments and incumbents are beginning to view Ethereum as the defacto new liquidity market rails for tokenization.
While PoS infrastructure may address concerns around energy efficiency, it fails fundamentally on Bitcoin’s core values: it does not provide fairer, decentralized and democratic financial infrastructure. Put simply, staking allows wealthy entities to continue to hold an overwhelming grip on power in this new infrastructure as resource allocation in the form of native currency powers the network.
Which brings us back to Bitcoin; fundamentally the energy consumption of the currency is a feature which cements its status as a truly fair and decentralized system of peer-to-peer payments. It is of course fair to evaluate the energy consumption of the network, but it is a normative question and the value it brings in terms of restructuring the balance of power in finance needs to be factored into this calculation.
Existing financial infrastructure should also be placed under the same microscope in order to give a fair comparison of the overall benefit to society. For example, a recent report by Greenpeace and the WWF showed that the amount of CO2 production financed by Britain’s banks and asset managers (805M tonnes in 2019) outranks Germany as the ninth largest emitter of CO2 in the world.
Many stakeholders have already realized the need to revitalize our financial infrastructure. Those that don’t, risk being phased out of the market. The time is now to move forward with a better, greener, and decentralized financial system.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.