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April 20, 2022
What a re-leaf it’s finally spring! And, what better way to kick off this refreshing season, than with a blog about environmentally friendly blockchains?
We’re all well aware of the catastrophic climate changes impacting the Earth. We’ve seen global warming devastate the ice caps, deforestation plummet natural production of oxygen and CO2, and energy consuming corporations gluttonously devour any chance we have at reducing our carbon footprint.
In the words of the beloved David Attenborough, “There is no going back.”
But it’s not all doom and gloom! As technology lawyers passionate about providing greentech solutions, we’ve had a think about the role technology is playing in this evergreen, everlasting battle between Earth and its inhabitants. Read on for a deep dive into the impact of blockchain and NFTs on the environment.
So far, blockchains like Ethereum have earned a bit of a bad rep for implementing a consensus mechanism that’s not very energy efficient. Their aim is to increase security, so finding a balance between preserving safety measures and “greenness” is a hard one to strike. However, there are a few different varieties of these consensus algorithms to choose from, some of which are better than others. It’s important to note that we are still very much in the first iteration of the technology. We are yet to discover its true potential and limits, so in this blog, we review the current candidates that are known and that we believe are the most important to know about.
These are the three main types of consensus algorithm that are widely deployed by blockchain networks.
Proof of Work (PoW) is the original consensus mechanism – first used by Bitcoin. This has now spread to other blockchains, like Ethereum. ‘Work’ is required from miners to show “skin in the game”. These virtual miners all around the world race to be the first to solve an extremely complex maths puzzle. The ‘winner’ is rewarded by the network with a bag of crypto dough of an amount predetermined by the network. Because PoW is a proven and robust way of maintaining a decentralised and secure blockchain, it’s favoured highly. As mentioned, increasing power and security is the aim of the game, and this is achieved by incentivising more miners to join the network, which in turns increases the value of the cryptocurrency being mined, and the cycle starts again.
And yep, you guessed it, there’s a catch. The mechanism has trouble scaling at such a fast rate to keep up with the miners, and cannot accommodate the vast number of transactions smart-contract compatible blockchains, like Ethereum, can generate.
This process also costs a few dollars along the way. It’s the most competitive algorithm, as a computer is racing to solve the puzzle, which throws out huge amounts of processing power. If you want to see this in action, Google search “Bitcoin farm” and your eyes will be dazzled by warehouses filled to the brim with hundreds of glowing computer racks using very large amounts of electricity to run the Bitcoin network. As you can imagine, the effect that this is having on the environment is simply not good. In fact, according to research conducted by the University of Cambridge, the annual electricity consumption by Bitcoin (which is by far the largest PoW blockchain), accounts for an estimated 0.6% of global energy usage.
Our client Minima has developed the PoW model using an alternative method, taking PoW one step further. Minima’s protocol is collaborative not competitive – everyone does a little bit of work to get to the end goal together. In fact, with Minima’s consensus, you can run a full node on a smartphone using less energy than WhatsApp. Mind (but not planet) blown.
In stark contrast to PoW, proof of stake (PoS) allows owners of the cryptocurrency of the relevant blockchain to stake their coins, which gives them the right to check new blocks of transactions and add them to the blockchain. Staking is the process of pledging coins to be used for verifying transactions.
This system uses almost no energy and relies on how many tokens, currency (or skin in the game) you have. If you have a lot, you’re incentivized to maintain the value of those tokens. In practical terms, PoS favours the early bird, but is by no means the end goal.
Finally, we have Proof of Authority (PoA). This system is based on reputation, rather than “skin in the game”, and is currently being implemented as an even more efficient alternative because it is able to perform more transactions per second. Gold star goes to Gavin Wood, co-founder and former CTO of Ethereum, who coined the term in 2017.
The PoA consensus algorithm leverages the value of identities, rather than currency. This means that block validators are staking their own reputation rather than coins. Blocks and transactions are verified by pre-approved, trustworthy participants, who act as moderators of the system.
Remember how we said that PoW struggles to scale fast? Well, this model relies on a limited number of block validators, so it’s highly scalable.
The PoA model also enables companies to maintain their privacy while availing the benefits of blockchain technology, and is being implemented by the likes of Microsoft Azure. Briefly, the Azure platform provides solutions for private networks, with a system that does not require a native currency like the ether ‘gas’, since there is no need for mining.
So, now you know what the options are and how they work. Let’s put this into practice and review the reality of blockchain progress.
Ethereum currently uses PoW to verify its transactions. Its founder, Vitalik Buterin, has said,
“It’s widely accepted in the Ethereum community that PoW uses far too much energy. For me it is the number one priority.”
Ethereum plan to migrate to the PoS way, predicting that the shift will cut out 99% of the energy it currently consumes. At the time of writing, Ethereum have just launched their final public testnet, ‘Kiln’ before transitioning to a PoS network.
This merge will remove computing power as a security mechanism, and reduce Ethereum's carbon footprint by approximately 99.95%. In this world, stakers commit funds instead of computing power to secure the network. The energy-cost of Ethereum will become the cost of running a single home computer multiplied by the number of nodes in the network. Meanwhile, blockchains such as Solana and Tezos are already utilising the PoS method, which means that verification is not based on mining and is therefore much more sustainable.
Some newer cryptocurrencies have incorporated renewable energy into their operational model, pairing it with alternative validation methods to create a token that uses a lot less energy than its predecessors. Cardano is a great example of renewability put into practice. It’s PoS-based cryptocurrency was built on a peer-reviewed blockchain, developed by one of the co-founders of Ethereum. You can buy units of Cardano to become a member of the network instead of mining new coins. This structure allows scaling to meet increased demand without a stratospheric increase in power consumption.
Meanwhile, in the Netherlands (home to our beloved CEO and Founder, Alice Stephenson!) blockchain blockbuster BlockLab.nl has teamed up with S&P Global Commodity Insights, a giant in the field of commodity trading and analytics, to create Distro. This AI-based trading platform allows users to buy and sell energy from a solar power microgrid on the roofs of buildings within the Rotterdam Port complex.
Using high-frequency trading and blockchain accounting, Distro is driving down user costs by 11%, producing returns up 14% and crucially, reducing emissions of CO2, according to an in-house analysis released October 5, 2021. This pilot project’s success has generated tremendous interest in pioneering other eco-friendly blockchain solutions.
Being gassy isn’t always a bad thing. Well, not according to EZ Blockchain which utilises wasted natural gases by converting them into electricity for the purpose of mining Bitcoin. “Our company is focused very much on incentivizing renewable energy,” Founder Sergii Gerasymovych says.
Unfortunately, many NFT marketplaces and websites, such as OpenSea, are based on the Ethereum blockchain, which in its current state, , is very inefficient and ecologically costly by design. Selling just a single-edition artwork on Ethereum has a carbon footprint starting at around 100 KgCo2, which is equivalent to a 1-hour flight (and depending on the platform, can reach a long-haul flight).
According to The Verge, an online marketplace for digital artists, ArtStation, cancelled its plans to launch a platform for NFTs within hours of receiving a tsunami of accusations and backlash on Twitter. Artists called NFTs an “ecological nightmare pyramid scheme” and ArtStation’s plans to offset emissions a “scam” on Twitter.
While the hype of NFTs has no doubt increased the carbon footprint of individuals and businesses alike, there are plenty of eco-friendly options to creators, buyers and enthusiasts, which we discuss below.
Influencers and celebrities are hyping up crypto’s energy consumption. When big names like Elon Musk get involved, the crowds open their ears, and soon follow trends. Musk in fact halted bitcoin payments at Tesla due to the cryptocurrency’s environmental impact.
If you want to mint an NFT, try to use eco-friendly resources. When Stephenson Law launched its own series of Pixelated art with Purpose NFTs, the TriNFTy trio, we minted on Polygon via OpenSea, as a result of its reduced use of energy. This meant that users could buy the NFTs using the MATIC token (wrapped ETH – which uses the proof of stake verification process).
Crackdowns in major countries like China are pushing the crypto industry to adapt to more environmentally friendly methods. Blockchain aims to make technology and finance more accessible to all, especially those residing in more disadvantaged countries or areas, so big bans and negative press hinder this altruistic goal and the ecological benefits that are partnered with it.
In response to events like these, new and existing blockchain projects are exploring all options, from migrating to less energy-intensive validation systems to exploring renewable energy-based mining (as demonstrated by Ethereum above).
Organisations like the Crypto Climate Accord, for example, are working toward a goal of having all blockchains powered by renewable energy by 2025.
So, is blockchain sustainable? Well, it’s still a loaded question, but it’s probably fair to say there are certainly aspects of the technology – particularly how it is run – that make a negative case for this. The main issue appears to be finding the right balance between the scalability of the systems and the fast-evolving technology and the ideas behind it. Blockchain as a concept removes the need for intermediaries and instils trust between parties to transactions, but simultaneously, the companies that own the blockchains guzzle large amounts of energy in order to run them on the systems we know exist, and, at the moment, this process contributes a huge majority of greenhouse gas emissions.
But we’re also seeing positive change happening – new consensus mechanisms are being invented to reduce the negative impact on the environment, renewable options are being implemented into existing models with a focused intention to improve the situation. For example, South Africa’s Sun Exchange allows anyone with an internet connection to buy solar panels online and rent them to businesses, hospitals, schools and other organisations in Africa. Sun Exchange uses the Bitcoin blockchain for cross-border payments so that there are no intermediaries between the beneficiaries and the investors.
With NFTs growing steadily in popularity, particularly with the introduction of the metaverse, more problems than solutions may arise as artists are left with few alternatives to this demanding energy increase.
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