If you’re caught up with the current cryptocurrency and NFT discussions, you might have heard about the environmental impact of this technology. In a nutshell, NFTs and cryptocurrencies like Bitcoin and Ether use something called Proof of Work (PoW) to generate the coins. This method has become extremely power-intensive and has taken a toll on the environment.
Erik Thedéen, the Vice Chair of European Securities and Markets Authority (ESMA), proposed a ban on PoW in all European Union (EU) nations in order to transition into something called Proof of Stake (PoS). ESMA is one of the top regulators in the EU regarding the stability of financial systems.
This proposal came into fruition because the EU has a climate goal of reducing its carbon footprint by 55% by the end of 2030 and reaching carbon neutrality by 2050. Thedéen argued that cryptocurrencies like Bitcoin and Ether (of Ethereum) are emitting lots of carbon for what seems like nothing.
You might think “They’re just numbers on a screen. It can’t be that bad, right?”. Well, you’d be very wrong. The University of Cambridge released a report last year that state that Bitcoin mining alone is accounting for more energy usage than the entire country of Argentina. Another report by Digiconomist estimates that Bitcoin generates more than 97 million tons of carbon.
How would a ban even work? China held approximately 75% of crypto mining, but they recently put a ban on cryptocurrency mining and transactions. Other countries like Bangladesh, Algeria, Egypt, and Kosovo have all set regulations on cryptocurrency mining.
Proof of Stake (PoS)
Crypto does not have to be this way. Proof of Stake (PoS) is an alternative method that does not emit nearly as much carbon into the atmosphere. The method is quite complicated to explain, but you can think of it like this. PoW encourages every participating computer to be running, while PoS only requires one validator for each block. This results in fewer computers running and lower emissions. In fact, the Ethereum Foundation estimates that PoS could reduce Ethereum’s energy use by up to 99.95%.
PoS is currently being tested out with cryptocurrencies like Tezos, but is not fully rolled out yet to bigger companies like Ethererum. The latter has been teasing a shift to PoS for a while now but has been pushing the deadline further and further back. They plan on switching over to PoS this year, but we’ll have to wait and see if that turns out to be true or not.