In today’s rapidly evolving finance industry, organizations can either change and thrive or fall behind the market competition. One of the most discussed evolving trends in finance is cryptocurrency. Many organizations are hesitant to use cryptocurrencies due to their volatile nature. However, as the world moves toward emerging technologies such as Web3, Web4,1 alternate virtual realities, blockchain-minted art and avatars, and second-to-second cryptocurrency exchanges, organizations and individuals must adapt to survive.
With the growing investor interest in cryptocurrency as an asset class and monetary tender, individuals and organizations must be well informed of the financial, legal, and technological risk associated with cryptocurrency and decentralized finance (DeFi) to develop risk assessment structures and risk mitigation processes. The process should begin with assessing all possible financial and cybersecurity threats and the possible extent of the threats and developing safeguards to monitor the safety processes to assure compliance. A risk management team is needed to further develop a plan of action in case a security threat develops and starts to grow.
With the growth of DeFi, the carbon footprint and sustainability risk of cryptocurrencies has been heavily debated by traditional investors and crypto enthusiasts alike. The entire crypto ecosystem has a huge carbon footprint, whether people are investing long term, undertaking leveraged trading, or producing and trading nonfungible tokens (NFTs) on blockchains. Cryptomining, which entails solving a complicated set of riddles to locate and obtain cryptocurrency hidden on the Internet and preserving it in digital wallets, consumes a majority of electricity and hard drive space.
Cryptomining, which entails solving a complicated set of riddles to locate and obtain cryptocurrency hidden on the Internet and preserving it in digital wallets, consumes a majority of electricity and hard drive space.Several sustainability experts believe that cryptocurrency production itself is estimated to generate between 22 and 22.9 million metric tons of carbon dioxide emissions per year.2 Offsetting cryptocurrency’s carbon footprint would require planting 300 million new trees.3 This issue continues to expand; therefore, research must be conducted to find ways to make cryptocurrency more sustainable including:
- Finance organizations should ensure that cryptocurrency use is allowed or encouraged
- Governments legalize the use of cryptocurrencies as an asset or legal tender
- IT professionals know how to work with blockchain technology
Making Cryptocurrency Sustainable
There are ways to make cryptocurrency a greener and cleaner investment asset. Not only would this curb sustainability risk, but it also can lead to further investments and add to coin goodwill.
More Research on Sustainable Energy Sources
Government bodies and the private sector are moving away from fossil fuels, coal-fired power plants, diesel generators and heavy oil fuel to renewable and sustainable energy. To counteract the effects of cryptomining, large-scale reforestation is also being undertaken.4
Need for More Accessible and Cost-Effective Energy Storage Units
Sustainable energy storage units must be made more accessible and cost-effective. A reduction in costs can improve profit margins, resulting in an increase of investors. This is imperative to generate energy from cleaner sources. Similarly, research should be conducted to find alternatives to hard drive data storage that reduce the carbon footprint.
Use of Alternative Techniques to Obtain Cryptocurrency
Building global pressure on currencies to abandon the proof of work technique, which results in excessive mining, has been taken into consideration by blockchain developers. Some proposed alternate methods include:
- Proof of stake—Aims to reduce energy use by needing proof of funds rather than solving difficult puzzles that cost energy. However, some proof-of-stake cryptocurrencies require locking up staked coins for a minimum amount of time; therefore, validators with large holdings can have excessive influence on transaction verification.
- Proof of capacity—A consensus mechanism method used in blockchains that allows mining devices in the network to decide mining rights and validate transactions using their available hard drive space
- Proof of history—A computation sequence that can be used to cryptographically verify the passage of time between two events. It employs a cryptographically secure function that must be fully executed to generate the output because the outcome cannot be predicted from the input.
- Proof of elapsed time—An Intel Corporation-developed consensus technique that allows permissioned blockchain networks to select who generates the next block. Each node in the blockchain network is assigned a random wait time by the algorithm, and each node must sleep for that length. The primary focus of this method is security for all stakeholders and investors.5
A process called sharding, which divides the blockchain workload and leads to less energy consumption, is also being increasingly used to move certain cryptocurrencies.
Regulation of Energy Consumption
Energy consumption regulation in developing and developed countries will limit the energy consumed by miners and cryptocurrency farms. The Crypto Climate Accord, which seeks to achieve net zero emissions from the crypto industry by 2040, is conducting further research on energy consumption. The objectives of the Crypto Climate Accord are to:
- Find cleaner energy sources
- Close the gap between crypto emissions today and a net-zero emissions industry
- Achieve rapid, industrywide decarbonization
- Include transformational levels of data transparency and trust in decarbonization efforts
- Create long-term value
- Ensure that crypto does not further exacerbate global warming but instead becomes a net positive contributor to the vital transition to a low carbon global economy.6
Regulation of Cryptocurrency Farms
Cryptocurrency farms that use several generators, drivers and machines for mining should be regulated. Iceland cryptocurrency farms use geothermal energy and are chilled by the Arctic air, resulting in lower energy use.7 Incentives for using cleaner energy could help convince miners and farms to switch. The geolocation of certain countries could provide the added benefit needed to develop farms where the cooling technology would require less power to be drawn.
Conclusion
Cryptocurrency and DeFi are here to stay due to the growing need for independent finance and blockchain technology. However, the climate risk that arises from the use of cryptocurrency must be mitigated as DeFi grows. To mitigate the risk, a combination of solutions that focus on sustainable energy sources and altering blockchain and cryptocurrency to require less energy would be ideal. Although proof of stake, proof of capacity, proof of history, proof of elapsed time and sharding are suggested alternatives to reducing the carbon footprint, there is, to a certain extent, risk associated with each method, including cyber and financial risk.
Based on the method used, cybersecurity measures to keep financial value safe and relatively stable in the dynamic blockchain and cryptocurrency industry must be tailored to fit each organization and rigorously maintained.
Although the risk associated with DeFi may never be fully erased, it is the collective responsibility of everyone to protect the environment that sustains humans’ very existence by not rapidly depleting and not replenishing primary energy sources such as those from fossil fuels.
Endnotes
1 The concept of Web3 and Web4 is that they will integrate ideas such as decentralization and a cryptocurrency-based economy for a new version of the Internet based on blockchain technology.
2 Reuters, “Factbox: How Big Is Bitcoin's Carbon Footprint?” 13 May 2021
3 Tully, S.; “Offsetting Bitcoin’s Carbon Footprint Would Require Planting 300 Million New Trees,” Fortune, 6 November 2021
4 Bellusci, M.; “Bitcoin ETF Pledges to Reduce Carbon Footprint by Planting Trees,” Bloomberg, 27 August 2021
5 Centieiro, H.; “What’s Proof of Elapsed Time,” Medium, 20 May 2021
6 Crypto Climate Accord
7 Hern, A.; “How Iceland Became the Bitcoin Miners’ Paradise,” The Guardian, 13 February 2018
Piyush Bajpai
Is a director in the cyberstrategy and risk advisory function of Deloitte India. He has more than 17 years of experience in client relationships and account management, business development, sales and sales operations, commercials, strategic alliances and partnerships, digital marketing, branding and marketing, and operations. He has been instrumental in leading business transformation initiatives, including business process reengineering and design; business excellence projects; enterprisewide program management; IT governance, risk, and compliance programs; audits and assessments; enterprise resource planning implementations and SAP/IT consulting services across industry verticals. Bajpai has experience working with diverse teams across Australia, India, Japan, North America, Russia and Singapore.