An ESG lens on crypto
Updated: Apr 20, 2022
In 2021, the price of Bitcoin rose to nearly USD 70,000 per coin. But by early 2022 it had fallen to around USD 33,000 - what caused this dramatic drop? One reason is that many governments have started putting restrictions on cryptocurrency trading or use in their countries. Additionally, there are concerns about sustainability due to its large electricity consumption which contributes heavily to climate change each year!
Is there a connection between crypto and sustainability? It seems so. The shift from proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism among popular blockchain protocols is expected to reduce the energy demands by as much as 99%. Instead of securing a blockchain network with energy-intensive PoW crypto mining, the PoS protocol involves securing networks by rewarding users who stake their crypto to verify transactions. Early research on PoS suggests that advances in crypto energy use could eventually undercut the energy intensity of traditional central payments systems.
Ethereum, the second-largest cryptocurrency in terms of market capitalization and one that has been around since 2015 when it first launched as an altcoin, is expected to make a major shift this June by moving from its energy-hungry PoW consensus algorithm over to the leaner, greener Proof-of-Stake (PoS) mechanism. This will happen with Ethereum 2.0 which was originally planned for release at year-end 2019 but now looks set to arrive in June 2022 - just a few months away!
This upgrade includes 3 elements: The Beacon Chain, The Merge, and Shard chains. And according to the Ethereum organization, the upgrade will make the crypto “more scalable, more secure, and more sustainable”.
Benefits of a PoS protocol include:
Protection against attacks
With PoS, the chances of an attack on the network are reduced. Before they can make any advancements, an attacker will need to own more than 50% of the coins on the network. And that requires a lot of money, more money than any network member is likely to have!
Reduced transaction fees
The low transaction fees on PoS networks make it possible for users to conduct fast and quality transactions at a much lower cost than ever before.
The new update will allow the network to handle more transactions without requiring additional work from validators. This also helps decentralize Ethereum since only shards are now being run by each individual validator instead of the entire Ethereum chain.
Ethereum’s transition to PoS will level off the risks associated with mining by making it more accessible for everyone. As opposed to just a few specialized companies, all users can now enjoy the benefits of a decentralized network!