Many companies are adopting technologies related to Web3. There is much discussion about the environmental impact of Web3… what’s real and what isn’t?
Let’s start with the bottom line:
How did we get here?
Reports on Bitcoin’s carbon footprint have often led to ]misconceptions about the carbon footprint of blockchain technology as a whole. Blockchain is still in its early adoption phase, and consumers that may not know the difference between Bitcoin and blockchain will often conflate the two. As more companies migrate into Web3, it is becoming more important and urgent that reporting on the carbon footprint of these technologies is not only presented with accurate data, but with the appropriate context as well.
Bitcoin’s carbon footprint is reported on most often because it has the highest carbon footprint of any blockchain in use today. Reports on Bitcoin’s energy use are often filled with bias, whether that bias comes from Bitcoin maximalists or skeptics. Few reports on the technology have considered how its energy use stacks up to competing industries like centralized banking, gold, or government treasuries. Other reports fail to point out that energy use does not equate to carbon footprint, instead opting to report only that it takes vast amounts of power in order to mine a single Bitcoin.
The truth about Bitcoin’s carbon footprint, like anything else, is that it’s hard to calculate in totality. Calculating the carbon footprint of a Bitcoin transaction can be traced to some degree, though it would require calculating the energy use of both the miners and every single individual completing a Bitcoin transaction. That means the cell phone you purchased a fractional Bitcoin on, or the large computer systems that are used to mine Bitcoin in remote locations. What type of device did they use to complete the transaction? What kind of power did that device use? How was that energy created in the first place? These are all things that factor into Bitcoin’s carbon footprint, just like sending a text message, driving a car, or even reading this post would contribute to your personal carbon footprint.
In comparison, to calculate the carbon footprint of global, centralized banking systems is potentially even more complicated. Some reports claim that Bitcoin’s carbon footprint is less than half that of either global banking systems or the gold industry. Calculating the carbon footprint of the gold industry, for example, requires research on the carbon footprint of the entire supply chain—from the mining process to the jewelry stores that sell gold necklaces to consumers.
For global banking, calculating the carbon footprint would require calculating the carbon footprint of physical banks, data centers, wire transfer services, wire transfer centers, ATMs, and data centers for card networks together. It would also mean calculating the carbon footprint of fiat (government-backed) currency, including the carbon emissions that come from printing physical money or running the skyscrapers and buildings that banks and government financial systems operate out of. Banks historically profit in times of war thanks to weapons sales, war bonds and military partnerships. Today’s banks are heavily invested in the oil and gas industries, which have some of the largest carbon footprints of any other industry on Earth.
The question of how much energy Bitcoin uses puts an objective implication to an extremely subjective issue. How you answer that question will depend on the potential you see for the technology, and how you feel about its competitors. But Bitcoin is not blockchain, and blockchain technology represents a global industry with millions of people working on solutions to the concern for its energy use.
Bitcoin is a decentralized ledger that facilitates peer-to-peer transactions of digital currency. The invention of Bitcoin in 2009 by an anonymous person that goes by the name of Satoshi Nakomoto brought with it the invention of blockchain, the decentralized ledger technology that Bitcoin runs on.
What makes Bitcoin energy intensive is its consensus mechanism, meaning the computational process that confirms a transaction on the network. Bitcoin and Ethereum use a Proof-of-Work consensus mechanism, while other blockchain networks use a less energy-intensive Proof-of-Stake mechanism. There are benefits and drawbacks to both types of consensus mechanism, but Proof-of-Stake has become the most popular due to its sustainable confirmation process.
The Ethereum network, one of the most popular in today’s Web 3.0 ecosystem, even plans to switch to Proof-of-Stake in the near future. Bitcoin will likely never make that switch for a number of reasons, but the Bitcoin network can’t support smart contracts, so its energy use will never grow exponentially (in fact it could shrink once all 41 million bitcoin are mined).
Today’s blockchain industry represents a wide range of innovations for other industries. The use case for blockchain is virtually endless thanks to the implementation of smart contracts on the Ethereum blockchain in 2020. Smart contracts enable the development of products on top of a blockchain, such as decentralized apps like metaverse games, financial services, entertainment services, business protocols, and non-fungible tokens.
The smart contract-enabled blockchain landscape offers a range of solutions for any industry from the medical field to Hollywood filmmaking. These smart contract-enabled blockchain networks are called layer-1s, and offer a platform for companies and projects to build on. Each blockchain network—and there are dozens in use today—offers its own set of drawbacks and benefits, which includes their carbon footprints.
Layer-1 projects like Solana, Kadena, Algorand, and Cardano are among the world’s most sustainable blockchains. Each of these networks serve a different purpose, with some offering solutions for the financial world and others focusing more on business or entertainment.
What makes a blockchain network inefficient is its throughput capability of transactions per second. The more transactions a blockchain can confirm in a short amount of time, the more efficient and less energy intensive the blockchain is. Currently the Bitcoin network can only process around 4.6 transactions per second, while networks like Solana can process around 2,700 today. Networks like Kadena, which can operate at-scale, can theoretically confirm an infinite amount of transactions per second by braiding potentially thousands of blockchains together.
For companies considering getting into Web3, which blockchain you choose could be informed by the implications on carbon footprint. Blockchains like Ethereum are certainly the most popular today, but with more consumers questioning the environmental impact of cryptocurrency, finding a more sustainable solution will only become more important. Many investors and companies migrating into Ethereum are relying on its transition to Ethereum 2.0, the Proof-of-Stake model that will cut Ethereum’s energy use significantly. However, launch dates for the Ethereum 2.0 fork have been pushed back several times already, so relying on a change that has no official release date could be a gamble long-term.
The drawback to migrating into Web 3.0 on other blockchains is that the industry is still small, and consumers interested in the ecosystem are largely on Ethereum and a small handful of other blockchain networks. Networks like Kadena, for example, are still in their nascency.
Picking a blockchain to host a Web 3.0 business venture on today would be like picking a computer company to invest in way back in 1985. The technology has potential, but determining which network will be the best investment is still a risk that businesses looking to venture into Web 3.0 should consider. But with sustainability becoming a driving factor in more consumer behavior than ever, investing in sustainable blockchain development could likely pay off in the coming decades.