Financial news

Year in, and year out, people continue to wonder how long the crypto hype is going to continue. The volatility of the market keeps leading some to believe that the digital currency’s time has ended. But without fail, it always pops back up again… why?

This month at The Fintech Times we will be looking at what makes digital currencies so popular. We will also uncover the emerging alternatives to cryptos and why the digital future looks so intriguing. Rounding out the month, our focus is going to be on quirky currencies, looking at the top-performing currencies of the year, as well as which are most sustainable.  

In this article we look at the impact cryptocurrencies are having on the environment and what alternatives to mining are being created to reduce the damage.

Importance of sustainability

The ‘E’ in ESG (environmental, social and governance) has become the top priority for a variety of organisations in the last couple of years. As cryptocurrencies have grown, the impact they are having on the environment has become more apparent. This is especially the case with larger, well-known cryptos like Bitcoin.

In 2021, Bitcoin was by far the most polluting and energy-intensive cryptocurrency, using 707 kWh per transaction. This equated to 1,060.5 lbs of CO2 for every transaction. This is impactful due to the differing attitudes of the new generation, compared to the previous ones.

Lombard Odier, a wealth and asset manager providing wealth planning solutions, released a report that found younger investors are placing increasing emphasis on sustainable investments. Findings also revealed that younger generations of investors were more likely to invest in assets complying with personal values and beliefs. With this in mind, cryptocurrencies are starting to tackle their CO2 output and invest sustainably to ensure they can keep investor trust.

Proof-of-Stake or Proof-of-Work?

Traditionally, cryptocurrencies ran using a Proof-of-Work (PoW) consensus. This required miners to solve computationally challenging problems to create new blocks on a blockchain. An enormous amount of energy was needed to run computers and mining rigs. With the changing attitudes, cryptocurrencies are starting to look at alternatives to PoW.

Jake Yocom-Piatt, co-founder and project lead at Decred, the blockchain platform, discussed the major alternative:

“Over the past several years, there has been an increased interest in Proof-of-Stake (PoS) consensus systems compared to PoW because PoW mining consumes large amounts of electricity. While the primary focus is on the energy and environmental issues with mining, the acute centralisation of the manufacturing, operation, and ownership of mining hardware is often overlooked.

“PoS avoids the centralisation that comes with mining, so the only requirements are that you own a certain amount of the asset, stake it, and keep a machine online to participate in consensus. In May 2022, Decred pivoted from being a majority PoW chain to a majority PoS chain in response to its miners being both highly centralised and malicious. Expect to see increasing interest in Proof-of-Stake as more projects become aware of the centralised and potentially-malicious nature of miners.”

More alternatives

Mitesh Shah is the founder and CEO of Omnia Markets, the blockchain-based platform that provides expertise on financial and smart analytics, trends, news and other information. He told The Fintech Times:

“To branch away from the costly PoW algorithm, some blockchains have decided to use the PoS consensus algorithm instead. This replaces miners with stakers that hold a certain number of cryptocurrencies for a specific chain.

“Apart from PoS, there are also other consensus mechanisms used by various blockchains as an alternative to mining. Proof-of-Authority is used to select network validators based on their reputation within the network.

“We have also seen a consensus called Proof of Space and Time (PoST) used by the Chia blockchain. PoST uses empty hard drive space to temporarily store random data from the chain used for network validation and uses the amount of space to determine that miners ‘chance’ to win the next block mined and earn Chia as a reward.

“Over time, I expect to not only see more chains elect to use PoS as their consensus mechanism, but also see different combinations of consensus mechanisms and completely new ones altogether.”

‘The’ best alternative

Daniele Servadei, co-founder of Sellix, an e-commerce solution built for digital entrepreneur. Servadei provided his views on what he believed the best alternative to PoW was:

“The absolute best sustainable crypto is Nano, which is decentralised, sustainable and secure. They have absolutely no fees and they’re eco-friendly. Nano is designed to make things simple for peer-to-peer transfers of value. The experience is intuitive and instantaneous, which should appeal to many crypto investors.

“Nano doesn’t rely on mining and they think digital currency should come at the cost of destroying the Earth. This innovative crypto coin uses far less data storage than other tokens—their energy usage is as low as 0.111 watt hours per transaction.

“That’s a fantastic example for the crypto world because it means Bitcoin’s way is not the only one. Many crypto companies are proving that they don’t need to follow the biggest name in the business. In fact, some crypto companies made a conscious effort to go against Bitcoin’s grain.

“Ethereum is probably the biggest one that made a fundamental change in their operations and development process. They reduced their energy consumption by 99 per cent in 2022, which is unheard of for most companies or even private, single-family households.

“How did that happen? One of the most important things they did was change their validation process from PoW to PoS. Switching from a competitive validation method to randomly selected validators for adding new blocks to the blockchain proved to be effective.

“While PoW mechanisms require miners to solve cryptographic puzzles, PoS mechanisms use random validators to hold and stake coins. Some of them even earn transaction fees. This eliminates the need for someone to verify every transaction.”