In today’s world, the topic of environmental sustainability and the energy consumption of cryptocurrencies has gained a lot of traction.
Central banks, governments claiming to combat climate change, and the hungry for energy Bitcoin, have made this discussion increasingly more popular, challenging the existence of digital currencies, which according to governments, need reductions in energy consumption and carbon emissions in order to be sustainable.
But today we want to focus on the energy consumed by conventional payment systems employed and overseen by central banks, rather than just discussing facts that are already well-known. We shall see that central banks are actually under pressure to increase their efficiency as well.
Digital currencies may thus contribute to this revolution by pressuring old and centralized payment systems to change and become more conscious of their own energy usage.
The balance between centralization, security, and in this situation, energy usage is always crucial. Finding a digital currency that uses less energy would require us to give up some decentralization and hand over security to a third party; however, if we wanted to achieve the highest level of decentralization, we would have to increase energy consumption while maintaining the highest level of security.
Taking inspiration from this IMF research, we want to attempt to compare cryptocurrency assets to current payment systems in order to add some numbers to our analysis. Considering various cryptocurrency assets as well as upcoming payment systems like CBDC.To add some numbers to our reflection, we want to try to compare crypto assets to existing payment systems. Both take into account different crypto assets and also think about future payment systems such as CBDC.
In a study, the IMF compared various digital currencies against established payment methods. The findings of this study, which examines the interplay between digital currencies and climate change, two issues that are crucial to policymakers, are especially relevant to many central banks that are developing new digital currencies while taking environmental effects into account. The IMF’s research demonstrates how the technological decisions made when designing digital currencies have a significant impact on their energy consumption.
This graph demonstrates that permissioned crypto assets are more energy-efficient than credit cards. According to the most recent Red Book numbers from the Bank for International Settlements, credit and debit cards account for nearly three-quarters of cashless transactions, making them significant for comparison.
This demonstrates that finding the right balance between energy use, reducing emissions, and security is crucial. While governments work to provide alternatives, the market offers a variety of options, allowing individuals to make their own decisions.
Cryptocurrency energy use is mostly influenced by two factors:
Without a central intermediary, the network of participating users that develop this system needs to agree on the validity of what’s being added to the ledger (using a set of predefined rules). A consensus algorithm is a procedure used to guarantee the security of a Blockchain.
All peers come to an agreement regarding the state of a distributed ledger through consensus. For the proof of work consensus used by Bitcoin to validate transactions, a lot of computational power and energy are required. Different consensus procedures, such as Proof of stake or DPOS (Delegated proof of stake), which consume less energy, are used by other cryptoassets.
2) Permissions and nodes
The possibilities of access to blockchains or distributed-ledgers may vary a lot. Again using bitcoin as an example, it is permissonless, which means that anyone is welcome to join and validate transactions on the network.
Because the nodes are spread widely, it is more secure and censorship resistant than others. It does, however, result in increased energy use.
Other blockchains, on the other hand, delegate decisions to a central authority, which allows it to maintain control over network users and energy usage.
We can draw the conclusion from this research that proof-of-work digital currencies consumes significantly more energy than credit cards. Many say that replacing proof-of-work with other consensus mechanisms would be a first green leap for crypto, and using permissioned systems is a second. Together, these advances put crypto’s energy consumption well below that of credit cards.
However, it is yet to be established whether or not processes other than proof-of-work are truly decentralized and safe. In this situation, why would someone utilize a digital money if they weren’t protected from attacks and censorship?
Numerous CBDC initiatives are built on energy-efficient distributed ledger technologies, wherein only authorized institutions, such as commercial banks, can participate and validate without the need for proof of work.
Other alternatives without distributed ledgers are also being thought about, some of which are viewed as promising in terms of energy usage. This indicates that CBDCs have the potential to lower the power requirements for digital payments and may potentially be more energy efficient than the currently deployed credit card networks.
We don’t know the future of CBDC, but we already talked about this topic of CDBC Vs Stable coins in a previous article.
Although CBDCs are still in their infancy and it is difficult to predict how quickly they will develop, it is obvious that central banks will employ cutting-edge technology that have an impact on energy use.
Again, this means that if we utilize CBDC and give up a significant amount of decentralization, we will probably reduce our energy consumption significantly. We believe is that authorities and policy makers will be encouraging and pushing towards these more energy-efficient options that are permissioned and don’t rely on proof-of-work mechanisms.
Power use is only one of many factors to be taken into account, even though the discussion concerning the future of money is also in its early phases.
Decentralization, security, and regulations are a few additional crucial elements that must be taken into account. Future solutions will be successful and widely used if they are constructed with the best combination of these factors.