“Imagine if keeping your car idling 24/7 produced solved Sudokus you could trade for heroin.” That’s how one Twitter user described the production, transaction, and utility of Bitcoin and other cryptocurrencies back in 2018. Though it’s an exaggeration, that description isn’t entirely off-base — cryptocurrencies require massive amounts of energy to be produced and used. Bitcoin has the yearly carbon footprint equivalent to the Czech Republic while producing as much annual electronic waste as the Netherlands.
Those numbers haven’t stymied the contention among many cryptocurrency enthusiasts that this is a singular solution to all the world’s energy problems. “Bitcoin mining solves a number of climate issues, while also creating a more profitable model,” crypto enthusiast Anthony Pompliano wrote last August.
Many developers say they are working on cryptocurrencies that are supposed to encourage eco-friendly practices, and even tokenize carbon offsets. While these solutions sound appealing on the surface, climate and environmental policy experts are dubious they will have much impact mitigating climate change and changing our energy habits. Even though some of these projects are driven by techies with good intentions, these quick fixes and greenwashing proposals are unlikely to bring us closer to a zero-emissions world.
For the uninitiated, Bitcoin and many other cryptocurrencies use a Proof of Work verification method to add new transactions to the blockchain. This process requires users to expend significant effort in validating transactions in order to make it more costly for a user to engage in malicious behavior. Similar security methods are also used to deter email spam. With Bitcoin however, Proof of Work is responsible for wasting large amounts of energy.
The process of verifying Bitcoin transactions is called crypto mining: millions of expensive computers attempting to guess a number that corresponds to a new transaction. The first computer that guesses this number gets to add this new piece of information to the list of transactions, and the owner of that computer receives Bitcoin as a reward. The rest of the energy is wasted.
At one point, China was home to the largest number of crypto-mining operations, roughly equivalent to 75 percent of the world’s bitcoin mining capacity. Then in June of 2021, the country banned crypto mining, pushing crypto mines back to the US. Since then, the percentage of renewable energy used for mining has dropped from 42 to 25 percent — many miners in China had access to renewable hydroelectric energy while in the US, many current operations are powered by natural gas.
The consequences are adding up fast. Bitcoin has the same power consumption as Thailand over the course of the year. The second most popular cryptocurrency, Ethereum, has an annual power consumption comparable to the entire country of Kazakhstan.
Ethereum has promised to move to a more eco-friendly method of settling transactions. Replacing Proof of Work, Ethereum 2.0 would use a method called Proof of Stake that would work more like a lottery. The more Ethereum that a person helping verify transactions holds, the more chances they have of being selected to verify a transaction. This means that only one machine will perform calculations for each transaction, rather than having millions of machines competing against each other. Supporters say this would reduce emissions by more than 99 percent.
But this upgrade has been continuously delayed, and it’s currently unclear when it will be ready.
As it stands, the vast majority of transactions in cryptocurrency involve wash trading, a process where the same party buys and sells an asset to pump up its price. When it isn’t being used for wash trading, crypto is being used as part of hacks and ransomware attacks to fund North Korea, run financial scams, or sell stolen art. There is little pressure from those involved in these endeavors to push cryptocurrency to green practices.
“Even if it were true that cryptocurrencies ran on renewable power, the idea that it is OK for speculation to waste vast amounts of renewable power assumes that doing so doesn’t compete with more socially valuable uses for renewables, or indeed for power in general. “Computer scientist David SH Rosenthal said in February.
Cryptocurrency Attempts to Greenwash Itself
Many decentralized applications and projects that sell NFTs, such as the curated generative-art platform ArtBlocks, compensate for greenhouse emissions produced by cryptocurrency transactions. Part of the money that ArtBlocks makes from selling art pieces is used to purchase carbon offset. One carbon offset unit represents the removal of one metric tonne of carbon dioxide from the atmosphere or the avoidance of one metric tonne of carbon emissions.
For example, if one organization develops an initiative that reduces their carbon emissions, they can generate carbon offset units to sell on an open market. Then, another party can compensate for excess emissions by buying these offsets on the market. In theory, it incentivizes the development and financing of greener projects.
One company that offers carbon offset services is Offsetra, which provides extensive open-source documentation for estimating the carbon emissions from a single Ethereum wallet or app. Clients can track carbon emissions and then pay Offsetra to purchase offsets on their behalf — making the process easier than having them find and purchase verified offsets themselves.
According to Offestra advisor Damien Schuster, the company essentially helps founders reduce the total amount of emissions and work in a more environmentally-conscious manner. “Today, there’s also other options for people that want to use Proof of Stake options,” he added.
Offsetra, like many other providers of carbon offsets, is stuck between a rock and a hard place. On the one hand, they’re educating and providing ways for founders in the cryptocurrency space to reduce or offset their emissions. On the other hand, they provide offsetting services which do not directly reduce greenhouse emissions for an industry that uses enormous amounts of energy.
“Our goal is also to encourage people to go back right retroactively, and resolve those issues or at least account for them,” Schuster said.
“Yes, it’s a Ponzi scheme. But who cares?”
– Andrew Thurman
Tokenizing Carbon Offsets
KlimaDAO, an ecologically-oriented cryptocurrency project founded by anonymous developers and aimed at addressing climate change, has proposed its own solution to address climate change through cryptocurrency: “tokenizing” the carbon offsets themselves.
How this works is a bit complicated, but here’s the gist: First, carbon credits are bought up from a verified seller and turned into a token on the blockchain. Then the original carbon credit is retired, meaning that no other company can claim to purchase and use it from the seller’s website. Carbon offsets are then deposited in the KlimaDAO treasury in return for carbon-backed currency called KLIMA. Holding the token pumps up the price of carbon offsets, in an attempt to make them more expensive and provide financial incentive for companies to go green. The price of KLIMA is tied to all the carbon offsets in the treasury, so increased carbon offsets means people in possession of KLIMA earn more money.
The underlying economics are a form of decentralized finance which has been criticized by financial and securities experts. The code underlying KlimaDAO is based on another project, Olympus DAO, which incentivizes people to deposit assets into a treasury to increase the price of the OHM token yielding more than 7000% in annual gains.
Proponents of Olympus DAO and similar projects readily admit that it may be a financial scam. In a 2021 Coindesk article, Andrew Thurman, reporter and co-founder of a blockchain startup wrote, “Yes, it’s a Ponzi scheme. But who cares? ”
Other projects based on this idea, built with similar code, have been hacked and had millions in funds pilfered away.
“KlimaDAO has built huge hype through misleading claims and brought in finance from people speculating on crypto token values,” Robbie Watt, an expert on carbon markets and international policy responses to climate change from Manchester University, told The Daily Beast. “Most of those who invested are looking at acute short term losses in an experimental project that may struggle to achieve a central place in the carbon offset market architecture.”
““In a net zero world there is literally nowhere now to offset to.””
– Matthew Paterson
While Watt himself studies and criticizes carbon offsets, he does not believe that the blockchain necessarily adds any transparency to carbon offsets without overall governance reforms. “You could as easily do the latter, without bothering with blockchain,” said Watt.
This criticism hasn’t stopped KlimaDAO, which has now acquired more than 14.5 million carbon offsets. It was developed by an anonymous team and funded by billionaire Mark Cuban, who has been involved in previous cryptocurrency scandals. He backed an Instagram account that provided undeclared paid promotions of NFT projects — resulting in the account’s ban on Instagram.
Asking users to offset the energy costs of miners is reminiscent of oil and gas conglomerates advertising individual responsibility and carbon footprints to obfuscate their role in anthropogenic climate change. Increasing the prices of carbon offsets may not be a viable solution either, given that the offsets themselves are heavily flawed.
“On top of all the traditional criticisms of offsets — that they almost never provide additional emissions reductions in ways they claim, they can generate human rights abuses, they shift attention away from the need to transform all our economic activities, ” Matthew Paterson, a professor of international politics at Manchester University, told The Daily Beast. “Ina net zero world there is literally nowhere now to offset to. ”