The Growing (positive!) Environmental Case for Crypto/Web3

There are few myths, if any, which capture the essence of human curiosity and its potential perils better than Pandora’s Box. For those unfamiliar, the story is as follows:

Pandora’s box is an artefact in Greek mythology connected with the myth of Pandora in Hesiod’s Works and Days. He reported that curiosity led her to open a container left in care of her husband, thus releasing physical and emotional curses upon mankind.

A familiar framework to us all. As I’m sure, we have all opened our own personal Pandora’s boxes, and in most cases, had to bear the consequences of that choice. For better or worse. Now on a larger scale, it feels like there was a box opened way before anyone currently living was here, and all we can do is respond accordingly… Do you know of a time in history free of human greed and curiosity? Me neither. One could say, it’s part and parcel of the human condition or mainframe. I would even argue it’s a beneficial contributor to our ongoing survival — although, at times, it can definitely feel as if we are testing the simulation limits. Regardless, there’s no turning back in this situation, as the immortal Willy Wonka states in the short clip below:

“You can’t get out backwards… you’ve got to go forwards to go back.”

So, onwards we must go, otherwise the ground we are walking upon will soon be swept from beneath us. However, it’s not always so easy to move forwards, or rather, let go of the things we know (habits, processes, lifestyles, objects, etc.) especially in chaotic and fear-inducing times, like we are experiencing now. So much to the point that any new incumbent is chastised by the many, whether that be a new: idea, way of thinking, innovative product, or service. Even when we know the law of diminishing returns is ever present.

Here, I’m specifically speaking about the strong rejection by many to what will soon (within this decade), due to its trustless and transparent underpinnings, become the base layer for how we as humans will, en masse: communicate, exchange, live, work, and play, for many years to come.

Of course, I am speaking about crypto (and everything that entails i.e. blockchain technology, etc.)

Disclaimer: This article may intentionally simplify certain crypto/web3 concepts for the sake of brevity. So, even for those unfamiliar with the space this should flow as a somewhat easy read. So, while it is completely based on factual events and information, apologies in advance for any seemingly reductionist faux pas’ in my writing.

Inevitability

“Dread it. Run from it. Destiny arrives all the same... and now, it is here.”

— Thanos

Now while the intricacies of this growing space aren’t exactly common knowledge (yet!!!), most people using the web will know about some of the varying aspects, such as: which meme coin did a 30x last month; or some of the “alleged” negatives which are plastered across media platforms; or they have some misinformed quip that gets a roaring response at dinner parties, often with the intention of ridiculing the industry participants... Anyway, I’ve digressed.

Out of the numerous pieces of exposure everyday people get to the crypto space, most are somewhat harmless bits of information, which will not prevent them from exploring further and in most cases encourage them.

However, there are some pieces of information, which are long term barriers to adoption. With obviously good intent (I assume) as you want to protect people from anything of high risk. These range from the time-old “crypto is only useful for criminals”, to the “it’s a scam, governments are banning it, and the price is going to zero”, and lastly, to the most recent and primary focus here, “crypto is bad for the environment”. Over time, the narrative surrounding the possible criminal usage and anti-government sentiment has waned in most circles. To the point, governmental crypto adoption seems inevitable, with various nations racing to produce their own CBDC’s (Central Bank Digital Currencies), as well as, (mostly) healthy conversations being had between various Governments and major players in the Crypto space. We only have to look towards the most recent (Dec. 8th) US congressional hearing for proof. In addition to that, we are now seeing many engineers and executives leaving Silicon Valley/Web2.0 in droves to join Crypto/Web3 startups, protocols, and DAOs, (additional reading) in search of great opportunity and a chance to be a part of a new digital revolution.

So, we can assume that crypto will be here for a very long time. That’s even without mention of: its growing involvement in the current rebalancing of the global power structure; the continued debasement of fiat currencies tied with the flatlining of real wage value over the last few decades; and various other examples outlined well in this video. It’s importance to our collective lives will continue to increase.

However, with all that said, the bad-for-environment narrative grows stronger, even in the aforementioned hearing, it was an issue brought up by several, including AOC. So where do we go from here… does crypto have a largely negative EV (Expected Value) for our planet? I personally do not think this is the case. I will even venture out to say it will become one of the most positively impactful tools we have to sustain and improve planetary conditions, and will be using the rest of this post to outline some of the reasons why.

At its core.. (or Introducing the Concepts)

I believe, one key reason for the strongly-negative broad-sweeping brush reaction to crypto, is mostly due to insufficient and outdated information. This is often in tandem with the conflation of various separate segments in the space, in addition to overexposure to fear-inducing sensationalism from a few media outlets. Meaning most people are never introduced to crypto with a clear understanding what the technologies are, and are capable of.

So, let’s start with the consensus algorithms which underpin the blockchain, and determine how these chains “verify new transactions, add them to the blockchain, and create new tokens.” Primarily, Proof-of-Work & Proof-of-Stake. Before going into them however, the excerpt below is helpful reading on the importance of Blockchain Consensus in crypto.

The two most important promises of blockchain are decentralization and immutable record. It’s a distributed database that the computers on the network, called ‘nodes’, maintain in a shared manner. All nodes are complete ledgers, i.e. they have the entire transaction history in the blockchain. Hence the blockchain technology is also called ‘distributed ledger network’ (DLT). The network can’t be destroyed by taking out any central server.

Block records, called ‘blocks’, are linked via a protocol program, and no existing block can be deleted or modified. Adding a new block is the only way to update blockchain, and any node can do so without any central authority.

If a node disregards the predefined standards and creates a block then the other nodes will ignore it. However, if the non-compliant node continues to create blocks in contravention of the standards and a few other nodes also start creating blocks on top of the non-compliant blocks, then a dispute will arise in the community. The community can choose a hard fork and take away the state of the network before the dispute arose, however, frequent hard forks impact the stability of the network. A consensus mechanism is needed to prevent such non-compliant nodes causing frequent hard forks.

There can also be malicious nodes overpowering the other nodes of the network by using the ‘distributed denial of service’ (DDoS) attack. Such nodes can trigger false transactions, for e.g. ‘double-spend’ i.e. spending the same cryptocurrency twice. The consensus mechanism is required to guard against this.

Proof-of-Work & Proof-of-Stake

Of the various consensus mechanisms out there, the primary two which are used at this time are Proof-of-Work (PoW) & Proof-of-Stake (PoS). In short, they can be described as follows:

Proof of Work — In order to mine and/or validate new blocks (which they are rewarded for in the native cryptocurrency of the network i.e. Bitcoin), PoW algorithms require the miners/participants to compete against each other by solving complex mathematical problems (hashing), which requires an abundance of computational power. The power required for this rapidly increases over time, as more new blocks are mined the overall difficulty of the mathematical problems increase, which will continue until the final blocked is mined. Fortunately, PoW miners can, in tandem with a mining rig (typically an ASIC), use any source of energy to mine blocks. However, up until very recently it was well known that many large scale miners were primarily using coal and fossil fuels to power their operations, creating a compounding negative effect on the environment. Which is most likely the main reason why you’ve heard many concerns raised about the environmental impact of crypto.

Proof of Stake — PoS was conceived as a less energy intensive alternative to PoW, where participation is allowed to all who hold the native currency. Also unlike PoW, it is not a race to determine who is able to mint/add blocks, instead the network randomly selects anyone who holds a node (coin/token holder) to do so. However, these participants will need a constant internet connection, and a decent computer with a specialised GPU.

Coinbase has a great write-up about the differences between the two algorithms, which you can read in more detail here.

Currently, PoW is only used by Bitcoin and Ethereum 1.0. However, Ethereum is in the closing stages of multi-year transition to being a completely PoS network (this is specifically referred to as “the merge”, which is part of the Eth 2.0 upgrade), which should be completed by summer 2022. For which, it has been estimated (based on early PoS validator tests) that this transition to PoS (in tandem with sharding and L2s/rollups) will reduce Ethereum’s energy usage/consumption by ~99.95%. Or another comparison made, is that the average Ethereum transaction (after the PoS transition/merge) will amount to ~0.4% of the energy used for the same number of Visa transactions (225x less!).

From source: “Estimate of PoW energy consumption per tx used in figure based on May 2021 data, at time of writing the same source suggested up to 175.56 Kwh”

As you can see from the data, the move to PoS is a substantial one.

Now, as you’ve probably already guessed, virtually every other popular blockchain already uses Proof-of-Stake (or some variation of it) as its consensus algorithm. These include, but are not limited to: Tezos, Algorand, Solana (which recently announced they’re carbon neutral for 2021), Lukso, Binance Smart Chain (BSC), Cosmos/Atom, and many more, which all tout low energy usage as a core feature of their blockchains. Of course this means every dApp (decentralised app) or service, built on top of these platforms shares the same benefits from the PoS algorithm, including security, transaction cost, energy usage, and so on. It should also be mentioned that most if not all of these platform do employ some kind of direct funding program to encourage and support projects combatting climate degradation.

Sidenote: Briefly stepping outside of the energy conversation here, there is also concern about what happens when more users jump on these platforms, and how that will impact throughput, user fees, usage, etc. while trying to maintain network stability & “usability”, as we will soon go into the hundreds of millions and eventually billions of blockchain users over the next decade. However, there are already a lot of efforts being made with regards to rollups & data sharding and other potentialities. In short, for every potential scaling question you might have there is someone working towards an answer. Recommended reading: Vitalik Buterin (core founder of Ethereum) has written a great article about his outlook on an “endgame”, that you can read here.

The Rise of PoW Supporting Nations

Compared to the majority of last decade, where crypto was largely insignificant on the nation-state level, the last few years has seen governments act with a lot more specificity towards this growing industry. We are beginning to see a lot more national positions etched out in stone, one such example of this, which has undoubtedly had the biggest impact globally, is China’s step-by-step banning of Crypto, where it was largely free to explore without fear of prosecution. However that is no longer the case.

Anyway, as one of the former biggest global hubs for crypto, China held much influence over the price of crypto assets, more so than anyone who had an interest in decentralisation would feel comfortable with. For example, it is well known, over various points during the last few years, the announcement of some type of ban in China, or regulatory pressure, had triggered massive sell-offs of crypto-assets. One surprising fact in this is that as recently as April 2021, China controlled close to two-thirds of all bitcoin mining in the world (according to some estimates). However, their contribution to the space, as of August 2021, is now zero, after the nationwide ban in May. This is where things get really interesting!

The Perfect Storm

As you can probably tell, there are several overlapping events here which have created a perfect storm: China’s crypto mining ban, forcing many established miners to either sell off their mining rigs or search for new locations to relocate their business to; A heightened global focus on the energy costs of Bitcoin mining/PoW; Bitcoin’s institutional adoption in various countries and the attainment of being valued as a Trillion dollar asset (with the total crypto market cap reaching around 2.5x that number at the time of writing); ongoing debasement of fiat currencies around the world, as the price of assets skyrocket and debt sharply increases as we slowly recover (or at least try to) from the aftermath of a (somewhat ongoing) global pandemic; Bitcoin’s price reaching new heights, which in turn makes mining more profitable and enticing for new participants; as well as, a growing global need to find willing buyers of renewable energy who can switch their connection to the grid on-or-off at a moment’s notice (if need be, typically in very rare cases), and afford the energy costs, without subsidy — although it may be willingly offered initially.

The key thing to take away here is that there is no one-size fits all destination for bitcoin miners who had to leave China. There are few who even called it quits and closed their businesses. However, for the majority who saw opportunity elsewhere, the second half of 2021 has mostly been exploring different avenues to restart operations, with some good and bad luck. Some immediately migrated to regions local to China, including (with link provided to their national electricity generation mix/splits), Russia, Kazakhstan, and the slightly further away Belarus, but the potential demand and impact on the electric grid (in relation to cost as well as capacity) was underestimated. Russia and Belarus are now in the process of introducing special electricity tariffs for miners. Meanwhile Kazakhstan, had a great summer 2021, onboarding miners into the country and had even become the second biggest bitcoin mining nation in the world (behind USA) for a short time. However, the country has not been able to manage the overwhelming rise of miners, as in addition to the large farms coming from outside, even residents have been purchasing their own mining equipment from china (another result of the ban) and partaking from the comfort of their own home (similar to Russia and Belarus), putting extreme pressure on the grid which led the Government to cut off supply to certain mining businesses, immediately resulting in an exodus by some of the larger players. So, we can see from results of early migration that more mining regulation is being quickly drafted up in response to this and more will need to be as they move forward in order to responsibly host miners.

Nevertheless, there are other nations already implementing such rules and others to appropriately respond to the demand while considering the potential environmental issues. Some of these include:

El Salvador—Also making headlines for having the most “bullish” president on bitcoin. Nayib Bukele, who has made the cryptocurrency legal tender, and regularly adds more to the national balance sheet any chance he gets, is also planning for a El Salvador $1 Billion USD bond sale to purchase more bitcoin in Q1 of 2022. The Central American nation, has also begun making strides to mining. First announcing in June, they were exploring possibilities with geothermal (volcano) energy, a clean and renewable energy with zero emissions, to mine bitcoin. It only took them a few months to come good on their promise and now, as of September, the country has begun to harness geothermal energy to mine bitcoin. Also, unlike most other nations who are still yet to completely switch to green sources, the energy used here is not reducing the capabilities of other sectors. Which is a point the president of for the Rio Lempa Hydroelectric Executive Commission (CEL), Daniel Alvarez stands firmly upon.

“We are not reducing the energy supply of El Salvador, on the contrary, we are increasing it, and from the amount that we have increased, we have taken these 1.5 megawatts to start this first step with mining,” — Daniel Alvarez

Additionally, Alvarez also touts the potential for El Salvador to generate electricity through tidal, wind, solar and hydro power projects.

Laos — The south-east Asian Country, which previously banned all crypto activities in 2018, is trial running a crypto (trading and) mining program. Where, in short, the pilot will allow for six companies they’ve preselected to begin mining PoW coins, such as BTC and LTC. In addition a few fees and other stipulations, it will also be required that these miners set up operations near the country’s hydropower plants, thus making use of the local “green” power”, as the nation hopes to draw in $200million per year from this to reinvest in public projects and partly pay off national debt. Of course, there are potential concerns about the impact on local communities and wildlife by increasing the number of dams to accommodate for mining businesses, however, that isn’t the only route available, as Laos is in a region with the potential to draw from wind and solar energy.

Texas, USA — There are several states in the US looking to woo miners (leaving China) to set up business with them, however, Texas seems to be a clear leader in this race, at the time of writing. Texas is the number 1 wind energy producer in the United States, and they are also a major producer for solar, in addition, of all the natural gas flared (burned/disposed of as it cannot be easily used, due to infrastructure, or other reasons) in the United States, West Texas is responsible for 50% of the total gas flared, according to senator Ted Cruz. In short, there is an abundance of energy — much of which is not able to be used in typical circumstances, for various reasons , including current grid infrastructure — waiting to be utilised at cheap prices.

Also, unlike most places, there seems to be great ideological, environmental, economical, and practical alignment — between local legislators and mining companies — about: bitcoin and the crypto industry; how mining should be carried out; and what type of a role Texas can play in this growing field. As the ERCOT (Electric Reliability Council Of Texas) also recognise, Bitcoin mining’s attractiveness to energy/grid providers is that it is unlike any other buyer of energy.

Below I have highlighted some of the key factors they would have taken into consideration, which I’ve directly quoted from an article, by Nic Carter and Shaun Connell, all about the mining advancements happening in Texas. Or tp summarise the crux of the article in their own words:

“we are pointing out that power providers will have improved economics from the existence of bitcoin mining as an additional source of offtake. These improved economics could induce extra construction. But we haven’t come across the suggestion that mining would finance the construction of bitcoin-only plants that would be directed to the grid in emergency situations.”

“The other claim is that bitcoin miners represent a unique type of interruptible load, whose ability to dial back energy consumption can help safeguard the grid from instability.”

The concluding key properties they highlight are as follows:

1. Interruptibility: This refers to the ability of miners to tolerate downtime with a merely linear worsening in their economics. Other load centers cannot tolerate interruptibility, and certainly not on a second-to-second basis. This enables Bitcoin mining data centers to qualify for advanced grid insurance products like Ancillary Services as Controllable Load Resources in ERCOT.

2. Attenuation: Bitcoin mining data centers can reduce their energy consumption on a fractional basis, dialing down from a full load to a small percentage of ASICs online at any point. Aside from the hit to their economics, they suffer no adverse consequences from doing this. This makes them suitable for participating in highly-configurable demand response programs.

3. Unconstrained location agnosticism: Bitcoin miners can participate in the network anywhere, mining with limited data overhead over cellular data or satellite internet. This is completely unlike most other load centers like households, which require expensive transmission from generation resources to centers of load. This property means that Bitcoin miners can colocate with renewables even prior to grid connection; can exploit fully off-grid assets like waste natural gas; and can consume otherwise-curtailed energy in places with abundant resources like West Texas.

4. Scale independence: Bitcoin mining is strongly fractionalizable, and does not maintain extreme economies of scale. This means that a shipping container of miners can be perfectly viable exploiting a sub-1 MWh source of energy. This property means that miners are highly portable and can attack stranded energy assets which would otherwise not find a buyer. Other industrial centers of load like aluminum smelting plants cannot be fractionalized.

Closing this section on Mining. One of the things we can take away from the numerous countries who are taking up the mantle to mine bitcoin and other PoW coins. Is that in a short amount of time, they have acknowledged the validity and growing potential of the space. Taking the time to seriously reflect on how and why they should participate, while also taking into consideration how this action can best positively impact community, environment, and economy. I believe, it’s only a brief matter of time before we see many other regional and national governments follow in the footsteps of Texas, El Salvador, and others.

This will also (if not already) be a wake-up call for the countries who may allow for mining but leave it largely unregulated and/or do not seem to be looking seriously yet to making the use of clean or renewable energy implicit (wind, solar, hydro, nuclear, geothermal, etc.) — as we know, even now that 50–60% of coins mined are done so with energy produced by fossil fuels, but it should be highlighted that this also occurs in several cases because these countries do not have access to or the available infrastructure for clean or renewable energy production right now. However, this will change soon, primarily because of our global environmental commitments.

On Chain: dApps, DAOs, & Protocols

We’ve covered much about the blockchain and the methods used to sustain them, but nothing about what is built on them, or rather, the application layer. As you should know blockchains are freely available for anyone to leverage the technology and build some type of smart contract on top of it. From which we have seen incredible projects built on chain, from, NFTs, to DeFi applications essentially banking the bankless, and even a DAO formed of people trying to buy an official copy of the US constitution — See here for my recent article on DAOs and Activism. The blockchain has brought many people the opportunity to: solve problems, take on challenges, or gain access to things previously thought to be inaccessible. So much so, that there are people also making use of this technology to help sustain and regenerate our planet, while also improving the infrastructure of the climate industry and building newer pathways for the general population to participate and positively contribute.

Nori—is a transparent and verifiable carbon-removal marketplace built on Ethereum, encouraging and empowering farmers to employ regenerative practices. The straightforward process is as follows: 1. They partner with farmers who use sustainable farming practices to sequester (capture) and store carbon from the atmosphere — 2. The carbon removals are quantified & verified (audited) by an independent third party, after successful audit the carbon removals are then listed on a marketplace for anyone to purchase — 3. Buyers from anywhere in the world are able pay the farmer for ownership of the carbon removal and receive a certificate to prove it. Recent numbers shared show over 70,000 Carbon Tonnes have been purchased through the platform.

They have also partnered with several platforms thus enabling other businesses and their users to verifiably participate in the carbon removal process, such as popular NFT platform, Rarible, as well as the popular on-chain video game, The Sandbox.

Toucan Protocol (BCT) — Toucan is a protocol which allows for the bridging of carbon credits onto the Polygon blockchain. These are then tokenised into TCO2 tokens, which “retains metadata (project origin, type, vintage, etc) of the original carbon credit.” From there, you are able to deposit your TCO2 tokens into a carbon pool and receive a carbon reference token. Toucan’s reference token is BCT (or Base Carbon Tonne), for which each BCT is 1:1 backed by a verifiable carbon credit (TCO2). The BCT is then able to be used in a multiplicity of ways, beyond even what Toucan had expected, of which you can see below:

The use cases for BCT in Web3 are extensive and we’ve been delighted to learn about the projects already underway. Let’s unpack how Web3 protocols are using BCT:

Carbon as Collateral: Add tokenized carbon credits as a diversified collateral type in decentralized finance.

Transaction Climate Action: Offer a small tip for the planet with every Web3 transaction.

Carbon in the Metaverse: Incorporate carbon into the metaverse and incentivize IRL positive impact.

Earn Interest on Carbon: Access new ways of turning carbon credits into productive, yield-bearing assets.

Carbon-Backed Currency: Launch a new cryptocurrency with carbon backing.

Green NFTs: Integrate carbon with your next NFT project for planet positive works of art.

Carbon as an Investment: Diversify treasury or portfolio holdings with a liquid, fungible, and real-world asset.

The ideas above are not just ours. In fact, they’re already underway among pioneering protocols leading a new wave of regenerative innovation. Check them out:

KlimaDAO: a cryptocurrency backed by BCT

Qi DAO: diversifying into BCT as a green treasury asset

Market.xyz: borrow against BCT and explore new ways to generate yield on carbon

Carbonized: BCT-infused NFTs

Atlantis World: building carbon-sequestering forests with BCT in the metaverse

Klima DAO — Mentioned briefly above, Klima is one of the ambitious projects making use of the BCT to encourage further climate action (less polluting) from the biggest polluters on the planet, by increasing the price of carbon assets/offsets — which, due to its cheap price, are typically used by polluting companies to offset their negative impact at a very low cost (relative to the long-term impact of such action).

Klima is a reserve currency protocol (forked from Olympus DAO) which is based around the KLIMA token, which can only be minted when bought with BCT. So, they lock up the BCT, buyer receives Klima and is encouraged to stake for a high APY return — thus they are additionally incentivised (to hold)by earning a high return on their investment(if all goes to plan). In turn, it is expected this (increasingly large treasury of carbon credits) could lead to a supply squeeze for carbon credits, driving the price and demand up sharply. This is expected to also have the knock on effect of steering necessary financing to more legitimate regenerative projects —click here to read more about this particular aspect.

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Treejer — is a blockchain protocol which, in their own words “enables transparent climate finance and credit management opportunities for individuals, businesses, NGOs and governments.” — their protocol will allow for anyone to: “track trees and their growth, create infrastructure for sourcing forest-based climate credits, and reduce costs of climate finance by connecting funders and enabling bankless payments to rural unbanked communities.” — most recently, they have also launched an NFT project of 10,000 generated NFTs each linked to a real tree in the world you can track the progress of.

In Closing

The rate of response with eventual solution and improvement to challenges in web3/crypto is so rapid it can often defy common sense. As we as a society are conditioned to accept relatively slow and likely minimal change from almost everything we interface with—the pangs of tradition, one could say — so it is easy for anyone to see a fairly “negative” aspect (assuming it’s true!) about the industry and assume it will be a longstanding feature for the foreseeable future and not something to be analysed and removed, as quickly as possible.

Nevertheless, we are only scratching the surface of what’s possible at this point, and still, every environmental concern/challenge right now about the space will be addressed & nullified within the next 6–18 months. So we can only imagine what the future will hold for this burgeoning space.

(Any views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)