One of the major positive news for the crypto industry was when Tesla announced it would accept Bitcoin as payment on the 8th of February 2021. The Elon Musk-spearheaded carmaker also reported a $1.5 billion investment into the coin.
In a surprising twist, Musk tweeted on the 12th of May 2021 that Tesla would stop accepting BTC because of its environmental impact on mining. ‘Energy usage trend over the past few months is insane,’ he wrote.
Moreover, the American billionaire suggested he was searching for a coin with less than 1% of Bitcoin’s energy consumption. Criticism from environmentalists over the energy consumption of most cryptocurrencies like Bitcoin is nothing new. However, this certainly has rekindled some conversations.
While eco-friendly cryptocurrencies have always existed, more investors sharing the ESG (Environmental, Social, and Governance) sentiment are on a quest looking for projects in this realm.
Therefore, this article will dive into the sustainability concerns with blockchains and the three most ESG-friendly cryptos to invest in as a solution.
Why are many cryptocurrencies not eco-friendly?
It’s beneficial to understand why concerns exist over the carbon footprint of many cryptocurrencies. Each project utilizes what is known as a consensus mechanism for verifying transactions and ‘minting’ new coins.
Currently, one of the most commonly utilized consensus mechanisms is proof-of-work (PoW). PoW involves computational mining, an activity whereby thousands of miners globally use advanced computers to solve blocks on a blockchain.
Whichever miner is the first to solve the cryptographic hash or math puzzle for each block receives a specific portion of the coin. Prominent examples of coins employing PoW include Bitcoin, Dogecoin, Ethereum, Litecoin, and Monero.
Of course, the common denominator with mining is its substantial reliance on electricity generated by coal. The purpose-built computers rely on massive amounts of power for mining coins and decreasing their heating.
As it’s been well-documented through academic studies over decades, coal has the worst emissions of any fossil fuel.
For instance, Bitcoin consumes an astronomical amount of power. According to the University of Cambridge, its energy consumption annually is well over 120 TWh (terawatts per hour), which is more than some small countries do.
In the early days, there were significantly fewer miners, and transaction activity was only a fraction of what it is now. As expected, this activity continues to increase daily.
So, what’s the solution?
Proof-of-work is not the only consensus mechanism used in blockchain technology. Another popular model is known as proof-of-stake (PoS). PoS involves a process in which users of a particular project stake or lock their holdings in a wallet.
No mining is involved in creating new tokens. Instead, the blockchain automatically rewards holders with new coins when confirming transactions based on the size of their stake. Both PoW and PoS provide financial incentives, except the latter does not rely on mining.
This single fundamental distinction is the primary motivation more investors have flocked towards proof-of-stake projects. Another important reason is the creation of such coins requires tremendously less power than on proof-of-work.
Aside from requiring large electricity consumption, many PoW coins aren’t scalable regarding how many transactions they can confirm. For instance, Bitcoin processes around 2700 transactions every 10 minutes (or about five every second), the time in which one block takes to form.
Contrastingly, Cardano boasts an incredible throughput of about 1 000 transactions per second. Other non-mining consensus mechanisms exist, such as proof-of-space, which are also more eco-friendly than proof-of-work.
Some cryptocurrencies like XRP were already ‘pre-minted’ well before launch, meaning they don’t need any mining as well.
The 3 most ESG-friendly cryptos to invest in
Now that we’ve understood where the concerns over the carbon footprint of cryptocurrencies come from let’s look at the three best ‘green’ coins to invest in.
Cardano was one of the first projects to implement a proof-of-stake blockchain successfully. 2021 has been its best-performing year by miles. It began the year trading at $0.14, and reached an all-time high of $2.45. It is presently the six-most traded cryptocurrency.
So, how does Cardano work? Cardano is a blockchain producing its native cryptocurrency, ADA. The brand has visions of becoming better than Ethereum. Presently, developers have scheduled gradual upgrades to Cardano towards smart contract and decentralized application (dApps) development similar to Ethereum.
Some might still consider Cardano as a work-in-progress despite already being in a position of dominance. Therefore, it provides a potential investment opportunity as it looks to advance in its vision in the near future.
Another venture not relying on proof-of-work is Holo. Unlike Cardano, Holo (HOT) is still some distance away from its all-time high price of $.0.03, making it more undervalued. The Ethereum-based HOT token is presently the 70th most traded crypto, according to CoinMarketCap.
Furthermore, Holo is still technically in development. It has quite ambitious goals seeking to act as a peer-to-peer platform for hosting dApps without blockchain technology.
Instead, Holo will use its proprietary technology known as the Holochain DHT (distributed hash table).
Holo would actually eliminate the need for proof-of-work or even proof-of-stake models as found on typical blockchains. Therefore, the power expenditure would be even lower. Leading developers describe Holo as ‘agent-centric,’ meaning individual computers confirm transactions rather than needing consensus from multiple nodes.
When most people mention the first three coins that come to mind, they are likely to say Bitcoin, Ethereum, and then Ripple or XRP. This project has existed since 2015, meaning it carries substantial credibility and has a proven and sought-after product in the industry.
Ripple has firmly remained in the top 10 for several years and at times in the top 4. In April 2021, it reached $1.92 for the first time in over three years but has slightly dipped back to $1.40.
Ripple is a gross settlement, remittance, and currency exchange network primarily for financial institutions; essentially, a lightning-quick and extremely cheap version of SWIFT.
The platform uses its native cryptocurrency, XRP, to facilitate transactions on the network.
Additionally, it is exchangeable across multiple exchanges and wallets on a personal and business level. No mining process is involved in creating XRP since Ripple made 100 billion tokens before launching the protocol.
Around 35.1% of this supply is in circulation at this moment. Not requiring any mining, of course, easily makes XRP an environmentally friendly coin and is esteemed as such.
While a large percentage of cryptocurrencies rely on mining, there is also a substantial group that doesn’t. The latter generally perform significantly faster in productivity and transfer costs, making them attractive alternatives to their counterparts.
Most of these projects and others like them aim to achieve carbon net-zero in the near future. For environmentally-conscious investors, this article should serve as a guide into the well-established ESG-friendly coins.