Environmental, social and governance (ESG) funds are growing in popularity with mainstream investors looking to put their money to work by generating returns from doing good for the world.
So where can crypto fit in with the ESG boom? Unfortunately, despite astronomical price surges, crypto assets have earned themselves a bad reputation on the environmentally front.
Certainly, it is the case that some cryptos have a green deficit, but there are many others that are in fact energy-efficient and could therefore be more likely to find themselves in an ESG-focused investment portfolio or fund.
ESG Funds May Shun BTC Companies
According to research by the University of Cambridge, most Bitcoin miners are based in China, relying heavily on coal to generate energy.
The researchers behind the Cambridge Bitcoin Energy Consumption Index also pointed out that Bitcoin uses more energy than some countries in the world.
The index puts BTC energy consumption at 113.27 TWh of electricity.
To put that into perspective, a single transaction of BTC has the same carbon footprint as 680,000 Visa transactions or 51,210 hours of binge-watching YouTube videos.
With the world looking to reduce greenhouse gas emissions, this presents a major problem for the nascent industry and the ESG funds with deep-pockets.
There are hundreds of crypto protocols relying on proof of work (PoW) in validating transactions, but Bitcoin is the most well-known given its large market cap. Another famous PoW user is decentralized finance (DeFi) facilitator Ethereum which plans to migrate to a less energy-intensive mining protocol called a proof-of-stake (PoS).
Bitcoin a negative for companies unless ESG issues fixed
Due to the inherent flaws in the PoW process, ESG-focused funds may shun companies with Bitcoin in their portfolio due to the growing environmental concerns.
ESG funds are investment portfolios of equities and bonds of which environmental, social, and governance factors have been integrated into the investment process.
These funds contain investments with high sustainability scores and exclude industries with poor records on environmental hazards, pollution, labor relations, or management practices.
In a sign of the popularity of ESG and how it is moving up the crypto agenda, One River Asset Management this week filed the One River Carbon Neutral Bitcoin Trust ETF for approval with the Securities & Exchange Commission. The fund intends to use carbon offset purchases to balance the emissions from its crypto holdings.
One River is also a supporter of Net Zero Asset Managers Initiative alongside VanEck, Fidelity, and 84 other digital asset management firms.
These groups aim to reduce global greenhouse emissions by repurposing their crypto mining practices.
Battle of the Protocols: PoW vs. PoS
PoW has played a significant role in resolving the ‘Byzantine Generals Problem’ in distributed computing (the problem of when A send to B, B can be sure that the message hasn’t been intercepted and changed before receipt). But the PoW validation protocol comes with several pitfalls.
There are currently a number of major contenders in the PoS field vying for the attentions of ESG investors, such as Cardano, Polkadot, Solana and Celsius. Then there are the likes of EOS, Tezos and Tron, which are more established PoS networks but have slipped in popularity because of perceived governance and centralisation issues.
Standing out prominently is its slow transaction speed. It takes time before a PoW protocol reaches a consensus, and Bitcoin takes about 4-6 seconds to validate transactions. Compared to Visa’s 20,000 transactions per second (TPS), this is a paltry figure.
Another notable shortcoming is the amount of energy PoW protocols use in validating transactions, which is problematic for investors like ESG fund managers. Bitcoin reportedly consumes more energy than several countries, even though it has rapidly led to more financial inclusion for more people.
These pitfalls have seen many blockchain developers look towards PoS protocols, which are scalable, interoperable blockchain networks. PoS is also less energy-intensive and will fit into the broader goal of reducing the global carbon footprint as the world embraces cryptocurrencies.
A top contender: Solana processes 50,000 transactions per second
And with PoS projects such as Solana processing over 50,000 tps, crypto projects using this validation process may better compete with big payment networks such as Visa and Mastercard.
More crypto projects are rapidly transitioning to the PoS consensus protocol by the day, given the small amount of energy needed. A recent prediction by crypto lending platform Celsius Network CEO Alex Mashinsky pointed to DOGE as likely to take the PoS plunge soon.
Even though the meme-based cryptocurrency has a considerably low energy demand of just 0.12 KWh and processes transactions faster than BTC, Mashinsky said the auxiliary proof-of-work (APoW) asset would migrate to PoS to further cut down on its energy consumption.
To most industry experts and ESG Funds, the continued criticism of the PoW mining process will aid the subsequent rise of PoS blockchain networks.
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