Can Digital Assets Go Green? The Dilemma for Institutional Investors

This article is my personal opinion about the conflicting strategies from institutional clients of increasing their digital asset allocation vs. strong sustainability objectives.

The move to Proof of Stake (POS) from Proof of Work (POW) is a significant step forward to increase the attractiveness of digital assets for institutional investors. However, on a standalone basis, it is unlikely to be enough. A full switch to renewable energy and other initiatives is needed to combine the two objectives.

The numbers are staggering. To put it into context, Bitcoin alone consumes around half as much electricity as the UK and consumes 0.65% of all electricity consumption worldwide.

Whist digital assets increase their attractiveness for institutional investors in terms of asset allocation, it is completely at odds with the same institutional investors who are extremely focused on building their strategy around ESG both for commercial opportunities and the greater good.

Blockchain technology is changing the way we do things and bringing efficiencies to operating models and markets, but is it worth it if it is at the expense of our planet? In its current form, the answer is no. We saw Elon Musk and Tesla backtracking from their initial USD 1bn + investment into Bitcoin based on concerns around the impact to the environment.?

But things are changing!

So how can digital assets and blockchain technology go Greener?

1.?????Proof of Stake (POS) instead of Proof of Work (POW): POW is based on a group (network) of users to compute and respond to a usually complex mathematical equation. As the mathematical equations become harder to solve, they require more brainpower in the form of super computers which consume more energy in order to solve the equations.?This has led to some of the staggering energy consumption numbers mentioned earlier.

Under a POS framework, priority is given to those with the largest stake who will receive network fees in response. POS was partially designed to lower the energy consumption. The most significant blockchain to switch from POW to POS is Ethereum. According to the Ethereum Foundation, POS consumes 99.95% less energy vs. POW.

Not all POS based systems are equal and we need more research to see exactly how much energy will be consumed by the larger blockchains under POS. We also need to compare vs. energy consumption vs. traditional assets before Institutional Investors can weigh-up the true impact vs. their sustainability goals of investing in digital assets.

2.??????Switch to Renewable Energy: ?This makes sense in terms of the cost of mining (renewable energy will typically be cheaper vs. non-renewable alternatives), but also is a much cleaner and sustainable way of powering the computers needed for mining. Today, approx. 40% of mining is powered by renewable energy. Countries such as Norway and Iceland who currently have almost 100% of energy production are seeing an increase in digital asset mining companies setting up in order to leverage their renewable energy sources.

3.??????Automation: If operating models are more seamless, have less human intervention and less support required, it could result in substantial savings in overheads and infrastructure costs which will have a reduction in energy usage and the related energy costs. The introduction of blockchain can help to achieve these benefits.

4.??????Additional incentives: Can corporate companies or governments introduce incentives to individuals for example to put more solar panels on their roofs? What other incentives can they provide?

In conclusion, we are moving in the right direction to reduce the enormous energy consumption from digital assets. However, in order to meet the ESG objectives in parallel and consequently increase the attractiveness for institutional investors, the move from POW to POS alone is unlikely to be enough.

Interested in your thoughts.?