Blockchain Technology: A Path to a Better World and Its Environmental Costs

Even the smallest tree leaves its mark

The Promise of Blockchain for a Better Future

In 2008, following the global financial crisis and the collapse of Lehman Brothers, an unknown individual or group under the pseudonym Satoshi Nakamoto introduced the first modern blockchain. This groundbreaking technology was designed to facilitate financial transactions directly between individuals without the need for intermediaries or trust-based systems. Transactions are validated by a decentralized community, securely linked in blocks, and stored in a distributed network, making them tamper-proof. Any attempt to alter a transaction would disrupt the entire chain, rendering manipulation infeasible with today's computing power. Additionally, digital signatures enhance asset ownership security, as seen in Bitcoin transactions (Nakamoto, 2008).

Technology companies worldwide are working to improve financial systems using blockchain (Hulko, 2018). According to the World Bank, as of 2022, approximately 1.4 billion people lacked access to banking services. This issue predominantly affects women, low-income populations, individuals with limited education, and those in rural areas (World Bank Group, 2022). Beyond financial inclusion, blockchain technology can provide secure digital identities, fundamentally transforming data management, particularly for millions of refugees and stateless individuals.

Blockchain also enhances supply chain transparency. Companies can track the origins of raw materials, ensuring compliance with environmental, social, and governance (ESG) standards and future regulatory requirements (Hulko, 2018). On May 24, 2024, the European Commission adopted the Supply Chain Act, mandating companies to assess and address human rights and environmental impacts throughout their value chains. Non-compliance could result in legal action against major corporations (Human Rights Watch, 2024). With blockchain, businesses are compelled to produce more responsibly, while consumers gain the ability to make informed choices, ultimately fostering innovation and sustainability.

Moreover, blockchain technology can support the achievement of the United Nations' 17 Sustainable Development Goals, which aim to empower people, combat poverty, and protect the environment by 2030 (Hulko, 2018). One great example comes from the Cardano Foundation: Switzerland for UNHCR uses the Cardano blockchain to support forcibly displaced people. It also provides an innovative way to raise funds and connects blockchain with humanitarian efforts for positive impact.

Source: Based on Cardano Foundation, n.d.

As Frederik Gregaard, CEO of one of the world's leading blockchain firms, stated, the objective is to leverage blockchain to enhance social and financial systems on a global scale (Cardano Foundation, n.d.).

The Environmental Impact of Digital Currencies

While blockchain technology offers many benefits, it also has significant environmental drawbacks, particularly in the context of digital currencies. A UN study compared the rise of cryptocurrencies to a modern gold rush, with Bitcoin being the most prominent asset. Despite its technological advancements, Bitcoin carries a substantial carbon footprint and negatively affects water and land use. The study found that if Bitcoin were a country, it would rank 27th in global energy consumption, surpassing Pakistan, which has a population of over 230 million. The energy used for Bitcoin mining is equivalent to running 190 natural gas power plants. To offset this environmental impact, 3.9 billion trees would need to be planted on an area the size of Switzerland. Additionally, the water consumption associated with Bitcoin mining equals the annual water needs of over 300 million people in rural sub-Saharan Africa (United Nations University, 2023).

Bitcoin mining operates on a Proof-of-Work (PoW) system, requiring vast amounts of computational power to validate transactions and add them to the blockchain. Miners race to solve cryptographic puzzles, and in return, they receive Bitcoin rewards. This process demands continuous energy, with a single 10-minute cycle consuming as much electricity as 400 four-person households use in a year.

However, more energy-efficient alternatives exist. The Proof-of-Stake (PoS) mechanism, for instance, consumes a thousand times less energy than PoW. In this model, validators stake a portion of their digital assets as collateral, and a lottery system selects them to verify transactions. In return, they receive financial incentives. PoS has gained traction as a sustainable alternative, reducing blockchain’s carbon footprint while maintaining security.

The global debate on blockchain’s energy consumption continues, particularly concerning PoW-based systems. Policymakers are increasingly exploring initiatives to curb the CO2 emissions associated with cryptocurrencies. The European Union has debated imposing restrictions on energy-intensive digital currencies, though such measures have been rejected so far (Vogel, 2022).

Conclusion

Blockchain technology holds the potential to create a more inclusive and transparent financial system while supporting global sustainability efforts. However, its environmental impact, particularly concerning PoW-based cryptocurrencies, remains a pressing challenge. As innovation progresses, striking a balance between technological advancement and ecological responsibility will be crucial in shaping the future of blockchain.