Proof of stake blockchain

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Beyond the wider adoption of cryptocurrencies by consumers in recent years, companies and organizations have also shown increased interest in crypto-assets in the past year. A myriad of industries, from sports to fashion to art to videogames to music, are entering NFTs, which, depending on the marketplace, may be minted on a PoW or PoS blockchain. Financial institutions are exploring how to compete with decentralized finance products by offering services on blockchains to provide more security and less friction in an effort toward safer and faster transactions. Depending on how such platforms are structured, such services will also be on a PoW or PoS network. This increase in investments in blockchain-based products and services by numerous and varying shareholders has resulted in increased due diligence on how much investments are complying with ESG mandates.  Corporate balance sheets are increasingly filled with cryptocurrencies, presumably as an inflation hedge or broad investment strategy, potentially impacting their ESG practices. At least one financial firm has announced that employers may soon have the option to offer workers the option to place a portion of 401(k) retirement savings in Bitcoin. Also, potential ESG issues can arise not only when investing in a cryptominer or in cryptocurrencies verified with a PoW consensus mechanism, but also with an investment in an exchange that transacts in certain energy-intensive cryptocurrencies.

Simply put, with the increased use of these types of emerging technologies, ESG concerns are likely to arise. It remains to be seen how such emerging technologies will balance innovation, while complying with ESG issues.  

On January 20, 2022, the U.S. House Committee on Energy and Commerce (the “Committee”) held a hearing on the energy consumption associated with cryptocurrency activity. In announcing the hearing on January 12, 2022, Committee Chairman Frank Pallone (D-NJ) and Oversight and Investigations Chair Diana DeGette (D-CO) stated: “In just a few short years, cryptocurrency has seen a meteoric rise in popularity. It’s time to understand and address the steep energy and environmental impacts it is having on our communities and our planet.”

By the close of the hearings, committee members received a two-hour lesson about a wide range of topics: blockchain (and its varying types of consensus mechanisms) and its energy impact to the climate; how crypto mining can affect utilities’ management of energy resources and ultimately the price consumers pay for their electricity; how utilities work with energy-intensive miners; and where to strike the balance between green energy goals and the economic development of cryptocurrency. A number of members of the Committee appeared open to preserving the potential innovations and economic growth from blockchain while still improving efficiencies in power usage and achieving growth in renewables.

This is Part I of a two-part post on the issues raised by the Congressional hearing on the energy usage of blockchains. In this part, we will discuss how different blockchain consensus mechanisms impact energy usage and some potential solutions discussed at the hearing. In Part II, we will delve into some ESG considerations now affecting businesses as related to cryptocurrency investments and blockchain usage.