Our base case scenario – Government Coin – posits a future where digital assets become firmly established, growing in importance and ubiquity as we move closer to 2035. While adoption and usage levels will vary by country, we advise firms to plan for a future where digital assets become mainstream.
In terms of sustainability, however, this future state poses some challenges. Chiefly, there is considerable unease about the carbon intensity of technologies that underpin digital ledger technology. In particular, related to the processing power needed to support how DLT systems ‘decide’ on the single source of truth stored in a blockchain. These processes are called consensus mechanisms.
The two most common consensus mechanisms used by today’s blockchain networks are Proof-of-Work (PoW) and Proof-of-Stake (PoS). PoW, the foundational approach used by Bitcoin and many other leading cryptocurrencies, accounts for approximately two-thirds of all mining activity. Here, miners compete to solve complex mathematical problems to receive rewards for the work done, which in turn powers the blockchain. The miner who solves the problem first is rewarded with a fixed number of tokens. For example, miners receive Bitcoin as rewards for solving the computational problems of the Bitcoin blockchain. However, the process of solving these cryptographic puzzles requires a great deal of computational horsepower, consuming a lot of energy in the process.
In contrast, PoS is a much newer mechanism, which is designed to be more energy efficient. Rather than having to solve complex mathematical problems, here PoS ‘validators’ are selected to add blocks to the blockchain based on the amount of cryptocurrency they have staked. Validators do not receive a block reward, instead earning a portion of the transaction fees that are included in the blocks they validate. This newer approach is more energy efficient than PoW.
PoS also benefits from being more scalable, being able to process more transactions per second than comparable PoW networks and delivering more ‘bang for the buck’ for every GWh of energy used. However, critics point out that, for all its benefits, PoS mechanisms are also less secure than PoW, being more vulnerable to so-called ‘sybil attacks’ – where an attacker uses a large number of fake identities to stake a large amount of cryptocurrency to gain selection as a validator – as well as being more centralised, favouring the wealthiest participants in the network.
As evaluation of the potential of central bank digital currencies (CBDCs) continues, we expect that the environmental impact of the technologies adopted will be an ongoing, and increasing area of focus. This is illustrated by the inclusion of their environmental footprint in the principles and requirements for designing central bank digital currencies set out by a number of central banks and others, including the G7, the European Central Bank and the Bank of England.
The sensitivity of investors to the environmental impact of different digital assets is increasing, as is the interest, and in some cases reliance, of society on blockchains of all types. This latter trend could itself be a strong catalyst for further investment in renewable energy infrastructure. The use of hypothecated green energy for crypto mining, for example, could create fresh incentives for the expansion of sustainable energy infrastructure. This, in turn, could attract other industries and investors to green energy projects, both as a source of energy and profit.
Away from the underlying mechanics of digital assets, we believe there are other means by which the future of money can help to deliver a greener, more sustainable future for all. For example, the data generated by digital payments is already being used to inform consumers about the carbon impact of the goods and services they purchase. Blockchain-based currencies promise richer data to power these tools. Functionality can also be added to reward the furtherance of sustainable trade. Buying eco-friendly products and services could decrease the payment fee levied on a transaction, while purchases with a higher carbon footprint might attract a standard (or perhaps even higher) payment fee.
In this way, the proliferation of digital marketplaces could also help to connect buyers and sellers of goods and services in ways that promote sustainable practices. Data-rich platforms can also assist in the growth of the circular economy, which promotes the recycling of materials, the efficient use of resources and a reduction in waste. Attaching economic value to costs not borne by the buyer or seller in a traditional transaction, and allowing frictionless incentive payments for small improvements in consumers’ environmental footprints, could bring us a step closer to achieving a circular economy – and a greener, more sustainable future for all.
Coming next: We consider how the future of money may mean for businesses and their customers. While physical cash will remain relevant, digital payments will continue to grow in both B2C and B2B contexts as valuable use cases emerge and trust in new forms of payments increases, forcing businesses to adapt.
1Forbes magazine recently reported that approximately 64% of the total market capitalisation of the universe of cryptocurrencies use proof of work for validation (Forbes.com, Proof of Work Explained, 16 February 2023).
2A study by the University of Cambridge estimated that Bitcoin consumes around 121.34 terawatt-hours (TWh) of electricity per year. This is more than the annual electricity consumption of some countries, such as Argentina and the Netherlands. In contrast, a recent study by the Cardano Foundation estimated that Cardano, which uses PoS, consumes only around 6 gigawatt-hours (GWh) of electricity per year.