Cryptos to watch: greener alternatives to Bitcoin

Elon Musk’s tweets have been sending Bitcoin zooming to the moon or screeching downwards for some time now, but his admission about the cryptocurrency’s environmental impact has sent different sorts of shockwaves around the market.

In short, mining Bitcoin uses more electricity each year than the whole of Argentina or the Netherlands, which has led many sustainability-focused investors to look for digital currencies that have a lower or even a minimal impact on the earth’s atmosphere.

Before we look at some of these greener cryptos, we need to look at why crypto mining is so energy-intensive.

Proof of work

It’s all to do with the inherent design of the ledger system, called blockchain, that lies behind these digital currencies.

To validate transactions and prevent the ‘double spending’ issue that might otherwise exist for decentralised digital currencies where there is no single authority like a central bank (or Paypal) in charge, the blockchain’s algorithm records every single transaction made using the currency.

This may sound simple enough but, for each transaction, everyone on the network gets a copy of the transaction and each copy is linked to all the other copies.

What’s more, for each of these transactions to be validated under the ‘proof of work’ system used for Bitcoin, ever more complex mathematical puzzles need to be solved to find a solution that matches a specific number provided by one block of transactions to link it to other solved blocks, forming the chain of blocks known as blockchain.

To carry out these solutions you need very powerful computers, known as nodes, and when you have thousands and thousands of humming PCs with powerful cooling systems, you are going to use lots of electricity.

Proof of stake

But not all cryptos use proof-of-work as their blockchain mechanism. The ‘proof of stake’ concept having been designed in part as a more sustainable and energy efficient alternative, as it does not require as much energy in the block mining process.

In simple terms, proof-of-stake, or staking for short, means the more of a cryptocurrency you own the more you can mine.

It requires users to set aside some of their currency as a ‘stake’ to enable them to become a validator in the network. As a validator, they are similar to miners in that they administer transactions and create new blocks, though blocks of transaction data are limited to a maximum capacity of 1 megabyte before being duplicated across the network.

So, instead of using energy to answer puzzles as in proof-of-work, staking validators are limited to mining a percentage of transactions that reflects how much of the currency they have staked.

For example, if you own 0.5% of all the coins available you are only able to mine 0.5% of the blocks, but if you have a gargantuan 4% of the currency you would be able to mine 4% of the blocks.

Greener coins to watch

If this seems a bit too much like capitalism, some of the coins using proof of stake, such as Cardano, operate a mechanism where groups of participants or pools of users are selected to create new blocks based on the stake they control in the network.

Cardano is a platform and its Ada coin is one of the main green bitcoin alternatives using proof-of-stake as its consensus mechanism, along with Polygon and Cosmos.

Cardano uses a proof-of-stake protocol that its creators say is the first provably secure mechanism of its type, and the first blockchain protocol to be based on peer-reviewed research and has “proven security guarantees able to facilitate the propagation of global, permissionless networks with minimal energy requirements”.

Polygon is another proof-of-work framework, on which the main token is called MATIC and is based on Ethereum blockchains.

Cosmos, where the currency is called Atom, is a third proof-of-stake contender.

Ripple and its related cryptocurrency, XRP, does not use proof-of-work nor staking, with its unique distributed consensus mechanism is said to be faster, cheaper, more reliable and more sustainable than most competitors.

These greener alt-coins have all seen spikes since Musk said he was “concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions”.

Since the start of April, Cardano’s Ada has risen over 80% to US$2.13, Matic is up over 350% to US$1.75 and Atom is up around 17% at US$22.87.

The unique XRP, meanwhile, is up around 150% to US$1.47.

Whichever way the crypto cookie crumbles, as the self-proclaimed Technoking’s says Tesla is “looking at other cryptocurrencies that use <1% of Bitcoin’s energy/transaction”, it seems quite likely that one or more of them will find themselves shackled to the Musk crypto rollercoaster from here.

As a final note, it should be pointed out that by no means all of the energy used to mine Bitcoin is churning out greenhouse gases, with Argo Blockchain (LON:ARGO) one of many companies aiming to mine crypto powered by renewable energy sources.

There are also suggestions that Bitcoin and Dogecoin could be migrated to less energy-intensive mechanisms – though that’s a whole different story.

Story by ProactiveInvestors