Image Credit: Finance Monthly
By Adam Button
The recent uproar in cryptocurrency has brought more awareness to the problems that arise from such currencies like Bitcoin, Dogecoin and Ethereum. The main problem is the large carbon footprint, that the generation of cryptocurrency creates.
What is cryptocurrency? There are six criteria that each crypto much reach to be considered a cryptocurrency. They are:
· The system does not require a central authority
· The system keeps an overview of the crypto units and their ownership
· The system defines whether new crypto units can be created and defines the circumstances of their origins and ownership
· Ownership of the crypto units can be proved exclusively cryptographically
· The system allows transactions to be performed in which ownership of crypto units is changed
· If two different instructions for changing the ownership of the same crypto units are simultaneously entered, the system performs at most one instruction
With these rules in place, it allows a cryptocurrency to be beneficial for a world that is becoming more digital. Specifically, these currencies by nature have no central authority which allows the currency to keep its value in different countries no matter the structure of the government or economy.
There are only two ways currently to gain cryptocurrency: buying it like it is a stock and “mining” the crypto itself. The first option is available in many third-party banking or stock apps like Venmo, Cashapp, Robinhood, Coinbase, etc.
Other than buying it, the process of “mining” is more complicated. Mining the crypto comes mainly down to blockchains. These blockchains are considered the ledger of all the transactions that have been conducted.
Each crypto that uses blockchain has a specific hash code that they use to identify the correct blockchain. This protects against scammers because the blockchain allows for only new
transactions to be added. Any modification to anywhere on the blockchain would render the chain unusable because it would cascade all the way down the chain and would not match the correct hash code.
Blockchains can be mined in two ways: proof of work (PoW) or proof of stake (PoS). Currently the more popular way is PoW; Bitcoin, Dogecoin and Ethereum currently use this method. PoW is also the most energy-intensive way to mine new crypto.
Since mining, crypto requires finding the next correct blockchain, PoW utilizes a competition aspect with many “miners”. These miners use very high-end computers to run these algorithms which in turn needs a lot of energy when there are a lot of miners. When a miner gets the new block, they get a little of the crypto unit in exchange. The process of mining is more like the hitting lottery than it is racing to the finish.
Unlike PoW, PoS utilizes the miner to put in an amount of the crypto as a stake. The percentage of their stake is directly tied to the percentage of the blockchain they would mine. This way there would be overall less computation needing to be done which would lessen the carbon footprint.
Another feature of PoS is it discourages malicious intent from stakeholders since their own currency is on the line. So, if any scamming or hacking of the blockchain would make them lose all of the currency they put in to be a miner.
With these cryptocurrencies becoming more mainstream, a new digital commodity has become available, are NFTs (Non-Fungible Tokens). The idea of NFTs can be compared to being an art collector. While you can have a reproduced image or song, the consumer could feel more value when they have the original art piece or original sheet music to that song. NFTs work the same way.
NFTs let the owner of the original piece to profit of the sales of their NFTs. When they get resold, the original owner gets a percentage. Allowing independent artists, a feasible way to get money in today’s economy.
The special part of an NFT is that they can only be purchased with these cryptocurrencies. This is why they also get a lot of criticism. The carbon foot needed to purchase these NFTs is insanely high because of the crypto used to purchase them.
Although Ethereum, the main creator of NFTs, has stated that they are planning to move from their PoW system to a PoS system to reduce the overall carbon footprint of NFTs. When the switch happens, the feasibility of NFTs could become higher and more accepted in the public’s eye.