Cryptocurrency has many advocates because of its built-in features, including a value derived independently from any sovereign government, and the decentralized and anonymized nature of transactions. Digital currency also has some built-in problems, including a massive appetite for electricity.
The U.S. Energy Information Administration estimates that cryptocurrency mining accounts for between 0.6% and 2.3% of annual U.S. electricity consumption. That’s a massive share — and more than the entire power demand of some countries!
This electricity use has resulted in plenty of criticism around cryptocurrencies. But it also has drawn the attention of coin issuers who are interested in providing an alternative to investors.
[Sign up for stock news with our Invested newsletter.]
To be clear, no digital token is ever 100% green. Cryptocurrencies naturally require electricity, which isn’t always generated from renewable sources.
That means there are many other factors at play here than just a carbon footprint. But if you are into cryptocurrencies and want to make an informed decision, this list may help you out.
Proof of Work vs. Proof of Stake
Without geeking out too much on how cryptocurrencies are mined, there is a movement toward a “proof of stake” model, as opposed to the energy-inefficient “proof of work” model.
Bitcoin (BTC) is a proof-of-work model, where users have to deploy computing power to validate network transactions, and miners have to expend significant energy to add new digital currency to the blockchain. But Ethereum, whose Ether (ETH) cryptocurrency is the second largest outside of Bitcoin, changed to a proof-of-stake model in 2022.
In this proof-of-stake model, a group of users agree to lock up some of their cryptocurrency as a kind of public record of recent activity on the blockchain. Transactions are then verified at random from across that group.
There are pros and cons of both models, but for the purposes of selecting a greener cryptocurrency, a proof-of-stake model is categorically better for the environment because it requires less energy.
How much less? After Ethereum executed “The Merge” in September 2022 to mark the end of its proof-of-work system, the Crypto Carbon Ratings Institute estimated it cut back on energy consumption by a staggering 99.9%.
With about $350 billion in market value, ETH is the most liquid and established of these proof-of-stake coins. But it’s not alone.
Solana (SOL) is another environmentally friendlier crypto alternative and is currently ranked fifth in global market capitalization, with about $55 billion in value right now. Cardano (ADA) is another top 10 coin by value, worth about $16 billion in total, that’s also proof of stake.
Green Cryptocurrencies Supporting Carbon Credits
Aside from looking for coins that are operating on a proof-of-stake model to reduce energy consumption, those interested in green cryptocurrencies can go a step further and explore tokens tied directly to a low-carbon future.
In recent years, millions of tons of carbon offsets have been tied to digital tokens that present a decentralized way to transact in these markets. Some might suggest these aren’t “cryptocurrencies” at all in the traditional sense, but remember that carbon is traded like a commodity.
One of the earliest examples of this in action is the Toucan crypto protocol, which launched in 2021 and features a foundational link between its digital tokens and carbon credits. Toucan has stated the aim is to support public exchange of carbon credits by offering visibility into demand or pricing trends. As many corporations, including Volkswagen AG (ticker: OTC: VWAGY) and Chevron Corp. (CVX), are spending significantly on carbon offsets, crypto tokens like Toucan may be part of building a liquid and transparent market.
Of course, Toucan’s Base Carbon Tonne, or BCT, coin and its related cryptocurrency, Klima, which uses the same protocol, are operating in a market of less than $20 million — down from $90 million two years ago, despite the fact other cryptocurrencies have been booming lately.
There’s also Moss, a Brazil-based finance startup that tokenizes verified carbon credits from sources like nonprofit environmental firm Verra and is designed to preserve the Amazon rainforest. The Moss-backed MC02 is even smaller, however, with about $2 million in total market value.
While there is some third-party certification involved in these credits, it’s important to acknowledge that these tokens are largely traded on unregulated and anonymized markets. That’s how crypto works, after all. So if you’re looking for indisputable links to carbon reduction, the paper trail may not be there.
There are some innovations to make this environmentalism bent more tangible, such as blockchain operator Treedefi, which trades tokens representing trees planted in the real world. Its innovative NFTrees — yup, that’s the token’s quirky name — incentivize reforestation, and users can pick the species of tree and the country in which they want to plant their carbon offset.
But as with some of the prior options, market liquidity is a real challenge. And while there is a bit more transparency, a token tied to a tree in Indonesia or Madagascar isn’t quite the same as turning a shovelful of dirt in your own back yard.
That’s a long way of saying that while there are plenty of innovative products out there, the evolution of green cryptocurrencies and related tokens is still underway. That means you should take the promises of environmentalism with a grain of salt and make sure to do your own research before investing in any of these products.
More from U.S. News
7 High-Risk, High-Reward Stocks to Buy
7 Best Long-Term ETFs to Buy and Hold
7 Best Dividend ETFs to Buy Now
Best Green Cryptocurrencies for Sustainable Investing originally appeared on usnews.com
