Part One: It Is Time for CBDCs To Consider the Environment

Key Insights:

• CBDCs should primarily focus on environment-friendly factors while choosing platforms, software, and hardware designs.
• The IMF notes that the annual energy consumption of the global payment system is 47.3 TWh.
• Energy consumption of POW-based cryptos like Bitcoin remains high, while POS consumes less energy.

The environment has constantly been questioned when the topic of cryptocurrencies such as bitcoin (BTC) and ether (ETH) pops up. Some crypto networks use significant amounts of electricity to maintain the blockchain, generating substantial greenhouse gas emissions. This applies to central bank digital currencies (CBDC) too.

These have raised concerns among regulators and global banks that have stepped in, proposing best practices to address the issue. 

For instance, the International Monetary Fund (IMF) released a report at the start of June, recommending countries looking to develop CBDC consider energy consumption while laying their design work.

The international organization, which has been studying digital assets and their impact on global financial stability, has now turned its focus to sustainable digital assets. The report read,

“Major cloud service providers are shifting toward renewable sources of energy such as geothermal and hydropower, as well as toward locations with colder climates, to reduce the carbon footprint in generating power. Adding the environmental footprint as a selection criterion of a cloud partner can benefit not only the CBDC project but also any future digitization project of a central bank.”

Most central banks across the globe have already agreed to work toward fighting climate change while designing their payment system.

How alarming are significant energy costs?

The IMF estimates that the annual energy consumption of the global payment system is around 47.3 TWh [terawatt-hours]. This comes close to the overall yearly energy consumption of countries like Portugal and Bangladesh.

In particular, the evaluations noted that bitcoin consumes about 144 TWh per year.

Per the Crypto Carbon Ratings Institute (CCRI), which tracks the carbon emissions of various crypto networks, BTC and ETH’s energy consumption is enormously higher than other networks.

These estimates seem more alarming as several nations are making strides toward launching their own digital version of national currency.

How can CBDCs adhere to sustainability?

IMF study suggested national banks and crypto firms to move away from energy-intensive proof-of-work (POW) protocols. Per the report, blockchain networks that use the POW mechanism consume large amounts of energy.

By definition, POW is a common consensus algorithm that is used by popular crypto networks like bitcoin and litecoin (LTC). Critics of bitcoin miners have argued that the POW mechanism is “overly energy-intensive” and takes longer processing time.

Alternatively, IMF said that energy-conscious crypto networks could rely on non-POW models such as proof-of-stake (POS) protocols. These mechanisms likely consume relatively little energy.

“The potential of non-PoW permissioned crypto assets to reduce energy consumption relative to the existing payment system comes about from energy savings on both core processing architectures and user payment means.”

IMF noted that depending upon the specific configuration details, CBDCs, and certain digital assets could be more energy-efficient. The report compared energy consumption of the current payment landscapes, including credit and debit cards.

According to a blog post on Thursday, IMF noted that replacing POW with other consensus mechanisms is the “first green leap for crypto,” and using permissioned systems is the second. It further said,

“Together, these advances put crypto’s energy consumption well below that of credit cards.”

Energy Consumption of POS Blockchain networks

According to new research by the CCRI, Avalanche (AVAX) blockchain is one of the most energy-efficient among other extensive blockchain networks.

The report said that Avalanche used just 0.0005 percent of the energy used by the Bitcoin blockchain and 0.0028 percent of the energy used by the Ethereum blockchain.

On the other hand, DeFiLlama data showed that the “total value locked (TVL)” for Avalanche was the highest per unit of electricity. TVL is the value of all financial applications on the blockchain.

The TVL of Avalanche per kWh is recorded as $18,454, more than four times compared $4,395 per kWh on Solana (SOL) blockchain. Tezos (XTZ) recorded $943 per kWh, while the TVL is $161 on Algorand (ALGO), $120 per kWh on Cardano (ADA), and $19.18 per kWh for Polkadot (DOT).

These six POS networks selected do not employ identical algorithms. They have different prerequisites in terms of hardware, network size, transaction throughput, and other properties, according to the CCRI.

Another user noted that SafeCoin (SAFE), which offers a new algorithm, Proof of Resource, consumes only ~0.0000027kW per transaction.

#SafeCoin Is Environmentally Friendly – With the power of multi-threading, the #SafeCoin network is the world’s most energy efficient crypto using only ~0.0000027kW per transaction. $SAFE

T: https://t.co/1jcbmj0haT
W: https://t.co/BexHGTkP0t pic.twitter.com/CZrg60CdhD

— Colin Crypto (@ColinCrypto2000) June 17, 2022

When it comes to the design of CBDCs, Richard Dennis, founder of the Dragon IT Security, emphasized that,

“The key criteria for central banks are speed, scalability, the need for it to be very efficient and for the cost to be low.”