Impact of Tokenized Carbon Credits on Climate Change

 Environmental concerns regarding blockchain and cryptocurrencies are well known and not surprising given that Bitcoin mining reportedly uses more electricity each year than all of Finland. People who might not know much about blockchain seem to have at least a vague notion that the technology is energy-hungry.  As such, reducing blockchain’s power consumption is high on the priority list of those looking to truly understand the technology. This article seeks to demystify the technology’s abilities and explore the role of tokenized carbon credits could play in combating the climate crisis. 

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Proof of Work is a cryptographic process that Bitcoin and Ethereum use to securely validate transactions This not only puts the ‘crypto’ in cryptocurrency,  but its inherent complexity also has the advantage of making it very expensive to attack a cryptocurrency’s network. Yet this Proof of Work (PoW) approach comes at a severe environmental cost due to the energy  required by dedicated and expensive hardware ‘mining rigs’ as they carry out the necessary complex calculations behind PoW. In contrast, Proof of Stake (PoS) is an alternative approach that maintains network security, but requires drastically less calculations and can be done on a desktop computer. This process – employed by networks like Polygon – can avoid the massive significant energy consumption of Proof of Work and has already managed to reduce associated greenhouse gas (GHG) emissions by over 99% in comparison.

However, looking beyond energy consumption, some climate technology entrepreneurs are asking whether there are even greater opportunities that blockchain technology can be used to support and address the climate crisis. 

The launch of KlimaDAO – which is working to realign the economic incentives of participating in the voluntary carbon market (VCM) by accelerating the shift towards net-zero global carbon emissions – and the Toucan Protocol, which is bringing carbon markets to the DeFi marketplaces, are effectively empowering individuals and organisations to contribute to a cleaner planet.  This symbolises something of a  watershed moment for the VCM, as together these entities created the infrastructure and incentives to embed the supply of carbon credits into DeFi and expose the carbon credits to the benefit of the blockchain. 

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