At HSBC's recent panel on the ESG of cryptocurrencies, we discussed the current sustainability issues in the crypto universe and talked about what actually constitutes a sustainable cryptocurrency. Here are our key takeaways.
In short
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Bitcoin was created in 2008 in response to the financial crisis. Born out of the desire to bypass third parties in transactions, it set the tone for an entire generation of digital assets. In those early days, sustainability was little more than a side note in discussions about the future. The ecological footprint has only come under fire in the recent past. Fast forward to today, when some of the younger coins and tokens integrate green aspects pretty seamlessly into their strategy. Examples include Binance Smart Chain $BNB, Algorand $ALGO, or Polygon $MATIC which strive to compensate or reduce CO2 emissions.
That said, only a limited number of cryptos are seriously addressing sustainability issues. Moreover, the associated challenges are still viewed in a very one-sided way. Most discussions revolve solely around power consumption, and little thought is given to a holistic set of ESG components.
We founded GCR to help establish ESG considerations as a constant in the crypto sphere. Ultimately, we want to empower people to make investments in cryptocurrencies with sustainability in mind. - Isabel, President & Co-Founder of Green Crypto Research
Nevertheless, it is only a matter of time before ESG considerations will spread. Driven by investor demand for measurable sustainability indicators, social and governance criteria will have to be addressed in the not-so-distant future. To make such efforts comparable, GCR has developed a rating system to assess the ESG of cryptos.
What makes a sustainable cryptocurrency?
In doing so, we have identified a number of key points to consider when developing a sustainable coin.
The blockchain must be based on an energy-efficient consensus mechanism such as Proof of Stake or Proof of History.
Speed is similarly important as it relates to power consumption per transaction. The more transactions we can perform per second, the better the energy is used.
For an A-level rating, verifiable commitment is another key factor. Cryptos must commit to sustainability with a tangible roadmap and offset their carbon footprint by, for example, planting trees like Cardano or buying carbon credits like Polygon.
Social intentions must be understandable and comprehensible. It is not enough to "include the unbanked" in a mission statement. True inclusion means ensuring that transaction fees remain low.
It is also necessary to safeguard the distribution of assets in an equitable manner. Large or very large holders result in point deductions. Ultimately, it is about building a decentralized platform that follows democratic processes.
Last but not least, network security is crucial for a good ESG rating. We thus look at the number of security incidents since the introduction of the blockchain and evidence of good governance, for instance on the basis of audits carried out or the existence of bounty programs.
Where do we get the data from?
Overall, data availability is a key component of our ESG rating. In cases where no or too little reliable data is available, we refrain from making an assessment.
We use sources such as the whitepaper, content from the official website, FAQ, Discord channels, social media, academic journals and news media, crypto explorers, and so on - pretty much anything that we consider reliable. Data aggregation alone is not enough, however. We assess data quality by generating, developing, and checking the plausibility of the information in our models and, wherever possible, with our own calculations.
Where do we go from here?
Since ESG considerations have a long-term horizon, we primarily think long-term when we reflect on the future of the crypto market. It is still unclear where regulations and institutional adaptation of cryptocurrencies will lead. But the last few tumultuous months should serve as a reminder that cryptocurrencies are subject to significant fluctuations. What is certain, however, is that the scene is still in its infancy and there is plenty of room to grow and optimize.