When considering crypto investments from an ESG perspective several factors must be analyzed and addressed. The assessment of energy efficiency of distributed ledger technology (DLT) systems is generally based on three parameters: mining, transactions, and storage.
Ethereum, which has been traditionally based on PoW (Ethereum 1.0), is now switching to PoS (Ethereum 2.0). This transition will allow Ethereum the ability to use 99.95% less power, achieving much greater energy efficiency as a network. The foundation presented a comparison between PoW and PoS energy consumptions, proving that PoS networks are significantly better from an environmental perspective.
The energy footprint of PoW-based blockchain systems exceeds the energy consumption of all PoS-based systems by at least three orders of magnitude.
A report by Solana, another Web 3 PoS-based network, provides energy comparison between a single Solana transaction and other common activities, like performing a Google search or charging an iPhone battery. It also shows that PoS can drastically reduce crypto carbon footprint while demystifying environmental criticisms.
From an environmental perspective within the ESG investment framework, additional factors must be taken into consideration.
PoS-based networks differ significantly amongst each other. A UCL study has proved that in PoS permissionless systems, like Tezos, Cardano, and Polkadot, the energy supply is much greater than in permissioned ones, like Hedera. The reason is that permissionless networks are open to anyone, which means a great number of nodes and validators must be deployed in order to operate protocols’ governance. On the other hand, in permissioned networks, the consensus nodes are run solely by council members; which means they can limit the number of validators involved so to reduce the overall energy throughput.
Validators are crucial to the PoS consensus mechanism whose responsibility is to verify blocks to earn rewards. The type of hardware a validator uses, as well as the number of associated nodes, are critical to the overall energy efficiency. This also suggests that total PoS network energy consumption is a more reliable sustainability metric than the energy consumption per transaction.
Overall, when compared to PoW, PoS is certainly more sustainable; it also proves to be closer to the total energy consumption of traditional centralized payment, like Visa Net.
Even though Ethereum 2.0 has not been launched yet and its market cap still lags Bitcoin, it has dramatic growth potential contributing to the transition of a much less environmentally harmful crypto ecosystem.