Are carbon offsets the key to green cryptocurrencies?

Cryptocurrencies have seen a meteoric rise in their adoption and value over the past decade. For instance, the most widely-traded cryptocurrency, Bitcoin, which started at only a few cents per token in 2009 when it was first mined [1], crossed an all-time high price of more than USD68,000 in November 2021 [2]. Largely made possible with the rise of blockchain technology, a cryptocurrency is essentially a digital form of money that allows the transfer of value directly between users, without requiring an intervening financial institution [1]. A blockchain is a system where records of transactions are distributed across multiple users in a network as encrypted ‘blocks’ [1,3,4]. The users in a blockchain network participate in both the creation of new tokens (equivalent to ‘minting’ new money), as well as the authentication of these records through complex mathematical operations on their computers, which is referred to as ‘mining’ [1]. This decentralized ‘distributed ledger’ prevents the false modification of records [3] and allows for a more secure, trustworthy and scalable way to make financial transactions [1]. These advantages have led to significant growth in this sector. However, the massive energy consumption of mining cryptocurrencies and consequently their carbon footprint is a significant environmental concern. Studies suggest that the annual carbon emissions from the Bitcoin network alone could potentially exceed 90 MtCO2e, which surpasses the total carbon footprint of some of the most populous cities in the world including Beijing, Sao Paulo and New Delhi (www.citycarbonfootprints.info) [5]. In response to these environmental costs, several approaches to make cryptocurrencies more sustainable are being explored. These either attempt to directly decarbonize cryptocurrencies by reducing emissions or try to compensate for their adverse climate impacts through negative emissions from carbon offsets. Naturally, both these pathways are needed in tandem to achieve carbon neutrality [6]. However, due to the significant constraints that limit the future decarbonization of this sector, connecting cryptocurrencies to carbon offsets is arguably the most practical approach for mitigating their climate impact.