Complex Made Simple

Investors are chasing green equity and sustainable cryptos

From green equity to sustainable crypto mining, investors are more and more interested in eco-friendly financial vehicles

One only has to look at the market for green bonds, where issuance this year is almost triple what it was a year ago Creating new coins and recording transactions uses as much electricity each year as a country the size of Argentina Proof of stake doesn't require any extra energy to prove trustworthiness, so it is much more energy-efficient

According to Bloomberg Green, officials at Goldman Sachs Group Inc. recently said they’re looking into the prospect of developing green equity for clients, and a group of crypto-miners said they’re considering the sale of “green Bitcoin.”

The idea behind green equity is to raise capital for projects intended to help the environment. Goldman Sachs may add its weight to the market for green equity. John Goldstein, the firm’s head of sustainable finance, said in a recent interview that the bank is experimenting with the idea. “When and where and how would we get to actual green equity, I think we’ll see,” he said. 

In the world of Bitcoin, some are working to sell coins whose transactions are verified on the blockchain by computers supposedly powered only by renewable energy.

“There’s a market that doesn’t know it yet,” said Sheldon Bennett, chief executive officer of crypto miner DMG Blockchain Solutions Inc. His firm has had discussions with “multiple banks and financial institutions” that want to buy Bitcoins that can fulfill the increasing demand for ESG compliance, he said. “More and more, they are saying if there’s an option, I am willing to pay a premium to get it,” he said.

Demand for green projects growing

Demand for these types of investments, for now, is big. One only has to look at the market for green bonds, where issuance this year is almost triple what it was a year ago, and environmental, social, and corporate governance (ESG) focused exchange-traded funds (ETFs), which have attracted net inflows for 50 straight weeks.

In recent weeks, US President Joe Biden ordered the creation of a strategy to quantify the risk climate change poses to both public and private financial assets. In the U.K., Chancellor of the Exchequer Rishi Sunak is pushing the Group of Seven economies to impose mandatory reporting of environmental risks on their big companies. The G7 has agreed to phase out fossil fuel subsidies.

Energy conscious crypto miners  

A group of North American bitcoin miners called the Bitcoin Mining Council decided they would act to deal with a major image problem for the cryptocurrency, i.e. its energy use.

The process of creating new coins and recording transactions uses as much electricity each year as a country the size of Argentina.

That issue has seen China and Iran move to ban cryptocurrency mining, and that has contributed to the wild swings in the Bitcoin price seen recently.

Jaime Leverton, chief executive of Hut 8 Mining, one of the members of the Bitcoin Mining Council, said the aim is to “counter the noise and some of the misinformation that’s coming at the Bitcoin mining industry”.

She insists that Bitcoin mining equipment – essentially computers packed with specialized chips – is getting much more efficient and quotes a study showing 39% of the energy used in mining comes from renewable sources.

But North America only accounts for a small proportion of mining, with much of it taking place in China using electricity from coal-fired power stations.

Proof of stake instead of proof of work

Because the basis of proof of stake doesn’t require any extra energy to prove trustworthiness, it is much more energy-efficient. Traditional mining using proof of work is where specialized computing equipment like high-end graphics cards are needed and the process is energy demanding. 

To participate in the blockchain verification process using proof of stake, users create a node, that node can be run by one person or by a pool of people working together. You can think of a node as a computer. The node is required to prove its trustworthiness by locking away a certain amount of crypto coins, the same type generated by the blockchain they are verifying.  

For each block of transactions that needs to be verified, one node is selected by an algorithm that takes many factors into account, to both reward those with more coins staked and prevent one node from getting too much control over the process. That node is responsible for checking and publishing or adding the block to the chain.

Then all the other nodes get some time to make sure that everything looks good. If there is a mistake or fraud, the node that published the problematic block is punished by having some or all of their staked coins destroyed. But if everything looks good, that node is rewarded with more coins. This is both the security mechanism for the blockchain and the motivator for participation.

As a result, participating in the “mining” process has a much lower barrier to entry, meaning that more people can participate in the process. And given that a core principle of cryptocurrency is decentralization, having more people participating in securing the blockchain helps secure the whole system.

Cardano, a top 10 crypto, uses proof-of-stake and has the fourth-largest market capitalization — $50 billion — of any cryptocurrency as of mid-May. It is currently the most significant proof of stake cryptocurrency on the market.

Cardano surged after Musk tweeted about ending the program to allow people to buy Teslas with bitcoin due to energy efficiency concerns.

Other already functioning cryptocurrencies that use proof of stake include Polygon, Tezos, Polkadot, and EOS.

But perhaps the biggest potential impact of proof of stake is a project called Ethereum 2.0.

Ethereum is the second-largest cryptocurrency and is designed to be a versatile platform for an emerging concept called decentralized finance (DeFi).

Ethereum is also run by proof of work, but since its inception in 2015, founder Vitalik Buterin envisioned a transition to proof of stake. Today, it has about $1 billion in funding to achieve that.