It Is Time for CBDCs To Consider the Environment

How can CBDCs adhere to sustainability?

IMF study suggested national banks and crypto firms to move away from energy-intensive proof-of-work (POW) protocols. Per the report, blockchain networks that use the POW mechanism consume large amounts of energy.

By definition, POW is a common consensus algorithm that is used by popular crypto networks like bitcoin and litecoin (LTC). Critics of bitcoin miners have argued that the POW mechanism is “overly energy-intensive” and takes longer processing time.

Alternatively, IMF said that energy-conscious crypto networks could rely on non-POW models such as proof-of-stake (POS) protocols. These mechanisms likely consume relatively little energy.

“The potential of non-PoW permissioned crypto assets to reduce energy consumption relative to the existing payment system comes about from energy savings on both core processing architectures and user payment means.”

IMF noted that depending upon the specific configuration details, CBDCs, and certain digital assets could be more energy-efficient. The report compared energy consumption of the current payment landscapes, including credit and debit cards.

According to a blog post on Thursday, IMF noted that replacing POW with other consensus mechanisms is the “first green leap for crypto,” and using permissioned systems is the second. It further said,

“Together, these advances put crypto’s energy consumption well below that of credit cards.”

Energy Consumption of POS Blockchain networks

According to new research by the CCRI, Avalanche (AVAX) blockchain is one of the most energy-efficient among other extensive blockchain networks.

The report said that Avalanche used just 0.0005 percent of the energy used by the Bitcoin blockchain and 0.0028 percent of the energy used by the Ethereum blockchain.

On the other hand, DeFiLlama data showed that the “total value locked (TVL)” for Avalanche was the highest per unit of electricity. TVL is the value of all financial applications on the blockchain.

The TVL of Avalanche per kWh is recorded as $18,454, more than four times compared $4,395 per kWh on Solana (SOL) blockchain. Tezos (XTZ) recorded $943 per kWh, while the TVL is $161 on Algorand (ALGO), $120 per kWh on Cardano (ADA), and $19.18 per kWh for Polkadot (DOT).

These six POS networks selected do not employ identical algorithms. They have different prerequisites in terms of hardware, network size, transaction throughput, and other properties, according to the CCRI.

Another user noted that SafeCoin (SAFE), which offers a new algorithm, Proof of Resource, consumes only ~0.0000027kW per transaction.

When it comes to the design of CBDCs, Richard Dennis, founder of the Dragon IT Security, emphasized that,

“The key criteria for central banks are speed, scalability, the need for it to be very efficient and for the cost to be low.”