Token, tokenization and sustainable development

Financial innovation has given great importance to sustainability. The Sustainable Finance Strategy represents one of the central points of the European agenda, and Fintech offers important opportunities in this field. However, some “valuable” Fintech instruments seem to not have been adequately considered. The reference is to Bitcoin and to the “crypto-industry”. The most common public belief about Bitcoin and sustainability is that Bitcoin is polluting the ecosystem. Immediately, the concept is extended to Distributed Ledger Technologies (DLTs), to blockchain and to all related innovations. Notwithstanding this, some research shows that there is still some uncertainty on the precise amount of energy used by Bitcoin-related activities and on how to calculate it. The scope of this paper is to make give some clarity on this uncertainly in order to show, on the one hand that DLT is not “polluting”, but that pollutions come from the way each miner decides to conduct their businesses. On the other hand, a DLT system can be considered sustainable thanks to its capacity to solve a various number of environmental problems “related” to how businesses are conducted.

Ключевые слова

Bitcoin, token, DeFi, sustainable development.

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12.04.2022

Дата публикации

30.06.2022

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ГОСТ	Furnari S. , Lener R. Token, tokenization and sustainable development // Law & Digital Technologies – 2022. – Tом 2. – № 1 C. 16-23 [Электронный ресурс]. URL: https://ldt-journal.com/S278229070019696-1-1 (дата обращения: 03.05.2024). DOI: 10.18254/S278229070019696-1
MLA	Furnari, Salvatore, Lener, Raffaele "Token, tokenization and sustainable development." Law & Digital Technologies 2.1 (2022):16-23. DOI: 10.18254/S278229070019696-1
APA	Furnari S., Lener R. (2022). Token, tokenization and sustainable development. Law & Digital Technologies 2(1), pp.16-23 DOI: 10.18254/S278229070019696-1

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1	INTRODUCTION Financial innovation has given great importance to sustainability. The Sustainable Finance Strategy represents one of the central points of the European agenda, and Fintech offers important opportunities in this field (Macchiavello and Siri 2020). However, some “valuable” Fintech instruments seem to not have been adequately considered. The reference is to Bitcoin and to the “crypto-industry”. At the present day, Bitcoin has a market cap of $731 billion, being at the 9^th place in the ranking of assets market cap, immediately after Facebook ($1,012 billion) and before Tesla ($675 billion) (CompaniesMarketCap 2021). In addition, the total market cap of the first 10 crypto-assets is equal to $1,270 billion (CoinGecko 2021), a market cap value near to the one of silver ($1,399 billion).
2	The most common public belief about Bitcoin and sustainability is that Bitcoin is polluting the ecosystem (Aratani 2021; Rowlatt 2021; Business Standard 2019; McMaster 2017). Immediately, the concept is extended to Distributed Ledger Technologies (DLTs), to blockchain and to all the related innovations.
3	Research on Bitcoin sustainability started in 2015 (Giungato et al. 2017). The controversial question of Bitcoin sustainability arises from the fact that Bitcoin protocol has been programmed to let this cryptocurrency become a scarce resource. The more Bitcoins are mined, the harder it is to mine more. This leads to the increased amount of energy spent in the process of mining (Giungato et al. 2017, 3).
4	There is a common conception that Bitcoin creation is an energy-consumptive activity. Cambridge University has conducted a comparison study on Bitcoin energy consumption (Cambridge Centre for Alternative Finance n.d.).
5	The research showed that Bitcoin ranks 39th in annual electricity consumption at 73.0 TWh, which is more than the electricity consumption of the entire country of Bangladesh (at 70.6 TWh), but slightly less than of Chile (at 75 TWh per year)¹. However, Bitcoin’s annual electricity consumption is still far less than that of Gold mining (131 TWh per year).	1. However, the first country is China (6453.17 TWh per year) followed by USA (3843 TWh per year) and India (1277 TWh per year)
6	Notwithstanding the above, some research shows that there is still some uncertainty on the precise amount of energy used by Bitcoin-related activities and on ways of energy consumption calculation (Stoll et al. year).
7	The aim of this paper is to clarify this uncertainty in order to show, on the one hand, that DLT is not “polluting”, but that pollutions come from the way each miner decides to conduct their business. On the other hand, a DLT system can be considered sustainable thanks to its capacity to solve a various number of environmental problems “related” to how businesses are conducted.)
8	1. FUNCTIONING OF BLOCKCHAIN TECHNOLOGY WHERE DOES THE DANGER FOR THE ECOSYSTEM COME FROM? 1.1 Blockchain and DLT. A brief overview Blockchain is a form of DLT, a technology based on a decentralized register managed by a peer-to-peer network. This database can keep the record of the transactions made by its participants independently of a unique and centralized authority that manages the system.
9	DLT allows transparency and full disintermediation. Transparency is derived from the fact that most blockchain protocols can be consulted by anyone. This means that anyone can read all the transactions made, as well as the number of crypto-assets contained in a wallet or the code of the software (i.e., smart contracts) deployed on it.
10	Disintermediation means, inter alia, that anyone can participate in the network to run a “node”. The nodes possess a full copy of the register containing the information on all the transactions made and on all the software deployed within the blockchain. Nodes, also, participate in block-validation activities, checking if the information which can be stored in the next block is coherent with the previously recorded one².	2. For instance, if in block no. 8 Alice is recorded to possess 10 tokens, and if she decides to transfer 5 tokens in the following block, the information that needs to be stored is that Alice holds 5 tokens. If a node “writes down” that Alice still holds 10 tokens, that information is not stored because the block is not validated.
11	1.2 Energy consumption and consensus mechanisms A distributed ledger requires a secure mechanism to store information. Each node – owning a copy of the register - could easily change the data stored, creating potential confusion or, at the worst, cheating. To store information in a secure way, in order to avoid double spending and manipulations, blockchain adopts specific systems known as “consensus mechanisms”. According to a common definition a consensus mechanism is “a fault-tolerant mechanism that is used in computer and blockchain systems to achieve the necessary agreement on a single data value or a single state of the network among distributed processes or multi-agent systems, such as with cryptocurrencies” (Investopedia.com n.d.). One of the first adopted (and actually used by Bitcoin protocol) is the one called Proof-of-Work (PoW).
12	A PoW-based blockchain requires validators to have done “some works” to connect blocks of information. For instance, Bitcoin protocol requires to solve a sort of “cryptographic puzzle” to find a number with specific characteristics that permits the connection of two blocks of information. Here, the first miner who solves the puzzle receives a payment from the protocol, equal to a specific amount of Bitcoin.

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Token, tokenization and sustainable development

Оглавление

INTRODUCTION

1. FUNCTIONING OF BLOCKCHAIN TECHNOLOGY

WHERE DOES THE DANGER FOR THE ECOSYSTEM COME FROM?

1.1 Blockchain and DLT. A brief overview

1.2 Energy consumption and consensus mechanisms