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Addressing the Sustainability of Distributed Ledger Technology

Author

Listed:
  • Carlo Gola

    (Bank of Italy)

  • Johannes Sedlmeir

    (University of Bayreuth)

Abstract

This paper proposes policies to improve the environmental sustainability of distributed ledger technology (DLT). While the proof-of-work (PoW) consensus protocol requires large amounts of electricity, several DLT protocols consume much less, while still being sufficiently reliable and decentralized. To move from a PoW protocol to a greener system, such as proof-of-stake (PoS) or proof-of-authority (PoA), the consensus of the majority of miners (measured by their computing power) is required during the transition period to preserve the security requirements. Given that miners have an incentive to maintain the status quo, this paper illustrates various policies designed to bring about the transition. We aim to show that the current policy approach adopted by banking and financial regulators, based on the principle of technological neutrality, may need a reappraisal in order to consider the ‘sustainability’ criterion. Policymakers should not stifle financial innovation but should instead intervene if technology is a source of negative externalities.

Suggested Citation

  • Carlo Gola & Johannes Sedlmeir, 2022. "Addressing the Sustainability of Distributed Ledger Technology," Questioni di Economia e Finanza (Occasional Papers) 670, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_670_22
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2022-0670/QEF_670_22.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Maciej Sołtysik & Mariusz Kozakiewicz & Jakub Jasiński, 2022. "Improvement of Operating Efficiency of Energy Cooperatives with the Use of “Crypto-Coin Mining”," Energies, MDPI, vol. 15(21), pages 1-25, October.
    2. Carlo Gola & Valentina Cappa & Patrizio Fiorenza & Paolo Granata & Federica Laurino & Lorenzo Lesina & Francesco Lorizzo & Gabriele Marcelli, 2023. "The governance of blockchains and system based on distributed ledger technology," Questioni di Economia e Finanza (Occasional Papers) 773, Bank of Italy, Economic Research and International Relations Area.
    3. Agur, Itai & Lavayssière, Xavier & Villegas Bauer, Germán & Deodoro, Jose & Martinez Peria, Soledad & Sandri, Damiano & Tourpe, Hervé, 2023. "Lessons from crypto assets for the design of energy efficient digital currencies," Ecological Economics, Elsevier, vol. 212(C).

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    More about this item

    Keywords

    blockchain; DLT; energy consumption; proof-of-work; proof-of-stake; proof-of-authority; carbon tax; prudential requirements; market infrastructures;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • K2 - Law and Economics - - Regulation and Business Law
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L63 - Industrial Organization - - Industry Studies: Manufacturing - - - Microelectronics; Computers; Communications Equipment

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