Web3 and ESG are two of the biggest trends in business right now, and like them or not, there’s no stopping either.
In this piece, I’m going to explore how utilizing blockchains can help organizations when it comes to ESG initiatives.
Proof of Work and Proof of Stake
Before getting into the intricacies of how Web3 and ESG marry up and what positive changes and challenges this will bring about, let’s first refresh on the two types of blockchain: Proof of Work (PoW) and Proof of Stake (PoS).
Proof of Work is the consensus mechanism that governs Bitcoin. In PoW systems, networks of computers solve math problems to build new blocks and process transactions. The first computer to guess the right hash builds the next valid block, earns the bitcoin subsidy in it and gets the transaction fees. This process is called mining, and yes, it requires lots of computers and energy. Critics of PoW point to this as unsustainable or wasteful.
Proof of Stake is an alternative consensus mechanism whereby new blocks are added to the network by whoever holds the most coins. Holding these coins proves the participants’ stake in the network, hence the name. Doing things this way reduces the energy required to build blocks and validate transactions, but critics have pointed to the fact that PoS systems lead to an unchallengeable oligarchy controlling things, which is a security flaw. PoS is the consensus mechanism used by blockchains like Ethereum and Cardano.
Now that we’ve defined both terms let’s look at how they impact various ESG initiatives.
How blockchain technology can impact ESG
Environmental, Social, and Governance initiatives are becoming increasingly important in how business is done globally. Organizations want to reduce their environmental impacts, promote social responsibility by behaving ethically and fairly, and engage in good governance practices by having effective oversight and accountability.
As it happens, blockchain technology can aid any organization, whether it is private or public, in implementing its ESG programs. Let’s explore some of the ways this emerging technology can help.
Most blockchain thinkers and enthusiasts will say that PoS has a smaller environmental footprint, and on the face of it, that’s true. While this comes at a cost (security) and is only half of the story (proof of work blockchains can be extremely efficient at scale), we’re not going to delve into busting those myths today. Suffice it to say both types of blockchain have their benefits and drawbacks, and there are tradeoffs in any system.
Blockchain technology can help an organization reduce its environmental impacts by dramatically increasing transparency and traceability in its operations. For example, entire supply lines can be tracked and traced on the blockchain, bad actors can be identified and squeezed out, and organizations can prove with 100% certainty that they are making efforts to deal with other parties with the same ESG goals.
Right now, where an organization gets its supplies, how other parties in the supply chain act, what happens to waste after products have reached the end of their life cycle, and other factors that relate to environmental impacts are difficult to pinpoint. With blockchain, all of it can be discovered, detected, and dealt with, thanks to the complete picture made visible by tracking everything in one immutable database.
When an organization in another country fails to discard its waste correctly and dumps it instead, that can and will be visible on the public blockchain. Corporations, governments, and other parties can then choose to no longer deal with that organization, incentivizing good environmental practices by the threat of exposure and financial consequences. For good actors, it will be much easier to prove that they are acting to reduce environmental impact for the same reason; everything is visible on the blockchain.
It is the loss of or deliberate falsification of records that make it difficult to discover bad actors in things like supply chains today. With the verifiable data being visible in one place, organizations will be able to make informed decisions as to how to reduce their environmental impacts as much as possible and will know who to deal with (or not) based on that organization’s practices.
Social responsibility is more difficult to measure than physical attributes like environmental impacts, but it can still be done, thanks to blockchain technology’s unprecedented transparency.
Social responsibility means an organization operates in an ethical way, respects human rights, and benefits local communities. It’s not difficult to imagine how a blockchain-powered world with Web3 apps interacting with and feeding underlying systems and an endless stream of data can help here.
Want to make sure a supplier is ethical? In a blockchain-powered world, you’ll see everything relevant about it, including where it sources materials, any regulatory violations or legal breaches it has been involved in, and even its track record of keeping its word.
How about ensuring that a company benefits local communities? It will be possible to see what donations it makes, whether it sources what it can locally, whether it hires from local pools of labor that include all members of society, and more. Utilizing micropayments, dealing with even the smallest suppliers and lowest-paid workers will be possible.
Once again, the key is to have all of the data in one place. While it is possible to find out many of these things about a given organization today, the data is stored in different places, is difficult to collate, aggregate, analyze, and is often unreliable.
In a Web3 world, organizations will upload this data via applications to the immutable public blockchain, where it will be time-stamped, verified, and attested to by whoever is in charge within an organization and potentially third parties such as regulators.
Such a system will allow organizations to prove they are involved in socially responsible initiatives and to find and deal with other organizations while avoiding those who are not.
The third element of ESG is good governance. This means ensuring an organization has effective oversight, transparency, and accountability. If you’ve read this far, it should be obvious how blockchain technology helps with this.
To clarify, scalable public blockchains mean data can be uploaded for all to see. Organizations of all kinds can keep track of everything from their current financial position to stock inventory to who in the organization accessed a given area at a specific time. This data can be private so that only those who need to know do, and it can be attested to (signed cryptographically) by those involved, creating true accountability.
Naturally, all of this helps with transparency, oversight, and accountability. It will be possible to know everything down to the smallest details on a minute-by-minute basis, making sure those who violate ESG practices are held accountable and making it possible to prove that an organization has complied with regulations and kept its ESG pledges.
What about governing the blockchains themselves? While PoS systems lead to unbreakable oligarchies whereby one or a handful of large actors can control networks by accumulating a massive stake, PoW systems allow local communities, individuals, and organizations of all kinds to be included in the governance process by joining distributed mining pools.
Which type of blockchain is better for an ESG-focused organization?
The attacks against PoW blockchains are well-known and have largely been debunked. Yes, they create electronic waste, but so do Teslas, and this can be managed responsibly by miners who are also incentivized to use renewable energy to gain a competitive edge.
At scale, PoW blockchains are unmatched for efficiency. For example, whereas the PoS network Ethereum can only handle 20 transactions per second and will require all manner of convoluted second layers to scale, the original Bitcoin blockchain can handle 100,000 transactions per second and is scaling faster than any other system.
What would happen if the world’s financial transactions and databases migrated to the Bitcoin blockchain? A dramatic decrease in energy usage would surely follow, and an era of unprecedented transparency and accountability would be the result.
While PoS systems appear to use less energy on the surface, it’s unclear that they do in reality. What is the sum total of the energy usage for every computer staking coins, and how much electronic waste do they produce? There’s no clear way to measure it. Likewise, no PoS system has yet proven it can scale to enable the sort of data management outlined in this article, meaning many of the benefits related to transparency and oversight are lost.
PoW blockchains win the ESG debate hands down. However, if you have a different opinion, we’d love to hear it. Which leads us nicely to…
Join us at the London Blockchain Conference
If you’re interested to learn more about how ESG will be managed in a Web 3 world, join us at the largest global blockchain conference – the London Blockchain Conference – between May 31st and June 2nd.
While we believe Bitcoin SV is the ultimate utility blockchain that will underpin the systems that allow for more effective ESG initiatives, we welcome different options provided those sharing them are engaged in the legal business and aren’t promoting unregistered securities.
To secure a speaking slot, book a booth, or just attend and mingle with other utility blockchain enthusiasts interested in how massive scaling blockchains will change the world, visit the London Blockchain Conference website now.
Watch: ESG Compliance & Blockchain
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