Addressing the Sustainability of Distributed Ledger Technology

Carlo Gola and Johannes Sedlmeir ()
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Johannes Sedlmeir: University of Bayreuth

No 670, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

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.

Keywords: blockchain; DLT; energy consumption; proof-of-work; proof-of-stake; proof-of-authority; carbon tax; prudential requirements; market infrastructures (search for similar items in EconPapers)
JEL-codes: G18 H23 K2 L63 O3 Q56 (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-ene and nep-pay
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Citations: View citations in EconPapers (3)

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