Tokenization: an acrobatic environmental exercise that adds value to Ethereum

Société Générale-FORGE tackles the incredibly complex carbon footprint calculation from security tokens. In addition to the methodological challenge, the report highlights the benefits of the public blockchain.

In the universe crypto, l’environment is a minefield. The mining of bitcoins is regularly referred to as energy consumption. What, then, of the future of finance through the tokenization ?

Will this transformation rhyme with an explosion in issuance? To answer this legitimate question, Société Générale’s crypto subsidiary has embarked on a complex equation: calculate the carbon footprint of the entire life cycle of security tokens.

The beginnings of a tokenization standard

SG-Forge didn’t set off alone, bringing on board the Lamarck consultancy, the Institut Louis Bachelier and the Crypto Carbon Ratings Institute (CCRI). The challenge was no less daunting.

The result is a general methodology. It calculates the carbon footprint of a financial product issued in the form of a token on the public blockchain. Ethereum – one of the most energy-efficient since the migration to PoS. The switch to Proof-of-Stake has reduced energy consumption by 99%.

Issuers and investors now also have access to a new environmental impact measurement. Our ambition with this initiative is to make it a market standard,” says Jean-Marc Stenger, Forge’s Managing Director.

A lack of accurate, reliable data

The method is not perfect, as always in this sector of energy measurement. Further iterations are needed. Experts in the field of digital responsibility regularly point this out, as they did this week in Montrouge on the occasion of the Green Tech Forum.

SG-Forge and its partners have identified “limitations and challenges”, including a lack of “precise and reliable” data. Measurement can therefore only be an estimate and a proposal. Multiple parameters come into play.

Calculating a footprint involves determining the energy consumption of the blockchain, which depends on two specific pieces of data: the number of nodes and the average power of a node. And gathering this information is no simple matter.

Although data collection on the number of active nodes has improved considerably, we still use a theoretical proxy hardware as the best estimate of node power and energy consumption,” the reporters note.

Cloud providers blocking transparency

Nodes are often operated on cloud services. Their providers like to highlight the environmental value of their infrastructures. They are, however, stingy when it comes to “precise and comprehensive data on energy consumption”.

Providers rely on their own approach, which is very favorable to their discourse. In fact, it can lead to “the scope 2 carbon footprint associated with the use of equipment being simply eclipsed”.

But these players also use “misleading terms such as carbon neutrality at company level and carbon-free electricity”. Under these conditions, determining precise measurements of the environmental cost of tokens is a tightrope walker.

Nevertheless, the effort made here is to be applauded. All the more so as it provides useful lessons, such as demonstrating “the value of working on decentralized public infrastructures such as the Ethereum network”.

Superiority of decentralized public infrastructures

Public blockchain also proves, for a number of reasons, to be better “than a cloud infrastructure, in terms of cost, security and optimization”.

But despite its advantages, “blockchain cannot and will not replace conventional IT infrastructure”. This is particularly true when big data and heavy calculations are required.

Regulation also prevents the use of blockchain by requiring private and confidential data to remain on financial institutions’ own infrastructure.

Blockchain and smart contracts have the potential to generate significant efficiency gains in the issuance and trading of financial instruments,” considers Jean-Marc Stenger.

The work must continue and the measurement refined.

“Although the experimentation is still in its early stages, the report has the potential to spark a wider debate on the environmental impact of technology on financial markets,” judges Georgina Jarratt, Head of FinTech and Digitization at the International Capital Market Association.

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