How Ethereum plans to get around a major drag on crypto prices

How Ethereum plans to get around a major drag on crypto prices

Climate change is becoming a major financial liability for bitcoin. Tesla CEO Elon Musk said on May 12 that the company will no longer accept the cryptocurrency as payment, over concerns “about rapidly increasing use of fossil fuels for bitcoin mining and transactions.” Other organizations may follow suit: Greenpeace became the latest on May 20, telling the Financial Times that it will stop accepting bitcoin for donations, which it has done since 2014.

Bitcoin mining globally uses about as much electricity as the nation of Argentina, producing a similar volume of greenhouse gas emissions to the London metro area. The reason for the big footprint is rooted in how bitcoins are “mined”: Fleets of computers compete to unlock coins by solving increasingly difficult math problems, a computational methodology known as proof-of-work. In this method, the only way to get an advantage over other miners is to run more computers, more efficiently, an approach that is energy-intensive by design and can only become more so over time. Some bitcoin proponents like Twitter co-founder Jack Dorsey have argued that the cryptocurrency can promote clean energy consumption by becoming a cornerstone customer for big solar and wind farms. But for the moment, most of the power for bitcoin mining is delivered by coal-fired power plants in China and hydropower dams—and no matter where it comes from, it’s an awful lot of energy to use on a service that benefits only a tiny niche group of speculators.

A better solution would be to scrap proof-of-work altogether—which is exactly what ether (a currency that runs on a network called Ethereum), bitcoin’s chief rival in the cryptocurrency scene, is planning to do.

Mining an environment-friendly cryptocurrency

In a blog post May 18, Carl Beekhuizen, a researcher at the Ethereum Foundation, a nonprofit that helps organize the currency’s community of miners, programmers, and investors, asserted that the currency’s long-planned shift to a new computational method will shave 99.5% off its energy consumption (which is already much lower than bitcoin, because of the smaller size of its market). In a colorful analogy, Beekhuizen writes that if the energy demand of bitcoin were represented as the height of the Burj Khalifa, the world’s tallest building, then Ethereum’s new energy demand could be compared to a single screw.

The new method, already in use by some other cryptocurrencies, is called proof-of-stake. Under this method, access to new coins is restricted based on how many coins a miner already owns; if a miner owns 3% of all coins, they can access only 3% of new coins. This system eliminates the need for energy-intensive number-crunching, because a miner’s rate of coin access is a product of their “stake,” not of their “work.” As a result, proof-of-stake mining software can essentially work on one normal computer, rather than a warehouse of servers, and there is no longer any strategic need to consume an increasing amount of energy.

The proof-of-stake transition is risky

Whether Ethereum can pull off this transition, known among insiders as The Merge, remains uncertain. Beekhuizen is vague about when the Merge will occur (“the upcoming months”), because no one individual or group can simply push a button and make it happen. To work, all ether miners (Beekhuizen estimates there are about 16,400) will need to update their systems at the same time, said Alex de Vries, a digital currency researcher. If they don’t—because of miscommunication, active resistance to the concept, or any reason—the Ethereum market could splinter. This has happened before: In August 2017, a disagreement among bitcoin miners and developers over the maximum transaction rate precipitated a split, with a minority going off to form a new currency called bitcoin cash.

While the technical details of such a split are complex, the upshot is simple: If it doesn’t work, ether’s value could suffer, and people who own Ethereum-based non-fungible-tokens could risk losing them, de Vries said.

“There’s reason for people to be afraid about doing it,” he said. “It’s going to create some interesting work for the lawyers.”

If the Merge works, it could increase pressure on bitcoin to follow suit. With a much larger and more diverse global community, the odds that bitcoin miners could come to consensus on a proof-of-stake transition are slim—but climate concern could tip the scales.

“If you are a bitcoiner today, you’ve made tons of money over the past year. The past few days have been bad but year-to-date, you’re still in a lot of profit. Why would you change a winning thing?” de Vries said. “But if bitcoin keeps going down in value because it’s attracting negative headlines or because Elon Musk is cracking down on it, then people might change their mind about that. Especially if they see that Ethereum succeeds.”

Ethereum to change technology underpinning its cryptocurrency to dramatically cut its energy use

Ethereum is set to make a major change to the technology underpinning its cryptocurrency, which will drastically slash the amount of energy and emissions it uses.

Until now, ethereum has been built on “proof-of-work”, the same technology found in other cryptocurrencies like bitcoin. That foundation is the primary reason that many cryptocurrencies are so damaging to the environment: miners must undertake complicated calculations to sustain the network, and those calculations require a vast number of computers to be running and using energy.

But an alternative to that technology is “proof-of-stake”. That requires the use of much less energy.

Ethereum says its blockchain – which powers the second most valuable cryptocurrency in the world, ETH, as well as much of the recent rise in non-fungible tokens or NFTs – will be moving to proof-of-stake “in the upcoming months”, according to a blog post from the foundation that runs it.

At the moment, Ethereum currently consumers as much energy as a mid-sized country. That is required to keep the network safe, since the miners ensure that the cryptocurrency cannot be attacked by malicious users, and in return are rewarded with coins.

Because miners are rewarded with more coins – and therefore more value – by doing that work, the amount of energy being used by cryptocurrencies is increasing all the time. And much of it is powered by fossil fuels, contributing to the vast amount of damage to the climate being done by cryptocurrencies.

Under the new technology, however, that will be vastly reduced. The foundation says that it will use around 99.95 per cent less energy when the move is completed.

The change will take the amount of energy used from that of a country to that of a small town, or roughly 2,100 American homes.

The group behind the technology refers to the switch to proof-of-stake as “The Merge”, and says that it has “several teams of engineers” “working overtime” to ensure that it happens “as soon as possible, and without compromising on safety”, though it not give a more exact date.

“Ethereum’s power-hungry days are numbered, and I hope that’s true for the rest of the industry too,” wrote Carl Beekhuizen, the Ethereum Foundation researcher who authored the announcement.

Ethereum cryptocurrency to slash carbon emissions

Ethereum, the second largest cryptocurrency after bitcoin, is just “months” away from shifting its underlying infrastructure to a new model that would slash its carbon emissions a thousandfold, the project has announced.

Since Ethereum also provides the infrastructure for a host of other cryptocurrency-related projects, including many non-fungible token platforms, the change could radically improve the energy efficiency of the sector.

At its heart, the plan involves shifting the way Ethereum’s underlying blockchain works. Currently, Ethereum uses a “proof-of-work” system, like the model used by Bitcoin and most other cryptocurrencies. The security of the system as a whole is guaranteed by a requirement that members burn electricity doing complex but pointless mathematics, in order to ensure that no single user can dominate the system.

When the switch is complete, Ethereum will instead use a model called “proof-of-stake”. Under that approach, rather than handing out internal responsibilities based on how much electricity is burned, the system instead allocates power based on how much Ethereum existing users already hold – requiring them to “stake” a portion of their currency every time they make a decision.

The switch to proof of stake has been planned for several years, with a host of problems, both technical and organisational, delaying implementation. But now, according to Carl Beekhuizen, a research and development staffer at the Ethereum Foundation, which leads development on the cryptocurrency, the change will be complete “in the upcoming months”.

Where the existing Ethereum network uses about 5.13 gigawatts of power – around the consumption of Peru – Beekhuizen estimates the network will drop to just 2.62 megawatts after the switch. “This is not on the scale of countries, provinces, or even cities, but that of a small town (around 2,100 American homes).”

And, Beekhuizen adds, the benefits increase as the value of the cryptocurrency does. “Under PoW [proof-of-work] … as the price increases, in equilibrium so too does the power consumed by the network. Under proof-of-stake, when the price of ETH [Ethereum] increases, the security of the network does too (the value of the ETH at-stake is worth more), but the energy requirements remain unchanged.”

While proof-of-work has lasted more than a decade, it has come under increasing criticism for the extreme resource demands that it imposes on cryptocurrencies. Bitcoin, still the largest cryptocurrency and one with no advanced plans to switch to proof of stake, uses the same amount of power every year as the Netherlands, and has a carbon footprint the size of Portugal’s, according to estimates from Digiconomist.

As well as consuming large amounts of electricity, proof-of-work also creates huge demand for fast computer hardware. That has led to shortages, both at the consumer and industrial levels. Nvidia, which makes graphics cards for PC gamers that can be repurposed into efficient cryptocurrency hardware, has even started to sell special versions of its products that are artificially weakened when it comes to running Ethereum’s software on them,to try to retain some stock for its core market.

Even if Bitcoin doesn’t follow Ethereum and switch away from proof-of-work soon, there may be another solution to the system’s energy usage: bitcoin’s price has tumbled in recent days, and is now 40% off all-time highs, after powerful players including China and Elon Musk signalled their dissatisfaction with the currency.