Earlier this month there was major news in the cryptocurrency world: on September 15th, the Ethereum community successfully performed what is known as The Merge and the Ethereum blockchain validation mechanism from the energy-intensive Proof-of-Work method moved away. Ethereum is now using the much greener and less resource-intensive proof-of-stake process.
According to an analysis by the Crypto Carbon Ratings Institute, the transition is expected to reduce Ethereum’s power consumption by 99.988 percent, significantly reducing its environmental impact. But Ethereum is only the second most popular cryptocurrency – Bitcoin still uses the energy-intensive Proof-of-Work system and most likely will not change in the near future. Here’s why.
It was hard to do
First, what the core team behind Ethereum have put together is technically very impressive. Christian Catalini, the founder of the MIT Cryptoeconomics Lab, points out that even simple updates to an app or operating system can go wrong. For the Ethereum community to complete such a “major upgrade” without anything going wrong is a testament to the level of planning and preparedness, he says. Crucially, it shows that these types of upgrades are possible — even for a cryptocurrency as big as Bitcoin.
However, since The Merge, Ethereum’s value has fallen by around 15 percent. This is most likely due to external market forces and has less to do with the technical aspects of moving to proof-of-stake. Still, it shows that a greener cryptocurrency doesn’t automatically mean a more valuable one – especially since Ethereum still has incredibly high transaction fees (or “gas”).
Proof-of-Work, unlike Proof-of-Stake, is basically a high-stakes mathematical lottery. Computers around the world compete to be the first to guess the answer to an extraordinarily difficult cryptographic equation. The first to do so gets to add the next block to the blockchain — and gets paid in cryptocurrency for their effort. The problem is that for every winner there are thousands of losers, whose computers were running at full speed and using a lot of electricity to guess answers. It’s a huge waste and the main reason cryptocurrencies are seen as an environmental issue.
Proof-of-stake, on the other hand, has no such waste. The computer that is allowed to add (and gets paid for) the next block is randomly selected from a pool in which the operator of each machine has invested a significant portion of the corresponding cryptocurrency. If they misbehave or otherwise fail to add the block correctly, they can be penalized by having their bet confiscated.
While Bitcoin has used Proof-of-Work to secure its blockchain for 15 years, Proof-of-Stake has never been tested to this extent. Post-merge, Catalini says, “The long-term viability and security of proof-of-stake will be an ongoing experiment.” If the Ethereum blockchain remains as secure as it was under proof-of-work, it will be a big one be a benefit to the community. One downside is that it’s more vulnerable to a number of different attacks, at least in theory.
There are other problems with proof-of-stake as well. SEC Chairman Gary Gensler said last week that stacked cryptocurrencies could be subject to federal securities regulations, which is something the cryptocurrency community has largely opposed since its inception.
And it also remains to be seen what former Ethereum miners will do with their power-intensive GPU rigs, which are no longer needed under proof-of-stake. Some may move to mining other proof-of-work currencies (including Bitcoin) or branch out into other areas such as 3D modeling and graphics processing. In any case, the huge server farms that worked hard under the old Ethereum mechanisms are unlikely to remain idle.
Also, Catalini says Bitcoin is “extremely conservative” and “much more risk-averse” compared to Ethereum, which is much more willing to take big risks like moving to proof-of-stake.
He also points out that the two major cryptocurrencies don’t really compete with each other, which is another reason Bitcoin is unlikely to follow suit. Ethereum launched with significantly more programmability (hence it’s used in NFTs) than Bitcoin, part of an attempt to fix what was seen as Bitcoin’s shortcoming. In response, the bitcoin community continued to do their own thing. As a result, he says that Bitcoin’s consensus methodology change is “not credible for the foreseeable future.” Ethereum to do this is not a big boost.
Despite this, Catalini says there are ways the bitcoin community could reduce the environmental impact of the network. (It currently uses about as much electricity as Pakistan does per year.) He believes that “bitcoin’s development and sustainability will be driven much more by miners targeting renewable energy and energy sources that can make bitcoin greener in the long run.” as a major transition to proof-of-stake.
First, miners could simply use more renewable energy sources and even “carbon negative” sources like flare gas from oil and natural gas exploration. This would allow Bitcoin mining to use electricity that would be “stranded” or otherwise unusable for other applications. Catalini says, “As long as you have a satellite dish or a Starlink connection, you can mine in the middle of nowhere.”
Second, mining could absorb peak capacity. According to Catalini, miners can “instantly go off the grid or go on the grid.” As a result, miners could go off-grid when power is needed elsewhere, or plug-in when generating excess power that would otherwise be wasted, e.g. B. when solar energy produces more energy than people need. Nevertheless, the environmental claims of cryptocurrency miners have been massively overstated in the past. It is unlikely that the methods proposed by Catalini would significantly reduce Bitcoin’s environmental impact to the extent that the move to proof-of-stake would, given that miners are generally motivated by potential profits.