Earlier this month there was significant news in the cryptocurrency world: On September 15, the Ethereum community successfully rolled out what is known as The Merge, moving the Ethereum blockchain verification mechanism away from the energy-intensive proof-of-work method. From now on, Ethereum will use a significantly greener and less resource-intensive proof-of-stake method.
According to an analysis by the Crypto Carbon Ratings Institute, the switch should reduce Ethereum’s electricity use by 99.988 percent and significantly reduce its impact on the environment. But Ethereum is only the second most popular cryptocurrency—Bitcoin still uses the energy-intensive proof-of-work system and is unlikely to change in the near future. Here’s why.
it was hard to do
First, what the core team behind Ethereum has done is technically very impressive. Christian Catalini, founder of the MIT Cryptoeconomics Lab, points out that even simple updates to an application or operating system can go wrong. It is a testament to the level of planning and preparation that the Ethereum community completed such a “major upgrade” with nothing going wrong, he says. Most importantly, it shows that such upgrades are possible even for a cryptocurrency as large as Bitcoin.
But since The Merge, Ethereum’s value has dropped by around 15 percent. This is most likely due to external market forces rather than anything related to the technical aspects of the transition to proof-of-stake. Still, it shows that a greener cryptocurrency is not automatically more valuable – especially since Ethereum still has incredibly high transaction (or “gas”) fees.
Proof-of-work, unlike Proof-of-Stake, is basically a high-stakes math lottery. Computers around the world are competing to be the first to guess the answer to an extremely difficult cryptographic equation. The first to do this adds the next block to the blockchain and gets paid in cryptocurrency for their troubles. The problem is that for every winner, there are thousands of losers running their computers at full speed – blazing with lots of electricity – trying to guess the answers. This is a huge waste and the biggest reason cryptocurrencies are seen as an environmental problem.
Proof-of-stake has no such waste. The computer that will add the next block (and get paid) is randomly selected from a pool where the operator of each machine stakes a large portion of the corresponding cryptocurrency. If they misbehave or fail to add the block correctly, they can be penalized with their share confiscated.
While Bitcoin has been using proof of work to secure its blockchain for 15 years, proof of stake has never been tested at current scale. “The long-term viability and safety of the proof-of-stake will be an ongoing experiment,” says Catalini post-merge. If the Ethereum blockchain remains as secure as it is under proof of work, this will be a huge win for the community. One downside is that it’s more vulnerable to a number of different attacks, at least in theory.
There are other issues with proof-of-stake. Gary Gensler, Chairman of the U.S. Securities and Exchange Commission, said last week that staked cryptocurrencies can be subject to federal securities regulations, something the cryptocurrency community has been widely opposed to since its inception.
We will also see what legacy Ethereum miners will do with energy-intensive GPU hardware that is no longer needed as a proof-of-stake. Some may move to mining other proof-of-work currencies (including Bitcoin) or dive into other areas such as 3D modeling and graphics processing. Either way, huge server farms running hard under legacy Ethereum mechanisms are unlikely to stay idle.
Also, Catalini says that Bitcoin is “very conservative” and “much more risk averse” than Ethereum, which is much more prepared to take big risks like transitioning to proof-of-stake.
He also points out that the two major cryptocurrencies are not really competing, which is another reason why it seems unlikely that Bitcoin will follow suit. Ethereum was released with significantly more programmability (hence used in NFTs) than Bitcoin, as part of an attempt to fix what is seen as a shortcoming in Bitcoin. In response, the Bitcoin community continued to do its own thing. As a result, he says Bitcoin changing the consensus method is “not reliable for the foreseeable future.” It’s not a big push for Ethereum to do this.
Despite this, Catalini says there are ways for the Bitcoin community to reduce the environmental impact of the network. (It currently uses as much electricity as Pakistan annually.) He thinks that “Bitcoin’s evolution and sustainability will be driven much more by miners targeting renewable sources and energy sources that can make Bitcoin greener in the long run.” A big transition to proof-of-stake.
First, miners can only use more renewable energy sources or even “carbon negative” sources such as flare gas from oil and gas extraction. This will allow Bitcoin mining to use electricity that is “grounded” or unavailable for other applications. “As long as you have a satellite dish or Starlink connection, you can mine in the middle of nowhere,” Catalini says.
Second, mining can absorb the highest capacity. According to Catalini, miners can “go off the grid or switch to the grid instantly”. As a result, miners can exit the grid when energy is needed elsewhere, or go to the grid when excess electricity is produced that would otherwise be wasted, such as when solar power produces more energy than people need. Still, the environmental claims of cryptocurrency miners have been greatly exaggerated in the past. The methods proposed by Catalini are unlikely to significantly reduce the environmental impact of Bitcoin to the extent that the switch to proof-of-stake will do, especially since miners are often motivated by potential profits.