The Ethereum Merge: Crypto Finally Goes Green?
Everyone has heard people discuss how much energy bitcoin mining requires. A single Bitcoin transaction requires more than 2,264 Kilowatt-hours (kWh) of electricity, enough to boil 1,500 kettles. To put this in context, an average American home uses around 893 kWh per month. However, this issue isn’t limited to bitcoin. Other cryptocurrencies employing the same proof-of-work (PoW) consensus protocol have the same problem.
Ethereum is one of the cryptocurrencies that uses the energy-consuming PoW consensus mechanism. In addition, it is also the second largest cryptocurrency ecosystem we have today — second to only Bitcoin. It consumes around 112 trillion kWh per year (more than what the Philippines or Pakistan use annually). The energy used to complete one ETH transaction could power an average home in the US for more than 9 days.
As Ethereum takes its final step toward The Merge, it will replace the existing Proof-of-Work (PoW) with Proof-of-Stake as the cryptocurrency consensus mechanism (PoS). This enhancement may also be the solution to the transaction fees and energy problems of non-fungible tokens (NFT).
The Ethereum network is slated to be 99 percent less energy-intensive, transferring power from crypto miners to a truly decentralized process in which no single entity controls the Ethereum network.
Using the existing PoW method, crypto mining requires a great deal of hash power (computative power) and resources. All nodes (devices) must solve a cryptographic puzzle for it to function. The first miner to solve this challenge will receive the reward. This has resulted in intense competition and the construction of larger mining farms.
The greater your hash power, the simpler it is to mine a coin. To maximize their chances of winning, miners form what are known as mining pools, where they combine their hashing power and spread the rewards proportional to the contributed hash power, ultimately driving them to consume vast quantities of electricity.
Increasing awareness of crypto’s energy consumption, and pressure from powerful individuals such as Elon Musk who stopped bitcoin payments at Tesla due to crypto’s environmental impact. In addition, crackdowns in countries such as China are forcing the crypto sector to adjust.
The question is: Is crypto finally green with the coming of the Ethereum Merge? In short, the answer is not yet; however, this is a significant leap forward in reducing the carbon footprint of the cryptocurrency industry.
Proof-of-Work’s toll on the environment
Blockchains rely on a consensus method to preserve their integrity in the absence of a central authority. Currently, Ethereum, like the majority of popular blockchains (including Bitcoin), uses a consensus process known as proof-of-work. It pits cryptocurrency miners against one another to solve a challenging mathematic puzzle called a hash puzzle.
The computational difficulty is crucial to the success of proof-of-work. A single participant may undermine proof-of-work by controlling the majority of all mining power (known as a “51 percent attack”), but the processing power and financial resources needed to accumulate such process power (including buying hardware and building mining infrastructures) required to achieve this makes a 51 percent attack against a big blockchain extremely challenging.
However, this advantage is also a disadvantage, as computer power takes energy. Coal facilities that have been decommissioned and repurposed into mining centers illustrate the dilemma. Proof-of-work contributes directly to carbon emissions unless a mining center uses renewable energy, which is typically not the case. Bitcoin, according to a tracker kept by the University of Cambridge, consumes more energy annually than Finland, Belgium, or the Philippines.
Making cryptocurrency mining become more eco-friendly is more difficult than it sounds. As more people become concerned about the amount of energy consumed by cryptocurrency mining, it stimulates a steady stream of new ideas to improve the industry’s environmental responsibility. These include the increasing use of renewable energy sources, the deployment of more energy-efficient processes, and the offsetting of carbon footprints. From these efforts, PoW cryptocurrencies may have the effect of increasing the development of renewable energy supplies and infrastructure.
How proof-of-stake mitigates crypto’s environmental impacts
Proof-of-stake employs a distinct methodology. It requires validators to stake a substantial amount of a blockchain’s coin or token (the “stake”) for the right to serve as a validator. In the case of Ethereum, participants must stake 32 ETH in order to become validators. This is eventually rewarded with more Ethereum.
The protocol then selects members at random to propose new blocks and vote on them. Validators on Ethereum require three pieces of software: an execution client, a consensus client, and a validator.
On the Beacon Chain, the future proof-of-stake network for Ethereum, there are more than 400 thousand validators. Slots for new validators arise every 12 seconds in order to construct a new block and distribute it to other nodes (network participants).
If validators behave dishonestly or go offline, there are consequences. For instance, proposing numerous blocks (equivocating) or submitting contradicting attestations (votes) results in slashings, which cause validators to lose a portion of the ETH they have staked. The quantity of ETH slashed is proportional to the number of validators slashed simultaneously, also known as the “correlation penalty.” It can range from 1% to 100% of a validator’s stake.
There are no cryptographic puzzles to solve. The rate of new blocks is fixed, and validators are chosen at random to add them to the chain. This dramatically cuts energy use and reduces the carbon impact as a result.
According to the official Ethereum website, “Ethereum’s energy consumption will be reduced by ~99.95% following The Merge from proof-of-work (PoW) to proof-of-stake (PoS). After The Merge, Ethereum will use dramatically less carbon to be more secure.”
To put it in a perspective, the existing Proof-of-Work system consumes 5.13 gigawatts on a continuous basis, while the Proof-of-Stake system consumes 2.62 megawatts on a continuous basis, consuming approximately 99.95% or around 2,000 times less energy.
As mentioned above, Ethereum PoW consumes around 112 terawatt-hours per year. The PoS Ethereum, which is 99.95% more energy-efficient, would consume only 56,000 megawatt-hours per year. Just enough to power New York City for only 5 days.
A small step for a blockchain, a giant leap for the crypto industry
Ethereum has sought to adopt a proof-of-stake consensus mechanism since 2017, but doing so without compromising Ethereum’s ambition of being a secure, scalable, and decentralized blockchain has required years of intensive research and development. Therefore, the network’s initial consensus mechanism was proof-of-work.
Substituting proof-of-stake for proof-of-work, in which the real-world value invested in ETH is staked directly in a smart contract, eliminates the need for miners to use energy in order to add to the blockchain. Consequently, the environmental cost of network security is dramatically lowered.
Trial and error
Changing a blockchain’s consensus method is not a job that can be done in a day. The possibility of a “fork” exists. A fork happens when certain participants reject proposed changes to the blockchain and diverge from it.
The DAO, a decentralized venture capital firm, lost around $150 million worth of ETH to an unknown hacker during Ethereum’s early days.
This led to the Ethereum Classic being formed in 2016, due to an ideological and technical split within the Ethereum community, following the infamous DAO attack. when the attacker (or someone portraying as them) claimed through an intermediary on The DAO’s Slack channel that they would seek to obstruct any soft fork by bribing Ethereum miners not to cooperate. The bribe consisted of one million ether and one hundred bitcoin.
Eventually, the attack was overcome by hard-forking Ethereum. While the vast majority of stakeholders supported the modification and the fork was implemented, there were a few dissenters (who went on to join Ethereum Classic). The blockchain currently known as Ethereum is the blockchain that implemented the hard fork and altered the blockchain’s and blockchain’s overall history.
In the months following the hack, the stolen tokens remained in the hacker’s ownership on the Ethereum Classic chain and were valued at approximately $8.5 million in ETC.
In the coming Merge, to reduce the likelihood of a fork, the Ethereum Foundation has completed a series of test runs to demonstrate that the Merge can occur safely and securely without a technical problem. These tests replace proof-of-work with proof-of-stake on blockchains used for testing Ethereum. On August 10, the most recent and final trial run featured the Goerli testnet blockchain.
It was not perfect. Several validators were offline for a variety of reasons during each test. Ethereum can continue to operate as long as the majority of validators stay online and no group of validators loses consensus.
The Ethereum Merge
The Ethereum Foundation has already recommended the block number at which proof-of-work would expire and proof-of-stake will begin: 5875500000000000000000. This block is anticipated to be mined around mid-September this year.
With technological obstacles addressed, Ethereum is poised to make the changeover, and its outcome will determine the future carbon footprint of cryptocurrencies. A failure would be a mark against proof-of-stake, but a successful Merge will make Ethereum the world’s largest proof-of-stake blockchain and demonstrate that any blockchain can make the shift.
The future of Ethereum
Ethereum’s projected reduced energy consumption is expected to attract the attention of ESG (Environmental, Social, and Governance) proponents and investors.
How the end of PoW mining will affect the price of Ethereum, the success of the Merge, and whether the new, greener PoS Ethereum 2.0 will attract additional interest or investment in ETH by organizations that previously shied away from ether due to climate change and energy consumption have all been the subject of much debate.
The impact of The Merge and the remainder of Ethereum’s roadmap on the ecosystem is still unknown. As the Ethereum ecosystem continues to mature, users, developers, and investors will focus on these massive changes and their repercussions, with the expectation that they will continue to have a positive impact on the industry, users, and the environment.
