Do we have an eco-crypto? Exploring The Merge

By Will Brown

Much has been criticised about cryptocurrencies, but no criticism has loomed larger than the environmental aspect. We see articles explaining how Bitcoin is using more energy than the entire country of Norway, how Ethereum requires more electricity than Austria. In a world where the climate crisis is an ever-increasing threat, people were understandably concerned that the latest trend in finance was significantly contributing to the damage wreaked upon the Earth.

Yet throughout all of this there was a recurring hope amongst cryptocurrency enthusiasts – The Merge. Cryptocurrencies are complicated at the best of times, and this is not exception. Bear with me.

The electricity requirement for cryptocurrencies is the result of the ‘Proof of Work’ system. In order to make cryptocurrency networks secure, the ‘Proof of Work’ system forces computers to solve arbitrary mathematical problems. This prevents people cheating the system, and is at the heart of the cryptocurrency mining we hear so much about. At scale, this requires an absurd amount of computing power and – by extension – electricity.

But there is more than one way to secure a cryptocurrency network. An alternative is the ‘Proof of Stake’ system. Whereas Proof of Work uses computing power to prevent cheating, a Proof of Stake system requires you to stake cryptocurrency in order to make transactions. Think of it like a deposit: If I cheat the system, I’ll lose my deposit. If all goes well, I get it back. Crucially, this method uses far less electricity. The Ethereum Foundation predicted a 99.95% drop in electricity consumption if they switched to this model.

So that’s exactly what they did.

It seems unlikely that Bitcoin will change to proof-of-stake

It took a while. Ethereum’s transition had been ‘coming soon’ for the last seven years, and some doubted whether it would even happen. But then things began to take shape. Ethereum tested out a Proof of Stake system on an offshoot of the main Ethereum cryptocurrency known as the Beacon Chain, and it worked rather well. So, last month, Ethereum was combined with this offshoot in (the dramatically titled) The Merge.

Was it as successful as they claim? Perhaps. A report from CoinDesk’s Daniel Kuhn emphasised that whilst the network may be more energy efficient, that does not directly translate into reduced electricity consumption. Cryptocurrency miners have invested significant funds into their operations, and as such it is reported that many have simply transferred to other, less popular cryptocurrencies in order to continue turning a profit. However, Ethan Vera (COO of Luxor Tech, a cryptocurrency mining company) recently tweeted his estimate that 70-80% of Ethereum miners have since closed their operations. So, whilst it may not be quite a dramatic decline as advertised, it appears there has been a measurable decrease in the environmental damage of Ethereum due to this transition.

So, what does the future hold for cryptocurrencies after this event? I spoke to Dr Carsten Sørensen, associate professor of Information Systems and Innovation at LSE, to try and learn what the Merge could lead to in the future.

Dr Sørensen emphasises that it is “too early to say” what the impacts will be, and there is much uncertainty around “how much the change will affect the uses cases that will flock to Ethereum and make it more valuable as a right-sensitive digital infrastructure.” Sørensen notes that the technology is always evolving, and up-and-coming cryptocurrencies like Hedera are looking to replace Ethereum with a more efficient network, just as Ethereum originally attempted to do with Bitcoin.

Prior to The Merge, it was often argued that Ethereum’s success would prompt other cryptocurrencies to do the same. As Bitcoin is the largest consumer of electricity within the cryptocurrency world, I asked Dr Sørensen if he felt Bitcoin would follow suit:

“[I]t seems highly unlikely that Bitcoin will change to proof-of-stake. Within the crypto community, there is a strong sense that proper decentralisation can only be guarded by proof-of-work consensus mechanisms. […] Ethereum’s Merge is, in my view, largely a result of the community power wielded by the founder Vitalik Buterin and the dominant use-case of Ethereum as an infrastructure for smart contracts.”

Dr Sørensen also noted that whilst the figure for Bitcoin’s energy consumption seems large, it is “a lot less than the domestic use of tumble dryers” – and much of Bitcoin’s energy consumption also comes from renewable energy.

So, whilst the Ethereum merge may have gone off without a hitch, it seems that the future of cryptocurrencies is still up in the air. The reputation of the technology has taken a hit over the last few years, and it remains to be seen exactly how – or even if – it will become more mainstream in our lives.

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