Earlier this month, there was big news in the cryptocurrency world: On September 15th, the Ethereum community successfully executed what is known as The Merge, moving the Ethereum blockchain’s validation mechanism away from the energy-intensive proof-of-work method. From now on, Ethereum will use the significantly greener and less resource-intensive proof-of-stake method.
According to an analysis by the Crypto Carbon Ratings Institute, the transition should reduce Ethereum’s electricity consumption by 99.988 percent, significantly reducing its effect on the environment. But Ethereum is only the second most popular cryptocurrency – Bitcoin still uses the energy-intensive proof-of-work system and is very unlikely to change in the near future. That’s why.
It was hard to do
First, what the core team behind Ethereum has done is technically very impressive. Christian Catalini, the founder of MIT’s Cryptoeconomics Lab, points out that even simple updates to an app or operating system can go wrong. That the Ethereum community completed such a “major upgrade” without anything going wrong is a testament to the level of planning and preparedness, he says. Most importantly, it shows that these kinds of upgrades are possible — even for a cryptocurrency as big as Bitcoin.
Since The Merge, however, the value of Ethereum has fallen by about 15 percent. This is most likely due to external market forces rather than anything to do with the technical aspects of the proof-of-stake transition. Still, it shows that a greener cryptocurrency isn’t automatically more valuable — 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 are competing to be the first to guess the answer to an extremely difficult cryptographic equation. The first to do so adds the next block to the blockchain and gets paid in cryptocurrency for their trouble. The problem is that for every winner, there are thousands of losers whose computers are running at full speed—burning large amounts of electricity—trying to guess the answers. This is a huge waste and the main reason why cryptocurrencies are considered an environmental problem.
Proof-of-stake, on the other hand, has no such waste. The computer to add the next block (and get paid) is randomly selected from a pool where the operator of each machine has staked a significant portion of the respective cryptocurrency. If they misbehave or otherwise fail to add the block correctly, they can be penalized by forfeiting their stake.
While Bitcoin has used proof of work to secure its blockchain for 15 years, proof of stake has never been tested on the scale it is now. After the merger, 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 win for the community. One disadvantage is that it is, at least in theory, more vulnerable to a number of different attacks.
There are other problems with proof of participation. US Securities and Exchange Commission Chairman Gary Gensler said last week that staking cryptocurrencies could be subject to federal securities regulations, something the cryptocurrency community has generally opposed since its inception.
Also, it remains to be seen what former Ethereum miners will do with their power-hungry GPU systems that are no longer needed in proof-of-stake. Some may move on to mining other proof-of-work currencies (including Bitcoin) or branch out into other fields, such as 3D modeling and graphics processing. Either way, the massive server farms that worked hard on the old Ethereum mechanisms are unlikely to remain idle.
Catalini also says that Bitcoin is “extremely conservative” and “much more risk-averse” than 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, which is another reason why Bitcoin seems unlikely to follow suit. Ethereum launched with significantly more programmability (hence why it is used in NFTs) than Bitcoin, part of an attempt to correct what was seen as a flaw with Bitcoin. In response, the Bitcoin community continued to do its own thing. As a result, he says Bitcoin changing its consensus method is not “reliable for the foreseeable future.” Making Ethereum is not a big push.
However, Catalini says there are ways for the bitcoin community to reduce the network’s environmental impact. (It currently uses about as much electricity as Pakistan annually.) He believes that “Bitcoin’s evolution and sustainability will be much more driven by miners targeting renewable energy sources and energy sources that can make Bitcoin greener in long-term plan’ than a major transition to proof-of-stake.
First, miners could simply use more renewable energy sources and even “carbon-negative” sources such as flare gas separated from oil and natural gas production. This would allow Bitcoin mining to use electricity that would be “stranded” or otherwise unable to be used 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 can absorb peak capacity. According to Catalini, miners can “go off the grid or go on the fly.” As a result, miners could go off the grid when power is needed elsewhere, or plug into the grid when there is a surplus of generated electricity that would otherwise disappear, such as when solar power produces more power than humans need. Yet cryptocurrency miners’ environmental claims have been massively overstated in the past. The methods proposed by Catalini are unlikely to significantly reduce Bitcoin’s environmental impact to the extent that moving to proof-of-stake would, especially since miners are typically motivated by potential profits.