There was major news in the cryptocurrency world earlier this month: On September 15th, the Ethereum community successfully pulled off what is known as The Merge, moving the Ethereum blockchain validation mechanism away from the energy-intensive proof-of-work method. Henceforth, Ethereum will use the much greener and less intensive method of proof of stake.
According to an analysis by the Crypto Carbon Ratings Institute, the transition should reduce Ethereum’s electricity use by 99.988%, significantly reducing 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 highly unlikely to change in the near future. Here’s why.
It was hard to do
First, what the core team behind Ethereum has come up with is technically very impressive. Christian Catalini, founder of the MIT 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 about 15 percent. This is likely due to external market forces rather than anything to do with the technical aspects of the proof-of-stake transition. However, it does show that a greener cryptocurrency is not automatically more valuable – especially as Ethereum still has incredibly high transaction (or “gas”) fees.
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 is paid in cryptocurrency for their effort. The problem is that for every winner, there are thousands of losers who had their computers running at full speed—burning through copious amounts of electricity—trying to guess answers. It’s a huge waste and the big reason cryptocurrencies are considered an environmental issue.
Proof of participation, on the other hand, has no such waste. The computer that can add the next block (and get paid) is randomly selected from a pool in which the operator of each machine has staked a significant chunk of the relevant cryptocurrency. If they misbehave or fail to add the block correctly, they may be penalized by confiscating their stake.
While Bitcoin has used proof of work to secure its blockchain for 15 years, proof of stake has never been tested at 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 has been under proof of work, this will be a major win for the community. A disadvantage is that it is, at least in theory, more vulnerable to a number of different attacks.
There are other issues with proof of stake. 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 widely opposed since its inception.
And it also remains to be seen what former Ethereum miners will do with the power-hungry GPU devices they no longer need for proof-of-stake. Some may go on to mine 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 have been working hard on Ethereum’s old mechanics are unlikely to sit idle.
Also, Catalini says that Bitcoin is “extremely conservative” and “much more risk-averse” compared to Ethereum, which is much more ready to take significant risks, such as moving to proof-of-stake.
He also points out that the two major cryptocurrencies aren’t really competing, which is another reason why Bitcoin seems unlikely to follow suit. Ethereum was released with significantly more programmability (hence why it is used in NFTs) than Bitcoin, part of an effort to fix what was seen as a shortcoming with Bitcoin. In response, the Bitcoin community continued to do its own thing. As a result, he says that changing Bitcoin’s consensus method is not “reliable in the foreseeable future.” For Ethereum to do so is not a big push.
Even so, Catalini says there are ways the Bitcoin community could reduce the network’s environmental impact. (It currently uses about as much electricity as Pakistan annually.) He believes that “the evolution and sustainability of Bitcoin will be driven much more by miners targeting renewable energy and targeting energy sources that can make Bitcoin more green in the long run,” rather than a big proof-of-stake transition.
First, miners could simply use more renewable energy sources, even “carbon negative” sources such as the flue gas released from oil and gas extraction. This would allow Bitcoin mining to make use of electricity that would be “dormant” 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 could absorb peak capacity. According to Catalini, miners can “exit the network or join the network instantly.” As a result, miners could go off the grid when power is needed elsewhere, or go on the grid when excess electricity is being produced that would otherwise be wasted, such as when solar power produces more power than people need. However, the environmental claims of cryptocurrency mining have been massively overstated in the past. It’s unlikely that Catalini’s proposed methods will significantly reduce Bitcoin’s environmental impact to the extent that switching to proof-of-stake would, especially since miners are generally motivated by potential profits.