Cryptocurrencies are often criticized about polluting the planet. According to Cambridge University’s Bitcoin Electricity Consumption Index, Bitcoin mining consumes more energy than Belgium every year. Ethereum consumption is generally pegged at roughly a third of Bitcoin, although estimates vary.
The problem is that it takes special computers powered by massive amounts of electricity to process and verify transactions in cryptocurrencies like Bitcoin or Ethereum on blockchains, through a process called proof-of-work mining. In this system, thousands of computers around the world (but mostly in the US, China, Kazakhstan, and Russia) compete to solve a mathematical puzzle and win the privilege of adding or “locking” a set of transactions, in the ledger. The miner who wins wins the crypto reward.
Although approximately 39 percent of the energy that goes into bitcoin mining comes from renewable sources, according to a 2020 Cambridge report, the industry’s carbon footprint is generally considered unacceptable.
Most Bitcoin proponents will tell you that proof-of-work mining is essential to keeping the network secure, and they would never think of tampering with something first invented by the coin’s pseudonymous creator, Satoshi Nakamoto.
But Ethereum is on the verge of a major change that will reduce its impact on the environment. Launched in 2015 by a 21-year-old wizard named Vitalik Buterin, Ethereum is set to replace proof-of-work mining with an alternative system known as proof of stake that doesn’t require power-sucking computers. . The Ethereum Foundation, a research nonprofit that leads updates and improvements to the Ethereum blockchain, says the move will reduce the network’s energy consumption by 99.5 percent. The big switcheroo is known as the Merge – and it’s set to happen on September 14th.
What is integration?
The merger depends on merging Ethereum’s current proof-of-work blockchain with Beacon Chain, a proof-of-stake blockchain that launched in December 2020 but has yet to process any transactions. Several upgrades scheduled to launch in the next few weeks will lay the groundwork for moving from one chain to another.
Justin Drake, a researcher at the Ethereum Foundation, says that the way the process is structured can be compared to a car switching from an internal combustion engine to an electric one. “How do we do it? First step: We install an electric motor similar to a gasoline engine. And then – second step – we connect the wheels to the electric motor and remove the gasoline engine. That’s exactly what Merge will be,” said Drake. “We’ve had this parallel engine on the Beacon Chain for a year and a half – and now the old ‘gasoline’ test engine is winding down.
After years of delays, the Ethereum community is positive that the long-awaited transfer will finally happen, following a successful dry run on a test block called the Goerli chain on August 10. The fact that Buterin has a book called Proof of Bet coming out in September is probably a coincidence.
How does Ethereum proof of stake work?
Talking about proof of stake is like talking about French cheese: There are many varieties – with hundreds of cryptocurrencies claiming to use some version of the process. However, at its most basic, proof of stake is based on the idea of securing the network through incentives rather than hardware.
In this scenario, you don’t need an expensive mining computer to join the network: You can use your laptop to place a “stake”—a certain amount of cryptocurrency locked in the network. This gives you a chance to be selected, usually by a random process, to validate a block and receive crypto rewards and payments. If you try to game the system, for example by blocking a block, the network will punish you and destroy or “chop” some or all of your stake.
This is very different from the proof-of-work feature of mining in the blockchain ecosystem, which ensures that no one can block its chronology. If a malicious actor wants to rewrite history and, for example, show that a certain cryptocurrency transaction didn’t happen, he has to shuffle the whole chain again. To do so, they need to amass the computing power and electricity equivalent to more than half the miners on the network – a form of exploitation aptly called a “51% attack”.
In the specific case of Ethereum, stakers must deposit at least 32 Ether ($58,722, starting August 17th) to become validators, and risk a fine or lose everything they have if they are not honest. Drake summed it up by saying that Ethereum’s proof-of-stake is “heavy” — that is, penalty-based — rather than “carrot-heavy,” or reward-based. “It turns out that the stick is 100 times stronger than the carrot,” he said. “And the reason is very simple: you can only reward validators with 1 percent, otherwise too many ether tokens will be issued to reward them. But you can cut off 100 percent of their food if they start misbehaving. “
This architecture, Drake said, also makes it difficult to maneuver the network in a 51% attack. In order to damage the chain, he said, an attacker would have to stake an amount of ether equivalent to more than half of Ethereum’s stake, which he says is currently around $25 billion. “They can rewrite history – but it’s a one-time attack. And in the process, they’ll be cut off and lose their $25 billion.
When they want to attack a second time, they’ll spend another $25 billion.” That’s what Drake said. is more expensive than a hardware and energy-based attack on Ethereum’s proof-of-work, which he estimates would cost $5 billion. Of course, for this assumption to be met, the value of Ether must remain high over the years. If the drop is at a small level, the network attack will be cheaper. “The value of the security is very, very relative to the price of ether,” Drake said. But he is sure that after the merger, the value of ether will increase significantly. In fact, since Goerli’s test, the price of Ether has risen.
Why is this important?
Ethereum differs from Bitcoin in that, while the latter is mostly about payments, the former allows the creation of blockchain-based applications and so-called smart contracts that themselves execute subroutines powered by ethereum tokens. After the merger, not much will change in terms of apps that can be built on Ethereum, Drake said.
But Merge opens the door to another process, called “sharding,” which divides the network into multiple parallel chains. That, Drake says, will unlock the network, which currently only supports about 30 transactions per second and charges users transaction fees. If everything goes to plan, according to the Ethereum Foundation, a sharded Ethereum should eventually reach a throughput of 100,000 per second.
A more pragmatic reason to celebrate the shift is simply the reduction in energy consumption.
“Ethereum has almost doubled in value since its low [in June 2022] in expectation of the much-anticipated Merge, but no products or services built on the blockchain will change materially,” says Frank Muci, policy fellow at the Growth Lab Research Collaboration at the London School of Economics. “The main change [will be] the reduced environmental footprint, which may reduce the reputational price of using the Ethereum database and the products and services built on it.”
What Are Miners Going to Do?
Ethereum miners stand to lose the most from the Merge, as all the computers and energy contracts they use to generate their income (in ether rewards) will suddenly become useless.
Some of them are reportedly working to “fork” the blockchain—that is, to split the chain into a separate network that will not enact the proof-of-stake shift and will allow them to continue mining. Chandler Guo, a miner and blockchain entrepreneur who has been promoting the fork, told CoinDesk that he floated the idea after many miners called him worried about “shutting down their business.”
Justin Sun, the founder of proof-of-stake blockchain Tron and the owner of crypto exchange Poloniex, has announced that he will list a hypothetical proof-of-work ether token on his exchange post-Merge. “I am very excited about the Merge,” Sun says. “[But] nearly 50 percent of members from the community think proof-of-work is safer and even more decentralized than proof-of-stake. Therefore, I think proof-of-work is still essential to build the Ethereum infrastructure, as well as the community.”
Ethereum has undergone forks before: A split known as Ethereum Classic, also supported by Guo, was created in 2016 following a dispute over the hack of an Ethereum-based entity called The DAO. Ethereum Classic, which will also keep operating as a proof-of-work network post-Merge, has become notorious for being the target of several successful 51% attacks since its inception.
Drake says that while forks are reasonable and by definition allowed in a decentralized blockchain industry, he does not think they have “much legitimacy.”
“There’s a very, very strong consensus within different communities that we do want to move to proof of stake,” he says. “This upgrade is not at all contentious.” He points out that most decentralized finance protocols and stablecoins (a kind of crypto assets that can be redeemed for state-issued currencies) have already voiced their support for the Merge and will not be providing services to a hypothetical continuity proof-of-work chain—which would therefore risk becoming a semi-deserted blockchain for which not many apps are available.