An ether-mining machine on display at a crypto conference in Thailand. Photo: Lauren DeCicca (Getty Images)
If you type the phrase “the merge” into Google today, you’ll be treated to a countdown: It’s coming in just over two days as I write this. The countdown is on to one of the biggest shifts the crypto world has ever seen.
The merger refers to the transition of the Ethereum network from a proof-of-work mining system to a proof-of-stake system. Ether is the second largest cryptocurrency by market cap, trailing behind Bitcoin. In January, 80% of the world’s NFTs were on the Ethereum network. When people talk about Web3 applications in crypto, they often talk about development on the Ethereum blockchain or related protocols. This shift could significantly reduce blockchain technology’s greenhouse gas emissions, but there are some thorny issues ahead.
What is the difference between Proof of Work and Proof of Stake in terms of climate?
The enormous energy consumption of the world’s cryptocurrencies comes from a mining process known as proof of work, which requires significant computing power. In this proof-of-work system, miners use machines that consume enormous amounts of energy to solve an equation. Whoever solves the equation first gets the privilege of creating the next block on the blockchain.
“I like to describe it as a giant guessing game where only the first person to guess correctly can create the next block for the blockchain,” said Alex de Vries, the founder of Digiconomist, a website that tracks carbon emissions from cryptocurrencies . “The bitcoin network is currently generating 200 quintillion of these estimates every second of the day — that’s 200 with 18 zeros. What they do basically goes, is it 1? is it 2 is it 3 But they are doing it at a very high speed, hoping that eventually they will find the one that fits the bill. If you succeed, you’re in luck: you can create the next block in the blockchain and get the associated reward.”
Proof of Stake, on the other hand, works more like a lottery. Instead of running numerous machines, miners submit a form of security — like buying a raffle ticket — to participate in a chance to build the next block on the blockchain.
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“In Proof of Stake, someone is randomly pulled out of a hat, which doesn’t take any energy at all,” said David Yermack, professor of finance at New York University’s Stern School of Business.
By moving to the lottery system represented by proof-of-stake, the network no longer requires energy-guzzling computers working out equations for proof-of-work systems. Some estimates suggest that if successful, the merger could eliminate more than 99% of the network’s carbon footprint. Considering that the Ethereum network currently has a carbon footprint roughly the size of that of Finland, that’s a pretty big improvement.
What exactly is happening this week?
Ethereum blockchain leadership said last week that the network would update its software between September 13 and 15. The update will impact Ethereum’s so-called difficulty – the time it takes for a miner to solve a new block on the blockchain. Crypto software is usually updated to ensure issues can be resolved in a timely manner. But this week, the Ethereum network will increase the currency’s so-called difficulty – making it virtually impossible to mine under the old proof-of-work system.
“The level of difficulty will increase enormously – the so-called ‘difficulty bomb’ will detonate,” said Yermack. “People mining proof-of-work will have no choice given how difficult it will be to mine under the old system. They have to put down their picks and shovels, stop mining the old way and move on to the new way.”
This change will theoretically usher in a permanent new way of Ethereum mining that doesn’t use all that energy. “Essentially all energy use will be eliminated,” Yermack said. “It’s very cheap to pick someone at random by lottery. Compare that to people doing trillions of calculations per second and running enormously powerful computers that use a lot of energy – the whole point is to reduce energy consumption, and that will almost eliminate it.”
Will everything go smoothly?
That depends on several factors. Ethereum leadership, De Vries pointed out, has said many times in the past that they would switch to Proof of Stake and have not made the switch. But this is the furthest they have come in the process and the first time they have given such a specific date for a move. The closer we get, the safer it becomes to assume that something will happen this week.
As with any software change, there may be bugs in the actual update material that could hinder the transition. But a bigger problem could come from miners choosing not to cooperate with the new way of working. The proof-of-work methodology has led to Ethereum miners, like all cryptocurrency miners, spending large sums of money investing in physical processors to solve equations – an investment they are compelling with the move to proof of Stake would be reluctant to give up.
Miners could create a so-called fork or fork from the main blockchain to create a separate version of the network. Both the Bitcoin and Ethereum networks have seen forks that have created different versions of the currencies known as Bitcoin Cash and Ethereum Classic. If enough ether miners stick to the proof of work, it could keep many of the machines that should be retired after the merger still active and generating emissions.
A team of these miners say they have already mined the difficulty bomb and are ready to hard fork. If these miners continue to mine their machines proof-of-work, just on another Ethereum fork – or by simply moving on to mining other cryptocurrencies – it could mean that many of these energy-hungry mining machines remain online, working and consume energy even when the rest of the network transitions.
“Miners have every reason to try,” De Vries said. “You will lose all your income, so why not try?”
If the merger goes well, will all of Crypto’s environmental issues be resolved?
Not quite. First of all, fixing Ethereum’s issuance ignores the real crypto elephant in the room: Bitcoin. Even after the crypto crash earlier this year, the Bitcoin network still emits an estimated 71.5 megatons of CO2 per year, far dwarfing Ethereum’s 46.8 megatons.
De Vries said there is a possibility that a successful Ethereum transition to Proof of Stake could kickstart a similar process for Bitcoin, especially given the recent attempt by the EU Parliament and some countries’ leaders to ban dirty mining. “I expect that, at least in Europe, a ban on proof of work will be back on the table pretty soon,” he said.
But Yermack is skeptical. He pointed out that unlike Ethereum, which has centralized leadership and recognizable public figures at the helm to fuel a major transition like the merger, the Bitcoin network is more decentralized: its founder is famously anonymous, and everyone switching to Proof of Stake would have to convince the operators of the thousands of Bitcoin “nodes” to make the switch.
“It had a political dimension [Ethereum] Going eco-friendly has never been an issue for the people who launched Bitcoin,” he said. “There’s going to be a fantasy from environmentalists like, ok, now bitcoin can switch, but it’s a very difficult governance issue.”
If the Bitcoin network eventually transitions, it would be huge for crypto’s issuance – but still not a silver bullet. Cryptocurrency, as De Vries pointed out, is at its core designed to provide stability through a decentralized network – the more machines running on it, whether they are running proof-of-stake or proof-of-work, the more secure that network is. This is the opposite of what is needed as the world reorganizes its systems to combat climate change.
“From a blockchain perspective, you always want more machines, but from a climate and efficiency perspective, less is more,” he said. “The thing is, if you add proof of work, you can make things ten thousand times worse. I wouldn’t say that moving to Proof of Stake completely solves all crypto-related sustainability challenges – I always tell people that if we didn’t have Proof of Work and we only had Proof of Stake today, we’d probably be pretty frustrated with the amount of inefficiency it introduces. But now we have blockchains that run on Proof of Work and make Proof of Stake look really good.”
Still, De Vries said any moves to proof of stake are more than welcome before these other issues are discussed. “Let’s fix most of the problem first.”