Bitcoin will not go green anytime soon

There was big news in the cryptocurrency world earlier this month: On September 15th, the Ethereum community succeeded in what is known as The Merge, moving the Ethereum blockchain 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 power consumption by 99.988 percent, which significantly reduces the effect on the environment. But Ethereum is only the second most popular cryptocurrency—Bitcoin still uses the energy-intensive proof-of-work system and that is highly unlikely to change in the near future. Here’s why.

It was hard to do

Firstly, technically what the core team behind Ethereum has achieved is very impressive. Christian Catalini, the 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 carried out such a “major upgrade” without anything going wrong is proof of the level of planning and preparedness, he says. Crucially, it shows that this kind of upgrade is possible – even for a cryptocurrency as big as Bitcoin.

However, since The Merge, the value of Ethereum has fallen around 15 percent. This is most likely due to external market forces, rather than anything to do with the technical aspects of the transition to proof-of-stake. Still, it shows that a greener cryptocurrency isn’t automatically more valuable — especially since Ethereum still has incredibly high transaction (or “gas”) fees.

Proof-of-work, unlike proof-of-stake, is basically a high-stakes math lottery. Computers all over the world compete to be the first to guess the answer to an extraordinarily difficult cryptographic equation. The first to do so gets to add 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 who had their computers going full blast – burning through vast amounts of electricity – trying to guess answers. It’s a huge waste, and the big reason why cryptocurrencies are considered an environmental problem.

Proof-of-stake, on the other hand, has no such waste. The computer that gets to add the next block (and gets paid) is randomly selected from a pool where the operator of each machine has staked a significant portion of the cryptocurrency in question. If they misbehave or otherwise fail to add the block correctly, they can be punished by having their stake confiscated.

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. Post-merger, Catalini says, “The long-term viability and safety of proof-of-effort is going to be an ongoing experiment.” If the Ethereum blockchain remains as secure as it was during proof-of-work, it will be a huge win for the community. One downside is that it is, at least theoretically, more vulnerable to a variety of different attacks.

Divergent philosophies

There are other problems with proof-of-stake as well. US Securities and Exchange Commission Chairman Gary Gensler said last week that staked cryptocurrencies could be subject to federal securities regulations, something the cryptocurrency community has largely opposed since its inception.

And it also remains to be seen what former Ethereum miners will do with their power-hungry GPU rigs that are no longer needed during proof-of-stake. Some may move into mining other proof-of-work currencies (including Bitcoin) or branch out into other fields, such as 3D modeling and graphics processing. Regardless, the massive server farms that had been working hard under the old Ethereum mechanisms are unlikely to sit still.

Catalini also says that Bitcoin is “extremely conservative” and “much more risk-averse” compared to Ethereum, which is far more prepared 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 looks unlikely to follow suit. Ethereum was launched with significantly more programmability (hence why it is used in NFTs) than Bitcoin, part of an attempt 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 Bitcoin changing its consensus method is not “credible in the foreseeable future.” Ethereum does it’s not a big push.

Still, Catalini says there are ways the Bitcoin community can reduce the environmental impact of the network. (It currently uses about as much electricity as Pakistan annually.) He believes that “the development and sustainability of Bitcoin will be much more driven by miners targeting renewable energy sources and targeting energy sources that can make Bitcoin greener in the long run run,” rather than a grand transition to proof-of-stake.

First, miners could only use more renewable energy sources, and even “carbon negative” sources such as flare gas released from oil and natural gas extraction. 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 Starlink connection, you can mine in the middle of nowhere.”

Second, mining can absorb peak capacity. According to Catalini, miners “can come off the grid or go on the grid instantly.” As a result, miners can go off-grid when energy is needed elsewhere or go online when there is a surplus of electricity that would otherwise be wasted, such as when solar power produces more energy than people need. Yet cryptocurrency miners’ environmental claims have been massively exaggerated in the past. The methods proposed by Catalini are unlikely to significantly reduce the environmental impact of Bitcoin to the extent that switching to proof-of-stake would, especially since miners are generally motivated by potential profit.