Cryptocurrency Ethereum Is About To Cut Its Emissions By 99 Percent – A Huge Shake That Will Challenge Bitcoin

Amidst the continuous noise about cryptocurrencies, it is often difficult to determine what really matters.

But this month, if all goes according to plan, the energy-hungry digital sector will undergo its biggest shake-up in years.

Ethereum, the world’s second-largest cryptocurrency, is expected tomorrow to begin a technology shift that, when completed, should see carbon emissions drop by 99 percent.

The rapid growth of cryptocurrencies in recent years has been staggering. Unfortunately, it has also been their contribution to climate change, due to the huge amount of electricity used by computers that manage the buying and selling of crypto coins.

Take, for example, the world’s largest cryptocurrency, Bitcoin. At a time when the world is desperately trying to reduce energy consumption, Bitcoin uses more energy each year than mid-sized nations like Argentina. If the Ethereum switch is successful, Bitcoin and other cryptocurrencies will be under enormous pressure to deal with this issue.

Why are cryptocurrencies so polluting?

Cryptocurrencies are digital currency systems where people make direct online payments to each other.

Unlike traditional currencies, cryptocurrencies are not managed from a single location, such as a central bank. Instead, they are managed by a “blockchain”: a decentralized global network of powerful computers. These computers are known as “miners”.

The Reserve Bank of Australia provides this simple explanation of how it all works (edited for brevity):

Suppose Alice wants to transfer one unit of cryptocurrency to Bob. Alice initiates the transaction by sending an electronic message with her instructions to the network, where all users can see the message.

The transaction sits with a group of other recent transactions waiting to be compiled into a block (or group) of the most recent transactions. The information from the block is turned into a cryptographic code and miners compete to solve the code to add the new block of transactions to the blockchain.

Once a miner has solved the code, other users of the network check the solution and agree that it is valid. The new block of transactions is added to the end of the blockchain, and Alice’s transaction is confirmed.

This process, used by most cryptocurrencies, is called “proof-of-work mining”. The central design feature is the use of calculations that require a lot of computing time – and huge amounts of electricity – to perform.

Bitcoin alone uses around 150 terawatt-hours of electricity each year. Producing that energy releases about 65 million tonnes of carbon dioxide into the atmosphere annually – about the same emissions as Greece.

Research suggests that Bitcoin last year produced emissions responsible for around 19,000 future deaths.

How Bitcoin’s energy use compares to selected countries

The proof-of-work approach willfully wastes energy. The data in a blockchain has no inherent meaning. Its sole purpose is to record difficult, but meaningless, calculations that provide a basis for the allocation of new cryptocoins.

Cryptocurrency advocates have offered a variety of excuses for the monstrous energy consumption, but none stand up to scrutiny.

For example, some seek to justify cryptocurrency’s carbon footprint by saying that some miners use renewable energy. That may be true, but in doing so they may displace other potential energy users – some of whom must use coal or gas power.

But now the most successful of Bitcoin’s rivals, Ethereum, is changing tack. This month, it promises to switch computer technology to something far less polluting.

What the switch is about

Ethereum’s project involves dropping the “proof of work” model for a new one called “proof of stake”.

Under this model, crypto transactions are validated by users, who stake significant amounts of blockchain tokens (in this case, Ethereum coins) as collateral. If users act dishonestly, they lose their stake.

Importantly, it will mean that the vast network of supercomputers currently used to check transactions will no longer be necessary, as users will perform the checking themselves – a relatively simple task. Doing away with computer “miners” would lead to an estimated 99 percent drop in Ethereum’s power usage.

Some smaller cryptocurrencies – such as the Ada coin traded on the Cardano platform – use “proof of stake”, but that has been limited to the margins to date.

For the past year, Ethereum has been running the new model on experimental blockchains. But this month, the model is being merged into the main platform.

Nowhere for cryptocurrency to hide

So what does all this mean? The Ethereum experiment could fail — if, for example, some stakeholders find ways to manipulate the system. But if the exchange succeeds, Bitcoin and other cryptocurrencies will be under pressure to abandon the proof-of-work model, or shut down.

This pressure has already begun. Tesla founder Elon Musk announced last year that the company would no longer accept Bitcoin payments for its electric cars, due to the currency’s carbon footprint.

The New York state legislature passed a bill in June to ban some Bitcoin operations that use carbon-based power. (However, the decision requires the sign-off of New York’s governor and can be vetoed).

And in March this year, the EU Parliament voted on a proposal to ban the proof-of-work model. The proposal was voted down. But as Europe heads into the cooler months, grappling with an energy crisis triggered by sanctions on Russian gas supplies, energy-guzzling cryptocurrencies will remain in the firing line.

One thing is clear: as the need to cut global emissions becomes increasingly urgent, cryptocurrencies will run out of excuses for their rampant energy use.

John Quiggin is a professor in the School of Economics at the University of Queensland. This piece first appeared on The Conversation.