Ethereum Merge: How Crypto’s carbon footprint is shrinking

Whether you own cryptocurrency or not, Ethereum Merge is a big deal. In the work since 2014, the long-delayed merger will see that ethereum, the second largest blockchain behind bitcoin, becomes almost carbon neutral.

This is of great consequence. Cryptocurrency critics claim that coins such as bitcoin and ether are useless and use huge amounts of electricity. The first point is polarizing and subjective, however the other is unequivocally true. At a time when more people than ever are looking at reducing climate change as society’s No. 1 priority, carbon emissions from bitcoin and ethereum are too conspicuous to ignore.

In the merger, ethereum will use a system known as proof of stake, which has been planned since before the blockchain was created in 2014. Due to its technical complexity, and the increasing amount of money that is in danger, it has been delayed several times. The merger is part of what was previously called “ether 2.0”, a series of upgrades that transform the basis of the blockchain. Mid-September is the deadline.

“We’ve been working on proof of effort for about seven years now,” Ethereum co-creator Vitalik Buterin said at the Eth Shanghai conference in March, “but finally all this work comes together.”

Here’s everything you need to know to understand the big day.

Why is crypto bad for the environment?

To understand the merger, you must first understand the role of miners in cryptocurrency.

Say you wanted to recover cryptocurrency. You would set up a powerful computer – a mining rig – to run software that tries to solve complex cryptographic puzzles. Your rig competes with hundreds of thousands of miners around the world trying to solve the same puzzle. If your computer decrypts the cryptography first, you gain the right to “validate” a block – that is, add new data to the blockchain. Doing so gives you a reward: Bitcoin miners get 6.25 bitcoin ($ 129,000) for each block they verify, while ethereum miners get 2 ethers ($ 2,400) plus gas, which are the fees users pay for each transaction (which can be huge).

It takes a powerful computer to have a chance in this race, and people usually set up warehouses full of rigs for this purpose. This system is called “proof of work”, and it is how both bitcoin and ethereum blockchains run. The point is that it allows the blockchain to be decentralized and secure at the same time.

“This is what is called the civilian resistance mechanism,” said Jon Charbonneau, an analyst at Delphi Digital. Every blockchain must run on a scarce resource, explained Charbonneau, one that bad actors cannot monopolize. For proof-of-work blockchains, that resource is power – in the form of the electricity required to run a mining business.

To take over ethereum right now, a bad actor must control 51% of the network’s power. The network consists of hundreds of thousands of computers around the world, which means that the villains have to control 51% of the power in this huge mining pool. Doing so would cost billions of dollars.

The system is secure. Although fraud and hacking are common in crypto, neither the bitcoin nor ethereum blockchains themselves have been compromised in the past. However, the disadvantage is obvious. As cryptographic puzzles become more complex and more miners compete to solve them, energy consumption increases.

How much energy does crypto use?

Lots and lots. Bitcoin is estimated to consume around 150 terawatt hours a year, which is more power than 45 million people in Argentina use. Ethereum is closer to Switzerland’s 9 million inhabitants, and eats up around 62 million terawatt hours.

Much of this energy comes from renewable sources. About 57% of the energy used to extract bitcoin comes from renewable sources, according to the Bitcoin Mining Council. (BMC is dependent on self-reporting among members.) This is not motivated by climate awareness, but self-interest: Renewable energy is cheap, so mining is often set up near wind, solar or hydro parks.

Nevertheless, the carbon footprint is extensive. Ethereum is estimated to emit carbon dioxide on the same scale as Denmark.

How will the merger help?

The merger will see that ethereum completely provides evidence of work, the energy-intensive system it currently uses, in favor of evidence of effort.

In crypto countries, “staking” refers to depositing cryptocurrency to provide interest. For example, the creators of terraUSD stablecoin offered customers 19% interest on the TerraUSD bet: You can deposit $ 10,000 and withdraw $ 11,900 after one year (all the way to the imploded).

Once proof of effort takes effect, miners no longer have to solve cryptographic puzzles to verify new blocks. Instead, they will put ether tokens in a pool. Imagine that each of these tokens is a lottery ticket: If your token number is dialed, you win the right to verify the next block and earn the rewards it brings.

It is still an expensive business. Potential block verifiers – who will be known as “validators” instead of miners – must wager a minimum of 32 ethers ($ 38,500) to qualify. This system sees that tippers put up raw capital, instead of power, to validate blocks. While a bad actor needs 51% of a network’s power to overtake a proof-of-work system, they will need 51% of the total effort to override the proof-of-stake system.

Since cryptographic puzzles will no longer be part of the system, electricity costs will decrease by an estimated 99.65%, according to the Ethereum Foundation.

Why is it called the “merger”?

The way ethereum will go from proof of work to proof of effort will be achieved through a merger of two blockchains.

The Ethereum blockchain that people use is known as “mainnet”, unlike various “testnet” blockchains that are only used by developers. In December 2020, Ethereum developers created a new network called the beacon chain. The Beacon chain is actually the new ethereum.

The Beacon chain is a proof-of-stake chain that has been operating in isolation since it was created 18 months ago. Validators have added blocks to the chain, but these blocks have not contained data or transactions. It has mainly been put to various stress tests ahead of the big day.

The merger will see the data held on Ethereum’s main network transferred to the beacon chain, which will then become the most important blockchain on Ethereum’s network. In the run-up to the merger, ethereum developers have stress tested the new blockchain by running data and transactions through it on various ethereum test networks.

“If you talk to the ethereum developers, and I have, they would tell you that if evidence-of-work mining was banned overnight, they could do the merger right now, and that would be fine,” Charbonneau said. Much of the spread developers are currently focused on applications and clients built on top of the ethereum, he added, not the actual proof-of-stake execution. “If they did the merger today, it would be buggy for a few months … but the protocol itself, there are no worries [among the developers]. ”

Is there any risk?

Absolutely. Critics of ethereum – typically bitcoin enthusiasts – compare the merger to changing the engine of a plane in the middle of a passenger flight. At stake is not just the plane, but ether worth $ 140 billion in circulation.

On a technical level, there can be many unforeseen errors with the new blockchain. Solana, another proof-of-stake blockchain, has had several complete outages this year. Solana and ethereum are different in that solana’s fees are small, which means that it is easier for robots to overwhelm the blockchain, but technical difficulties are not ruled out.

Critics also wonder if evidence of effort will be as certain as evidence of work. Charbonneau reckons that it may be safer due to a feature called “slashing” – essentially, validators can get their staked ether burned, and network access revoked, if they turn out to have acted maliciously.

“Say that some 51% are attacking bitcoin today, you can not really do anything,” said Charbonneau. “They have all the miners, and they can just keep attacking you. … With proof of effort, it’s very simple. If you attack the network, it’s proven and we’ll just cut you off, and then your money’s gone.”

“You get a bullet, and that’s it. Then you can not do it again.”

Will it cause the price of ether to go up?

Ether has fallen almost 70% since the beginning of the year, and many hope that the merger will revive the price of cryptocurrency. This has been a hotly debated topic in crypto circles in recent months. The answer is that no one knows.

Many claim that the merger has already been priced in; it has been in business for seven years, and many large investors, the argument goes, have put money on ethereum with the expectation that the merger would be successful. More important than how the merger affects the price of the ether in the short term is how it shapes the long – term outlook of the cryptocurrency.

Charbonneau said reducing ethereum’s carbon footprint due to environmental concerns is “definitely a meaningful part” of ethereum developers’ motivation for the merger. But beyond that, he notes, it is also about making ethereum adoption easier to justify for large companies.

“The reality is that if you remove the environmentally friendly part, many people will not use it [ethereum] and do not want to invest in it solely on ESG grounds, “Charbonneau said, referring to environmental, social and corporate governance standards for ethical investment.” There are many technology companies that have openly said, ‘We are not going to do that. until after the merger. ‘”

When will the merger take place?

The merger is expected to take place in September. In a recent conference call among ethereum developers, Tim Beiko of the Ethereum Foundation set September 19 as a tentative date.

“This merger timeline is not final, but it’s extremely exciting to see it come together,” tweeted another developer. “Please look at this as a planning timeline.”