Ethereum’s Shanghai update opens a rift in crypto

Under the old system, proof-of-work (PoW) mining, the right to process a group of transactions and earn a crypto reward is determined by a race to solve a mathematical puzzle. The more computing power miners throw at the problem, the better their chance of winning the race. Under Ethereum’s new proof-of-stake (PoS) system, there is no race and there are no miners; the winner will instead be decided by lottery. The greater the amount of ether someone unlocks on the network – or stake – the greater the chance they have a prize-winning ticket.

By demonstrating that a large-scale blockchain can shift from one system to another, Shanghai will reignite a debate over whether the mining industry that still underpins bitcoin, the most traded cryptocurrency, is viable and sustainable. Figures from the University of Cambridge suggest that the Bitcoin network consumed 107 terawatt-hours of energy in 2022 – equivalent to that of the Netherlands – of which just over a quarter came from renewable sources. Before The Merge, Ethereum consumed about two-thirds as much energy as the Bitcoin network. But the move away from mining has cut that consumption, according to analysis by Alex de Vries, data scientist at De Nederlandsche Bank and creator of Digiconomist, a source of crypto emissions data, by at least 99.84 percent.

“The energy consumption problem is Bitcoin’s Achilles heel,” says de Vries. “It’s a simple fact that as the price of bitcoin gets higher, the energy consumption problem gets worse. The more money miners make, the more they’ll typically spend on resources: hardware and electricity.

But many bitcoiners dispute the characterization of the network as energy-guzzling and carbon-intensive, saying mining is increasingly powered by renewable energy. And, they say, PoS is worse than PoW – prone to centralization (the crypt’s great nemesis), concentrating influence and wealth in the hands of the wealthy, without any mitigating forces, such as energy costs, pulling in the opposite direction. All of this makes Shanghai a proxy battle for the future of crypto.

In bitcoin’s infancy, the cryptocurrency could be mined efficiently with just a personal computer and simple software. But as the appetite for bitcoin grew, the industry professionalized. Today, the mining scene is dominated by large companies – some publicly traded, such as Marathon Digital and Riot Blockchain – that operate giant facilities with rack upon rack of hardware. The largest of these mines, many of which are located in Texas, can draw upwards of 700 MW of power.

But bitcoin supporters argue that looking at the absolute amount of energy the industry consumes misses important context. Far from triggering investment in new fossil fuel plants, miners say they stimulate the development of renewable energy by plugging the gaps when demand is low.

“Only the miners with the cheapest energy can survive, so bitcoin is driven to areas of low or no demand,” says Yan Pritzker, co-founder of bitcoin trading platform Swan Bitcoin. “Sources of wind and solar are unreliable and must therefore be over-provisioned. But bitcoin miners come in and act as a buyer of last resort.”

By purchasing energy from renewable sources when it is not needed in the grid, the argument goes, bitcoin miners can increase the profitability of solar and wind farms and accelerate the transition to sustainable energy sources. Miners also say consumption figures such as those compiled by the University of Cambridge do not take into account the amount of off-grid energy sources used to power mining, nor the 1 percent or so that goes on methane – a byproduct of oil extraction that is otherwise vented or burned away.

A common argument among bitcoiners is that instead of focusing on trying to cut down on the amount of energy consumed by the network, critics should look at how the network can help expand the amount of renewable energy on the grid. “Bitcoiners understand that the way to reduce emissions is not to use less energy, but to generate orders of magnitude more low-emission electricity,” said Chris Bendiksen, head of bitcoin research at investment firm CoinShares. “To do that, producing low-emission energy must be profitable, which PoW mining ensures in a completely unique way and at scale.”

While persuasive on the surface, these arguments don’t stand up to scrutiny, bitcoin critics say. Pete Howson, an assistant professor in the Faculty of Environmental Sciences at Northumbria University, likens the common defense of bitcoin mining to “magic tricks” – sleight of hand that hides inconvenient truths and “gives the illusion of clean and profitable investment.”

“The only difference between flaring methane and flaring methane for bitcoin,” says Howson, “is that the latter makes fossil fuel companies more profitable, slowing the transition to green alternatives.” There are even a handful of examples—in New York and Montana—of the additional revenue generated by bitcoin mining reviving fossil fuel plants that had either closed or were slated for closure.

Meanwhile, in countries like Iceland, Howson says, bitcoin miners outcompete other energy consumers, such as recycling plants, which “can’t access” otherwise abundant sources of renewable energy. “There is no such thing as wasting energy in a sustainable way,” he says.

Whether it is really a waste is at the heart of the debate.

The scrutiny of bitcoin’s environmental credentials, Pritzker says, is out of proportion to the emissions it produces, which best estimates place somewhere between 0.1 percent to 0.15 percent of the global total. He asks why bitcoin is singled out, when other industries pollute in greater volumes or are powered by a dirtier mix of energy. The simple answer is that the argument hinges on a matter of personal opinion; it comes down to whether someone believes that crypto serves a purpose.

If bitcoin is agreed to have greater societal value than tobacco, for example an industry responsible for a greater volume of emissions, the footprint becomes easier to justify. But if bitcoin is instead just one big Ponzi scheme, the sums will never line up.

This ideological battle, and the strength of the animosity between bitcoin evangelists and their critics, makes it difficult to have a nuanced discussion about the industry, and both sides have become entrenched in their positions.

According to de Vries, it would be entirely possible, from a technical perspective, for Bitcoin to follow in the footsteps of the Ethereum network. “Bitcoin can move to PoS, no problem,” he says. “But it’s a social challenge.”

De Vries is often the attack by bitcoiners, who claim he is encouraged by his association with the central bank to criticize bitcoin, that his data is wrong, and that he fails to account for the nuances of bitcoin’s relationship with the environment.

Bitcoiners have locked horns with environmental charities. On March 23, activists at Greenpeace unveiled an art installation called the Skull of Satoshi, an allusion to the pseudonymous creator of bitcoin, Satoshi Nakamoto. The skull is 11 feet tall, decorated with old motherboards, the eye sockets glow red, and the chimneys emit smoke from the crown. The installation was meant to represent cryptomining’s dual contribution to carbon emissions and e-waste, says Rolf Skar, campaign director at Greenpeace USA. But the skull was quickly appropriated by bitcoin followers on twitter, who described the skull as “metal” and “badass”. Some used it as a new profile picture.

– The reaction was predictable, but disappointing, says Skar. “It’s not surprising, but it’s a bad look to downplay these very real problems.”

The artist who designed the sculpture, Benjamin Von Wong, also bore some of the backlash. On March 25, he published a Twitter thread said he had revised his “black and white” assessment after conversations with bitcoiners. But he also pointed to the forces that stand in the way of productive debate: “There are people on both sides who believe that the other is naively optimistic, delusional and misinformed,” he wrote.

The Skull of Satoshi, which is being taken on a tour of US cities, is part of a wider Greenpeace campaign called “Change the Code, Not the Climate”, which aims to push for changes to the Bitcoin codebase that would reduce the network’s emissions. . Skar says the intention is to prevent fossil fuels from “roaring back to life”, courtesy of bitcoin, but Bendiksen calls the effort a “smear campaign”.

Both parties also accuse the other of misrepresenting facts and data. The Greenpeace campaign, Pritzker and Bendiksen say, is partially funded by Chris Larsen, founder of Ripple, a company with interests in promoting XRP, a cryptocurrency launched as a direct competitor to bitcoin. But by the same token, Howson says, arguments for bitcoin mining are often based on data provided by the Bitcoin Mining Council, a coalition of mining companies led by Michael Saylor, CEO of MicroStrategy, a business with hundreds of millions of dollars invested in bitcoin.

The trouble is exacerbated by the ideological opposition to PoS among bitcoiners, separate from environmental concerns. Some find the idea of ​​tampering with Satoshi Nakamoto’s original invention unthinkable, and others, like Bendiksen and Pritzker, believe PoS introduces greater risks of centralization and censorship – and therefore represents a threat to crypto’s fundamental principles. “PoS is essentially the fiat system,” says Pritzker, “because whoever has the gold makes the rules.” For this reason, Bendiksen explains, bitcoiners will “never agree” to a shift.

“Any attack on bitcoin is an attack on their morals, their values ​​and often their net worth. This makes everything feel personal,” Von Wong told WIRED. “Because most people don’t see themselves as inherently bad, they feel misjudged and misunderstood, which is a terrible place to start a conversation.”

The result is a situation where both parties hurl insults across the void, but register none of the legitimate or well-intentioned complaints. Any bit of information that can be used to discredit the opposition is also seized. And Von Wong worries about becoming a bit himself.

“The hardest part about being at the center of a controversy is feeling like a pawn,” he says. “I don’t feel like I can speak freely in public without someone, somewhere, taking what I say out of context and trying to exploit it against the opposite side.”