How Ethereum’s “Merge” Will Reduce Climate Pollution

Ethereum just kicked off The Merge – and the stakes are huge for the planet. The merger is arguably one of the most anticipated events in cryptocurrency history, when the Ethereum blockchain will switch from a disturbingly energy-hungry method of validating transactions to a new strategy that uses a fraction of the electricity the network guzzled before.

The transition is intended to cut Ethereum’s energy consumption by as much as 99.95 percent. It’s a serious matter since, just last week, the cryptocurrency network was estimated to use as much electricity annually as the country of Bangladesh. Of course, all that energy comes with a lot of carbon dioxide pollution, which exacerbates climate change. Ethereum’s original token, Ether, is the world’s second largest cryptocurrency by market capitalization after Bitcoin.

How will almost all the pollution that Ethereum previously pumped out practically disappear? It’s complicated, so let’s break it down as simply as we can.

What is The Merge?

It boils down to a dramatic change in how transactions are recorded on the Ethereum blockchain. A blockchain is a record of transactions that is maintained collectively rather than by a single institution such as a bank (check out The Vergeits handy blockchain explanation here). “Blocks” of transaction records are added to the chain by many different actors, which is why blockchains are often described as “distributed ledgers.”

With so many players – also known as nodes – involved, blockchains need a security system to ensure that no one tampers with or takes over the ledger. Ethereum’s old version of a security system happens to be energy intensive, so the network switches to a new one through The Merge.

What made Ethereum so polluting in the first place?

Energy inefficiencies were built into the network from the start, thanks to the old “security system” Ethereum ran on called proof of work. With proof of work, “miners” validate blocks of new transactions by solving computational problems. This is meant to prevent double spending, and miners earn new tokens in return. To prevent too many new tokens from flooding the market, the puzzle gets harder over time – and requires more energy.

The cost of solving these puzzles, in equipment and utility bills, is meant to make it harder for an entity to gain too much leverage over the ledger. If that happened, it would basically defeat the purpose of having a decentralized financial system. It also comes with the risk of a bully coming and manipulating the ledger for his own gain.

With proof of work, energy consumption and pollution balloon because miners can earn more tokens by adding more powerful computers to their operations. Crypto “mines” are essentially giant computer farms filled with hardware that run around the clock to solve puzzles. When miners set up shop in a new location, they usually run up electricity bills for nearby communities. In addition, they leave behind e-waste from the hardware they use to solve these puzzles.

Besides Ethereum, the other major cryptocurrency is notorious for problems related to proof of work Bitcoin. Bitcoin miners’ quest for abundant, affordable energy to power their businesses has breathed new life into dying fossil fuel power plants. These plants then spew more pollution into the air.

Politicians are struggling with how to deal with all the consequences stemming from proof of work. State lawmakers in New York, which became a hub for cryptomining after China cracked down on it in 2021, passed a moratorium this year on cryptocurrency mining that uses proof-of-work. Nationally, Democratic lawmakers have scrutinized cryptomining companies about their energy use and have asked federal regulators to establish new rules for cryptomining in the United States.

There is even a campaign called Change the Code, Not the Climate led by the non-profits Greenpeace USA and the Environmental Working Group that is pushing the Bitcoin network to follow Ethereum’s move.

Will The Merge Fix Ethereum’s Environmental Problems?

The merger, if all goes well, is expected to significantly shrink Ethereum’s environmental footprint. To leave proof of work, Ethereum is moving to a new process for validating transactions called proof of stake. This method gets rid of all the annoying puzzle solving – and eliminates the need for powerful hardware and huge amounts of electricity to keep the blockchain running.

Instead of using huge energy costs as a deterrent to bad behavior, proof of stake requires validators to unlock crypto tokens as collateral. That way, the validators have a stake in keeping the ledger accurate. If anyone else on the network finds out that someone has added defective blocks to the chain, the culprit loses the tokens they have staked. In Ethereum’s case, you need to stake 32 ETH tokens to get started as a validator. With each token worth around $1,600 today – bad actors risk losing a large amount of money.

Validators will still be rewarded with new tokens for doing the job right. Staking tokens enter them into a new type of lottery to verify blocks of transactions and receive that reward. An algorithm randomly selects which validators, among those who have staked tokens, to create the next block in the chain. To increase your chances of being the one chosen to add the block, you need more tokens — not more computing power.

As a result, a successful transition to proof-of-stake is expected to reduce Ethereum’s energy usage by at least 99 percent. The Ethereum Foundation put the number at about 99.95 percent. There is about a percent of leeway based on how much energy is used after The Merge by the computers still needed to store data and verify transactions. Validators will still want to keep computers running 24/7, but they won’t use up as much juice to solve those pesky puzzles.

Overall, we are talking about serious energy savings. That’s about as much electricity as a quarter of the world’s data centers use annually, according to Alex de Vries, a researcher who runs the website Digiconomist that tracks Bitcoin and Ethereum energy use. de Vries expects that the dramatic reduction in energy use will reduce 30 to 35 million tonnes of carbon dioxide emissions a year if the merger is successful.

How is this all going to go down?

In a nutshell, all the computers running the blockchain’s software must update that software to the latest version that uses proof of stake. That is of course easier said than done when you have hundreds of thousands of nodes in the network. But we will return to that later.

To get to this point, researchers developed a new “Beacon Chain” that uses proof of stake that has been running in parallel with Ethereum’s main proof of work blockchain. The old blockchain would eventually merge with the Beacon Chain, getting rid of proof of work. The merger will take place in two phases, the first of which has just started after years of delays. The Bellatrix upgrade went live today, which will get the Beacon chain ready for the final transition over the next few weeks. In the second phase, the Paris upgrade, cryptomining for Ethereum using proof of work should finally stop.

What can go wrong?

The big worry is that too many miners will mutiny and decide to stick with proof of work. They have already invested in setting up their crypto mining farms and many will likely be hard pressed to let go of their hardware. There are a couple of different ways this mutiny could play out.

If enough of them decide to forgo the software update, they can keep Ethereum’s old proof of blockchain alive. There is already a push from some miners to do this. If that blockchain persists, so will the pollution it produces. How much pollution again depends on how many miners mutiny and how much value the tokens on that zombie chain, called a “fork,” hold. They will essentially only be able to sustain as much mining as the value of the token allows, as they need to be able to pay off their electricity bills and still make money.

Or the miners may choose to find another, more established proof-of-work blockchain. The Ethereum network has already split in two previously in response to a hack in 2016, which created two blockchains: Ethereum and Ethereum Classic (both use proof of work). Now it seems that some Ethereum miners are already switching to Classic in response to The Merge, sticking to their energy-hungry ways.

There are also security risks for Ethereum if eventually there are not enough validators participating on the new proof of stake blockchain. “If you have very, very few validators, then it’s easy to attack the network. So we want to make sure that the participation rate of hundreds of thousands of validators is close to 99 percent,” said Leonardo Bautista Gomez, founder of the blockchain research group Miga Labs, which also has worked with the Ethereum Foundation to help develop the Beacon chain.

For Bautista Gomez, The Merge shows that although it may be technically difficult to implement, we make an effort to do this because we are aware of our environmental responsibility.

But even if everything goes smoothly with The Merge, blockchains are still inherently inefficient, says de Vries, who also works as a data scientist for De Nederlandsche Bank. By nature of being a distributed database, data is replicated across many devices and that consumes more energy. Still, de Vries acknowledges that proof of effort is orders of magnitude less wasteful than proof of work.

The merger is currently expected to be completed by the end of the month. Then we will see how successful the transition was and what new challenges may have arisen.