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Ethereum ‘Merge’ upgrade has sustainability implications

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The Ethereum ‘Merge’, an upgrade to the way the cryptocurrency operates, is being viewed with interest by other cryptocurrencies. The prospect of vastly reducing the amount of energy and hardware used is being weighed against reduced security, while the question of added or reduced decentralisation, vital to blockchain transactions, remains unknown.

● Ethereum changes its underlying blockchain technology to proof of stake, which will result in a vast reduction in the amount of energy and computing power it uses.
● Cryptocurrency mining is a major consumer of energy, and contributes up to 0.3% of global greenhouse gas emissions.
● The switch to proof-of-stake mechanisms may provide the catalyst for the wider use of blockchain technologies in improving sustainability.

Blockchain is a highly contested solution in climate terms. It can act as a major enabler of secure data transfer but, as a major energy consumer for cryptocurrency mining, has a significant negative climate impact. In fact, a recent report from the White House Office of Science and Technology even warned that such cryptocurrency mining could prevent the US from meeting its climate goals.

The challenge lies in the potential for climate solutions using the underlying blockchain technologies, which could result in increased transparency, accountability and the management of risk. The World Economic Forum is promoting the potential for smart contracts in accelerating climate action and there is growing interest in the use of regenerative finance applications to tokenise carbon credits for example.

Ethereum staking green blockchain claim post merge

Following the merge, Ethereum is branding itself a green blockchain, based on its use of a proof-of-stake (PoS) consensus mechanism that requires less computing power and cuts down on hardware waste compared to proof-of-work (PoW) consensus mechanisms.

PoS claims to run on 99% less power than the proof-of-work (PoW) that Ethereum used to run on, going from using 72 terawatt-hours per year, or as much as all of Austria, to 0.01 TWh per year, roughly equal to that of running a laptop for each node on the network. 

As further proof of its green credentials, Ethereum claims a growing community of regenerative finance (ReFi) applications on its network. These applications use decentralised finance components to build financial applications that benefit the environment. ReFi applications are being touted as a solution that can be used in carbon markets to tokenize carbon credits

Ethereum has also quantified its carbon debt under its previous PoW incarnation, which may bring renewed scrutiny to the sustainability profile of the likes of Bitcoin. Its total energy consumption peaked at 94 TWh per year in February 2022, and dropped to 60 TWh per year this summer, with a carbon emission equivalent of 33 MT per year. It will be interesting to see if, or how, it starts to address that carbon debt.

Proof of work, proof of stake and private blockchains

The blockchain networks that power cryptocurrencies use different processes, depending on the type of consensus mechanism they use. Validating transactions and specifying the order in which they occurred is an example of a consensus mechanism on a distributed network.

A proof of work (PoW) blockchain network is the most commonly used consensus method, used by 58% of the cryptocurrencies in the market, including Bitcoin.  Proof of stake (PoS) has emerged as a more energy efficient and speedier alternative to PoW. 

Private and consortium blockchain, differ from PoW and PoS based ones in that they are not public or decentralised. The lack of decentralisation also results in this type of technology being referred to as distributed ledger technology (DLT).

PoW miners confirm the most recent block of transactions on the blockchain to all other nodes on the network. Upon verification (consensus) and addition of the block to the chain by the nodes, the miner receives a block reward in the form of newly minted cryptocurrency.

In the case of Bitcoin, this can take up to ten minutes, which contributes to its high energy use. The amount of data and computing power needed also results in the generation of hardware waste, which includes a lot of environmentally hazardous materials.

PoS could be the next big thing for cryptocurrency growth, but there are some hurdles along the way known as thin clients and shard takeovers. These forms of attacks involve corrupting a specific shard to exploit the entire system. However, this is not possible in a PoW model due to the high energy requirements.

PoS puts and takes 

PoS is the mechanism of choice when on-chain transaction and settlement speed is of the essence. Validators of transactions are owners of significant amounts of the nodes and tokens in a network, which creates a financial incentive for them to keep it safe.

There are vulnerabilities in the PoS system, which make it less secure than PoW. For example, when significant changes are made to cryptocurrencies new nodes created by a “fork” in the network which don’t accept the old ones, rendering old coins worthless.

The security of Ethereum is rumoured to have been threatened prior to the merge via such a “fork”, although nothing has emerged as yet.

A big positive that has accompanied the merge is the presumed powering down of a lot of computing power. While this tweet suggests 20-30% of Ethereum miners may have found a temporary new home at other blockchains, their profitability may be questionable.

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