The long-awaited merger of Ethereum is complete and, in addition to being a testament to the dedication and ingenuity of its developers, it also represents a huge leap forward for the environmental impact of the cryptocurrency industry. Before the merger, Ethereum consumed about 83.89 TWh of electricity each year, equivalent to the consumption of a medium-sized country like Finland. Now, its shift to a proof-of-stake consensus mechanism has reduced this footprint by 99.95%, to 0.01 TWh.
This is a huge change for Ethereum and cryptocurrencies in general, for a number of important reasons. Not only does it make Ethereum blockchain validation more accessible to more participants, but it will reduce its carbon footprint at a time of rising global temperatures, helping to improve crypto’s reputation in the eyes of the general public.
Needless to say, this could be an important factor in the gradual acceptance of cryptocurrencies over time and could help remove many of the regulatory and government resistances currently facing blockchain technology. As such, the Ethereum merger could be a very important step on the road to crypto becoming mainstream.
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Ethereum fusion and why proof-of-stake requires less energy
The Ethereum Foundation has been
planning to move Ethereum toward a proof-of-stake consensus mechanism since at least 2016, and its developers’ designs have changed and evolved over time, meaning that Ethereum PoS as conceived in 2016 (and even earlier) is different from how it has now been implemented.
However, the basics are quite easy to grasp. In the past, Ethereum has validated transactions and new blocks through miners using mining equipment that creaked large sets of numbers. Now, the network will use validators that simply point ethereum (ETH) in favor of the blocks they choose to validate. All they need to run this are conventional computers running the latest Ethereum software, and that’s where energy reductions come in.
Validating blocks based on which receive the most targeted ETH might initially seem risky, but committing money discourages dishonest behavior. This is because Ethereum 2.0 (as the new proof-of-stake Ethereum was known) requires a minimum bet of at least 32 ETH, meaning validators risk losing a considerable sum of money if it turns out that they are betting dishonestly. And that’s exactly what happens to dishonest validators, with their ETH up for grabs being destroyed.
It’s also worth pointing out that once you get rid of proof of work and expensive energy-intensive mining equipment, you also get rid of the financial incentive to invest in even more powerful mining equipment and so on. As the industry has seen with Bitcoin and other proof-of-work coins, an arms race tends to develop among miners to see who can procure the most powerful mining chips and, by extension, receive the most important rewards. This is a recipe for environmental disaster, with Bitcoin’s energy consumption increasing as a result.
With the merger, Ethereum eliminated Antminers, Whatsminers and other powerful mining chips, with the only things that now consume energy are its mining algorithm and the (ordinary) computers that run it. As a result, Ethereum is not only less energy-intensive than Bitcoin and its former PoW, but also less expensive than Netflix and PayPal.
On a practical level, this will incentivize greater participation in the Ethereum network. This is because, in the past, anyone who wanted to validate blocks and receive mining rewards had to invest in increasingly expensive mining equipment and facilities, something that could be a deterrent.
For example, the cost of producing a single bitcoin is currently just under $27,000, according to data from Capriole Investments, implying that miners are currently losing money relative to the price of bitcoin right now. This is not something Ethereum validators will have to worry about, since the cost of validating transactions for them will now be extremely low and likely to be more profitable.
What Improved Green Credentials Mean for Ethereum and Crypto
It’s probably no surprise that people inside and outside the Ethereum community are very excited about the 99.9% drop in energy consumption. In fact, the boasting related to Ethereum’s move to proof-of-stake has become a semi-regular fixture on Crypto Twitter.
In fact, it’s not just on Twitter that you can find comments about the historic Ethereum merger. The mainstream media is also paying more and more attention to the shift to proof-of-stake, with an increasing number of serious media outlets publishing pieces that all seem to agree that such a move is of enormous importance for cryptocurrencies.
For example, The Economist published an article on September 6 titled “The Future of Cryptocurrencies Is at Stake in the Ethereum Passage.” In particular, the publication agreed that the merger will make Ethereum more energy efficient and put it on the path to becoming more useful and scalable.
A significant passage in this article stated that “the effect on [carbon] emissions will be as if, overnight, the Netherlands has been turned off… More importantly, the merger, if successful, will suggest that Ethereum has the capacity for self-improvement, opening the door to more radical changes.
Later in the article, the Economist author goes on to acknowledge that “fusion will be a step towards a much more useful technology” and that post-change updates will be “aimed at improving scale and efficiency,” including the subsequent introduction of sharding.
What will the world do with Ethereum’s new energy-efficient design?
It’s not just financial outlets that weigh on the new, more energy-efficient Ethereum. The left-wing Guardian published a similar article at the end of August, in which (again) the 99% reduction in energy consumption is the headline. It includes the endorsement of statements by economist Alex de Vries, who publishes energy consumption estimates for Bitcoin and Ethereum under the name “Digiconomist” and who has become one of Bitcoin’s most vocal public critics.
He told the newspaper: “They could cut a big chunk of their energy demand. I will work to quantify it more accurately, but at least 99% (probably even 99.9%) reduction should be achievable.”
Such media have not been outspoken advocates of encryption until now, so their positive reports on the merger represent a very significant change in attitude. What’s also significant is that this reporting is coupled with continued criticism of Bitcoin and its continued reliance on the most energy-intensive proof-of-work consensus mechanism.
As the Guardian article concluded, “The bitcoin network uses 130TWh of electricity per year, De Vries estimates, a sum that will be increasingly difficult to defend if the [E]thereum blockchain demonstrates that the same capabilities can be achieved in an environmentally friendly way.”
In addition to Ethereum’s migration to proof-of-stake, Bitcoin’s continued reliance on PoW comes at a time of exorbitant energy bills for much of the developed world. This fact has not been overlooked by commentators working within cryptocurrencies.
It actually looks like Ethereum’s move to PoS will help provide impetus for a Bitcoin attack of sorts and proof-of-work. This is not only evident in the articles by university researchers declaring that “a global regulatory crackdown on proof-of-work mining is needed,” but also on the preliminary steps taken by governments (including the U.S. government) to regulate cryptocurrency energy consumption and carbon emissions.
However, it is highly speculative that Ethereum’s move will have the final effect of forcing a similar change on Bitcoin. This could potentially happen, especially if coupled with regulatory and government moves that make PoW unwelcome in most major nations, and would no doubt make encryption even greener than it will be now after the merger. However, given how protective most Bitcoin supporters and maximalists are of proof of work, it seems unlikely at the moment.
On the other hand, what is more likely is that the growing pressure on Bitcoin will encourage its miners to lean more on renewable energy as an energy source. This process is already underway in recent years, with the latest and most authoritative study on energy use in Bitcoin mining – the University of Cambridge’s Global Cryptoasset Benchmarking Study – showing that 76% of Bitcoin miners used renewable energy (to varying degrees) as part of their energy mix in 2020. compared to 56% in 2019.
The latest version of this study found that 39% of all bitcoin mining is powered by green energy, so there’s definitely room for improvement here. That said, the most recent data from the (admittedly interested) Bitcoin Mining Council revealed that this had risen to 58.5% by Q4 2021. But with Ethereum’s embrace of proof-of-stake putting additional pressure on Bitcoin, this percentage could increase further in the coming years, adding to the narrative that crypto is fueling investment in renewable energy sources.
The merger could shift the sentiment surrounding cryptography
At the end of the day Ethereum’s transition to PoS is a big win for Ethereum and the broader cryptocurrency industry. By changing public attitudes towards cryptocurrencies, it will potentially encourage more people to engage with the space.
This is suggested by perceptions of NFT, Web3 and metaverse. When these first gained prominence in 2021, they were greeted by a wave of negativity surrounding their potential environmental impact, as most NFT and Web3/metaverse platforms were running on Ethereum.
Just look at the pieces published in 2021 in major venues such as Wired, The New York Times, The Verge, Time, CBS, The Independent, The Guardian and CNN, which have desperately desperated at the expense of NFTs in terms of energy consumption and carbon emissions. Given that Ethereum – and its second-tier solutions – account for about 63% of the entire crypto ecosystem in terms of total locked value, such criticisms will no longer be valid. Not least when the other 37% is mostly covered by rival platforms (e.g. Avalanche, Tron and Solana) that were already proof-of-stake.
While the effect will not be immediate, it is already evident that a change in attitudes and perceptions has already begun. The mainstream media will become less critical of cryptocurrencies and more favorable over time, and the result of this is that more individuals and companies may feel inclined to get into crypto in one way or another.
That climate concerns have discouraged involvement in cryptocurrencies is evidenced in a small number of surveys that have been conducted on the subject to date. For example, an October 2021 poll conducted in the UK by YouGov found that Britons supported banning cryptocurrency to combat climate change, with a majority of 43% versus 18%.
This shows that climate concerns have impacted cryptocurrency investments among the general public, while it has undoubtedly been a concern for institutional investors. This is because ESG (environmental, social and governance) investments have become increasingly common in recent years, meaning that many corporate and institutional investors who follow ESG guidelines (and this is most of them) have likely been turned away from Bitcoin (and Ethereum) by the environmental impact of PoW. According to a November 2021 EY survey, about 74% of institutional investors reported that they will divest from companies that fail on ESG measures.
Similarly, the
European Central Bank published a report in July this year warning that “the operation of some crypto-assets (such as bitcoin) uses a disproportionate amount of energy that clashes with public and private environmental policies and environmental, social and governance (ESG) objectives.”
In other words, PoW has arguably been an obstacle to more institutional investment in Ethereum in the recent past. This is no longer the case, with institutional investors having already increased their investments in Ethereum in the weeks leading up to the merger.
According to an August report by CoinShares, institutions piled into Ethereum at a time when they were leaving bitcoin, with the cryptocurrency enjoying seven weeks of consecutive inflows (totaling $159 million at the time). Of course, bitcoin remains the largest cryptocurrency in terms of associated assets managed by institutions, but this recent difference in fortunes over the past couple of months points to a very different future.
As some Ethereum proponents have been suggesting for a while, the merger could help accomplish the much-heralded “flippening,” whereby Ethereum becomes a larger cryptocurrency than bitcoin in terms of market cap and other metrics. If this were to happen, it would potentially improve the public image of cryptography even more, to the extent that the largest coin in space would be much greener than the previous largest one.
Ethereum’s place in history
It’s worth pointing out that what Ethereum achieved with the merger is more or less unprecedented in history. This may sound like an overly grandiose statement, but it’s rare for a large platform — accounting for $35.26 billion in total value (with a record high of over $110 billion) — to see itself back to the point where its energy consumption drops by a staggering 99%.
Obviously, the specific nature of blockchain technology – and the alternative approach offered by proof-of-stake consensus – makes such a drastic reduction more manageable, but it still looks impressive when compared to other green-ification attempts in other parts of the world. To take perhaps the crudest example, global carbon emissions continue to break new records every year (with the unsurprising exception of 2020), despite the scientific consensus surrounding global warming and the public wave of support to take some kind of meaningful action.
Looking at specific nations, many advanced economies have set themselves the task of becoming “carbon neutral” by 2050, but still remain far from achieving this goal. The UK will not meet its target of reducing its CO2 emissions by 57% (compared to 1990 levels) by 2030, with the country needing another 32% reduction before the end of this decade, although the government only expects a 10% reduction.
Many large companies have also set net-zero emissions targets by the end of this decade (e.g. Apple, Microsoft), while some have already achieved that goal (e.g. Facebook, Salesforce). Regardless, they won’t reduce their total energy consumption by 99%, something that makes Ethereum’s result even more impressive and singular (although other coins are already PoS).
The Ethereum merger is such an important event in environmental terms that it will not only pressure Bitcoin to use more renewable energy (and possibly contemplate its own consensus change mechanism), but could also put pressure on other areas of the economy in the years to come. This includes the global banking system, which according to a 2021 report by Galaxy Digital, consumes about 263.72 TWh of electricity per year. That’s more than double Bitcoin’s consumption and more than triple Ethereum’s pre-Merge energy consumption.
The interesting point here is that, by using proof-of-stake, Ethereum could ultimately help put pressure on the financial sector (and other industries) to adopt more efficient technologies.
This includes blockchains such as Ethereum. In this regard, it is significant to note that an IMF report published in April concluded that “DeFi has the potential to offer financial services with even greater efficiency […] DeFi has the lowest marginal cost compared to incumbents in both advanced and emerging market economies. indicating maximum cost efficiency”.
And given that Ethereum is the largest platform for DeFi apps, it seems that its historic move towards proof-of-stake lays a very important foundation for the further infiltration of crypto into the mainstream. Yes, the Merge is just the beginning of a long process to make Ethereum more scalable and efficient. However, it is probably the most important step of all, as it demonstrates that major improvements can and should be made to a large blockchain platform.
