Ethereum, the world’s second-largest cryptocurrency after bitcoin, will soon overhaul its blockchain technology to curb the network’s much-criticized environmental impact.
Ethereum’s digital unit ether, which plummeted in a cryptocurrency crash earlier this year, is set to undergo a major technological revolution in September.
So what’s the background to the looming reset (called a merger)? How will it flatten prices and reduce electricity usage?
Bitcoin, Ethereum and other such currencies are “mined” by solving complex puzzles using powerful computers that consume large amounts of energy in huge warehouses, often close to cheap sources of electricity.
A blockchain is a decentralized and secure ledger used to record these transactions, which occur when encrypted code is passed through a computer network.
Users verify their success through a so-called “proof-of-work” mechanism, which rewards them with network currency — but only after they demonstrate their participation in this energy-intensive mining.
Despite collapsing in the first half of 2022, the lucrative crypto industry is worth around $1 trillion.
However, Ethereum is still down 55% in value so far this year.
Nonetheless, Ethereum is considered vital as it is the place where most virtual assets are bought and sold, including the high profile non-fungible tokens (NFTs).
That’s partly because users can create “smart contracts,” or algorithmic computer code, to execute custom transactions for different functions.
“The Ethereum blockchain is the base layer infrastructure for much of the entire crypto ecosystem,” concludes Lennart Ante, CEO and co-founder of Blockchain Research Labs.
“Everything depends on Ethereum,” he told AFP.
“There have been other platforms like Solana or Cadano over the past few years, but none have had such a large network, such a large number of developers and projects, and historical success.”
The widespread adoption of ethereum has made addressing environmental concerns and changing strategies even more important, as those concerns sparked some resistance.
“Proof-of-work mining is environmentally damaging, expensive and inefficient,” concluded Eswar Prasad, a Cornell University professor and digital currency expert.
However, the carbon footprint of a decentralized blockchain system is difficult to assess because it is not always possible to determine the source of electricity.
Ethereum creator Vitalik Buterin plans to switch to a so-called “proof-of-stake” mechanism starting in mid-September.
This means that participation no longer requires proof of electricity usage, but instead relies on staking blocks of ether.
Users will then verify or effectively wager their currency in an attempt to win more ether.
Ethereum currently consumes about 45 terawatt-hours of electricity per year.
By comparison, Bitcoin uses an estimated 95 terawatt-hours of electricity per year, equivalent to the annual consumption of Pakistan.
Experts estimate that the upgrade will reduce energy consumption by 99 percent over the current setup.
Therefore, it will allow users to perform faster and more efficient transactions.
“Energy consumption will be close to zero,” Ant told AFP.
“You don’t need any hardware anymore, just software.”
At the same time, the new approach is not without risks.
Some users may decide to switch to a rival network, where they can still mine the currency with a lot of energy.
Prasad also warned that proof-of-stake methods are “not perfect” due to liquidity and governance issues.
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