Cryptocurrency systems like Bitcoin and Ethereum consume huge amounts of electricity because they rely on an energy-intensive backup process. At least now the Ethereum community dares to switch to an environmentally friendly system. However, “The Merge” is risky.
“Super Crash”, “Crypto Winter”, “Billions in Value Destroyed”: The current headlines about the cryptocurrency industry this year are spreading bad sentiment among investors.
But not only the falling prices of Bitcoin and Ether, the currency of the Ethereum blockchain, are causing headaches. In light of the impending climate disaster and the general energy shortage, politicians and environmental activists are increasingly questioning the enormous power requirement for the maintenance of the two main cryptosystems.
Electricity demand must be reduced by 99.95 percent
At least for Ethereum, however, a drastic ecological turnaround is within reach. Expected to begin on Tuesday (September 6), the final phase of The Merge transition process, which aims to reduce the power requirements of the Ethereum blockchain by 99.95 percent. This is made possible by replacing the so-called consensus finding system, which for example prevents a crypto coin from being used more than once. “The Merge” would be the biggest upgrade of a blockchain in the crypto world to date.
The Ethereum blockchain is a publicly visible database that stores and verifies information and transactions in a cryptographically secure manner. Ether is the cryptocurrency exchanged on the Ethereum blockchain. It is second in the crypto world behind Bitcoin in terms of total value.
Unlike the Bitcoin blockchain, not only virtual values can be stored and transmitted with Ethereum. In 2013, Ethereum inventor Vitalik Buterin wanted to create a system that would enable more complex forms of exchange, such as borrowing and lending cryptocurrency. But Ethereum also forms the technical backbone for the exchange of digital collectibles known as non-fungible tokens (NFT).
High energy consumption due to “Proof of Work” process
Bitcoin and Ethereum face the challenge of validating transactions on the blockchain in a tamper-proof manner. So far, the “Proof of Work” method has been used with these systems. Complicated cryptographic puzzles must be solved. Whoever solves the puzzle first can write the next record in the blockchain and receives a reward in the form of ether or bitcoin. This process is also called “mining” because it “digs” new crypto coins.
In mining, many players compete with each other, but only one wins in the end. This is the real reason why this process uses so much electricity. According to estimates by crypto expert Alex de Vries, the Ethereum blockchain alone has consumed as much electricity as Austria.
Buterin had already considered in 2014 whether it would not be better to switch to the “Proof of Stake” process (PoS), which uses much less power. Crypto investors deposit a certain number of digital coins to participate in a kind of lottery. Each time a transaction needs to be validated, a participant (“staker”) is selected from the draw pool to confirm the exchange and receive new coins as a reward.
In the crypto scene, the swing is not without controversy. Bitcoin advocates in particular consider “Proof of Stake” to be unfair because ultimately only owners of large coin holdings would benefit from the procedure. Among the PoS critics, however, there are also a particularly large number of “miners” who have invested large sums of money in their data centers to mine Bitcoin and Ether. You have vested interests in rejecting a change.
Conversion is a major technical challenge
However, some experts also fear that the complex transition could fail technically. “The conversion of the Ethereum blockchain is a major technological challenge and can be compared to the conversion of a diesel car to an electric motor while driving,” says Peter Grosskopf, co-founder of Solarisbank.
Berlin entrepreneur Grosskopf expects that the successful implementation of the mammoth project will have a positive effect on the entire industry. “The conversion results in radical energy savings.” This makes the second largest blockchain more attractive to investors who choose their investments based on sustainability criteria (ESG). “More than that, financial transactions can now be processed globally with minimal energy consumption on Ethereum technology.” It could become a driver for further savings as it replaces thousands of bank data centers.
However, “The Merge” will not solve two important problems. On the one hand, there are always large delays in the validation of transactions because the system’s capacities cannot keep up with the onslaught. This is related to the second problem: the high network utilization with many transactions keeps driving the transaction fees (“gas fees”) to staggering heights. In the case of a number of digital art auctions, for example, it led to execution fees being much higher than the price of the NFT itself. “The Merge” will neither clear up the traffic jams nor lower the high “gas fees”. This should be reserved for further updates, which should take place in 2023.
Ether trading must be temporarily suspended
For investors who already own Ether coins, “The Merge” will not change much at first. However, Ether trading, deposits and withdrawals will be suspended for a few hours during the transition as a safety measure on platforms such as Coinbase or Bison.
Since it is not yet clear whether the Ethereum community will fully join the switch, it could get confusing in the days to come. It is conceivable that some PoS deniers do not want to switch and part with the official Ethereum blockchain. The Bison exchange platform from the Stuttgart stock exchange is already warning its customers about possible fraudsters who take advantage of the situation and, for example, offer coins for sale that do not even exist. (dpa)