Amidst the ongoing noise about cryptocurrencies, it is often difficult to choose what really matters. This month, however, if all goes according to plan, the power-hungry digital sector will undergo its biggest shake-up in years.
Ethereum, the world’s second largest cryptocurrency, is expected to begin a technology change tomorrow that, once completed, should see its carbon emissions plummet by 99%.
The rapid growth of cryptocurrencies in recent years has been staggering. Unfortunately, it has also been its contribution to climate change, due to the enormous amount of electricity used by the computers that manage the buying and selling of cryptocurrencies.
Take, for example, the world’s largest cryptocurrency, Bitcoin. At a time when the world is desperately trying to reduce energy consumption, Bitcoin uses more energy each year than mid-sized nations like Argentina. If the Ethereum switch is successful, Bitcoin and other cryptocurrencies will be under immense pressure to deal with this issue.
Kin Cheung/AAP
Why are cryptocurrencies so polluting?
Cryptocurrencies are digital currency systems where people make direct online payments to each other.
Unlike traditional currencies, cryptocurrencies are not managed from one place, such as a central bank. Instead, they are managed by a “blockchain”: a decentralized global network of high-powered computers. These computers are known as “miners”.
The Reserve Bank of Australia provides this simple explanation of how it all works (edited for brevity):
Suppose Alice wants to transfer a unit of cryptocurrency to Bob. Alice initiates the transaction by sending an electronic message containing her instructions to the network, where all users can see the message.
The transaction meets a group of other recent transactions waiting to be compiled into a block (or group) of the most recent transactions. The information in the block is converted into a cryptographic code, and miners compete to solve the code and add the new transaction block to the blockchain.
Once a miner successfully solves the code, other network users verify the solution and agree that it is valid. The new transaction block is added to the end of the blockchain and Alice’s transaction is confirmed.
This process, used by most cryptocurrencies, is called “proof-of-work mining.” The central feature of the design is the use of calculations that require a lot of computer time and large amounts of electricity to perform.
Bitcoin alone consumes about 150 terawatt-hours of electricity each year. Producing that energy emits about 65 million tons of carbon dioxide into the atmosphere annually, about the same emissions as Greece.
Research suggests that Bitcoin last year produced emissions responsible for around 19,000 future deaths.
Author provided
The proof-of-work approach intentionally wastes energy. The data on a blockchain has no inherent meaning. Its sole purpose is to record difficult but meaningless calculations that provide a basis for allocating new cryptocurrencies.
Cryptocurrency proponents have offered a variety of excuses for monstrous power consumption, but none stand up to scrutiny.
Some, for example, seek to justify the carbon footprint of cryptocurrencies by saying that some miners use renewable energy. That may be true, but in doing so they may displace other potential energy users, some of whom will have to use coal or gas-based power.
But now the most successful of Bitcoin’s rivals, Ethereum, is changing course. This month he promises to switch his computer technology to something far less polluting.
Read more: Ethereum: The transformation that could see it overtake bitcoin
Michael Probst/AP
what is the switch about
The Ethereum project involves abandoning the “proof of work” model for a new one called “proof of stake”.
Under this model, crypto transactions are validated by users, who stake substantial amounts of blockchain tokens (in this case, Ethereum coins) as collateral. If users act dishonestly, they lose their participation.
Importantly, it will mean that the vast network of supercomputers currently used to verify transactions will no longer be needed, because users themselves are doing the verification, a relatively easy task. The removal of computer “miners” will lead to an estimated 99% drop in Ethereum’s electricity usage.
Some smaller cryptocurrencies, such as the Ada coin traded on the Cardano platform, use “proof of stake” but this has been limited to margins to date.
For the past year, Ethereum has been running the new model on experimental blockchains. But this month, the model will merge with the main platform.
Lui Xingzhe/EPA
There is no place for cryptocurrencies to hide
So what does all this mean? The Ethereum experiment could fail if, for example, some interested parties find ways to manipulate the system. But if the switch is successful, Bitcoin and other cryptocurrencies will be under pressure to abandon the proof-of-work model or shut down.
This pressure has already started. Last year, Tesla founder Elon Musk announced that his company would no longer accept Bitcoin payment for its electric cars, due to the currency’s carbon footprint.
The New York state legislature passed a bill in June to ban some Bitcoin operations that use carbon-based energy. (However, the decision requires the New York Governor’s signature and can be vetoed.)
And in March this year, the European Parliament voted on a proposal to ban the proof-of-work model. The proposal was defeated. But as Europe heads into the colder months and grapples with an energy crisis triggered by sanctions on Russian gas supplies, energy-hungry cryptocurrencies will continue to be in the line of fire.
One thing is clear: as the need to reduce global emissions becomes ever more pressing, cryptocurrencies will run out of excuses for their egregious energy use.
Read More: Tesla’s Bitcoin Turnaround Is a Warning to Climate-Ignoring Cryptocurrencies
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