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Cryptocurrency Industry energy consumption: how the merge will affect it

Sep 15, 2022

           It is not a secret to the public eye the quantity of energy the cryptocurrency industry uses. According to the Cambridge Center for Alternative Finance, only the Bitcoin blockchain uses roughly 100 Terawatts per hour annually, which is roughly equivalent to the amount Washington State uses annually (this state holds 7.5 million persons according to a 2020 census), or the whole country of Poland. Energy consumption in this scale produces a huge amount of carbon dioxide as a consequence, although it depends on the way the energy is being produced (coal-powered energy creates a much higher amount of carbon emissions than those produced by hydro-energy. Nevertheless, it still is quite a lot of energy for a sole industry to consume, let alone only one brand of blockchain, but why is that?

The reason is tightly linked to the existence of cryptocurrencies themselves, the purpose of them: decentralized digital currency. For this to exist, the cryptocurrency’s transactions have to be verified by computers in order to make them visible and unrepeatable. These transactions happen in the blockchain, all of them being encrypted one by one into in blocks until each block reaches its capacity and is attached to the previous block. The way a computer verifies them is by using algorithms, which require a certain amount of computational effort, and that computer effort uses electricity as its fuel.

There are currently two algorithms that verify blockchain transactions: Proof of Work (PoW) and Proof of Stake (PoS), differing in the way they choose and qualify their users to add transactions, as well as the amount of electric energy they require.

Ethereum’s Merge

          As it is known by the cryptocurrency community, Ethereum is going through a huge change in its platform and blockchain system: they will switch from a Proof-of-Work validation system to a Proof-of-Stake, by merging their current PoW blockchain with the younger PoS Beacon Chain. The latter is not a full blockchain system but only a layer of it, which was launched back in 2020 as the first step for this change and leaving the PoW system behind forever.

The currently estimated amount of energy they consume is that of 80 Terawatts per hour annually, comparable to the whole Republic of Chile's annual electricity consumption. It is 20 terawatts less than Bitcoin but still a very considerable amount, much more when you sum them up and realize how much energy only these two main blockchain systems consume.

According to them, this merge will lower their energy consumption by 99.5%, thus making it much more sustainable and leaving behind the huge electricity usage and carbon dioxide emissions created as a result.

But how is that possible? As Ethereum itself has stated, this change would be like being in a spaceship in the middle of an astronomic trip and deciding to change its motor in the middle of the flight. It is certainly difficult, plus, how do we know it will actually lower the amount of energy it consumes? The answer is the difference between Proof-of-Work and Proof-of-Stake systems.

Proof of Work & Proof of Stake

          The PoW algorithm functions by sending complex problems for computers to solve, using a trial and error method, and once they’re solved the computer gets the authority to add new blocks to the blockchain for transactions. Unfortunately, the reason this process consumes a lot of energy is that the computers have to compete with each other —trying and trying to be the first to solve the problem sent by the algorithm— in order to gain the right to validate the transactions, being that the first of them is the “winner” and earns coins as a reward. The intense use of energy is what impulses the miner not to verify illicit transactions since it would be a loss of expensive resources.

On the other hand, the PoS algorithm validates transactions by asking for a high quantity of the cryptocurrency it is validating upfront in order to become part of the network, locking them in a smart contract on the blockchain —thus “staking” them. It does not rely on energy consumption and computer effort to compete for the validation of a block, and instead randomly selects a participant to validate the transaction, earning a fee of the cryptocurrency in exchange. The method of securing is that once a validator submits fraudulent data or transactions they would be punished by “burning” all of their stakes, by sending it to an unusable wallet that nobody has access to. Its downside is that those who can afford to stake the most amount of cryptocurrency have the most probability of being selected by the algorithm, and those who have less or can not afford the amount of cryptocurrency they’re being asked to stake as an initial can not become part of the network or will earn much less.

So, which one is better?

          In both instances, there is an investment to make anyways, either by investing in specialized equipment that uses a high amount of energy —which will reflect in the electricity bill— or by locking up a significant amount of cryptocurrency in a network upfront. This leads us to our main point, when it’s the moment for a person who wants to invest in either mining or staking to decide, they can choose a path in which the consumption of energy and equipment is the area of investment and which collateral effect is the contribution of carbon dioxide emissions, thus worsening the climate crisis we’re already facing, or instead invest their cryptocurrency in a much less harmful for the environment and direct way.

The merge that Ethereum is facing will totally lower the amount of energy consumption the cryptocurrency industry uses since it is —along with Bitcoin— one of the top cryptocurrencies in terms of energy consumption, and the overall market as well. PoS has existed since 2012 so there’s not much of a revolution in the field per se, but this change will certainly have a big and noticeable impact in the cryptocurrency sphere, prompting other technologies into considering PoS as a new alternative, impacting the very own wide range of tools and services that operate in the Ethereum blockchain, plus the slow stabilization of cryptocurrencies after the crash at the beginning of the year will totally be aided by this.

Karliana Medina