A huge shift is about to be underway for the second-most widely circulated cryptocurrency that could drastically reduce the amount of energy it uses.
In a move that’s been dubbed “The Merge,” Ethereum is set to change the way it validates its transactions, from a “proof-of-work” system to a “proof-of-stake” system, which the Ethereum team says will reduce energy consumption by 99.95 per cent.
Currently, the amount of energy that Ethereum uses is about 112 terawatt hours annually. To put that into perspective, that’s more electricity than what the entire country of Pakistan uses in a year.
Here’s how the cryptocurrency plans to go green:
DITCHING PROOF-OF-WORK
Cryptocurrencies like Ethereum are all decentralized, which means that the ledger, or the records of transactions, is stored on multiple computers in a network.
Currently, Ethereum relies on a proof-of-work system to validate the transactions and update the ledger. This means that each transaction requires advanced computers to solve an extremely complex mathematical equation in order to add it to the ledger, in a process called “mining.”
When a new transaction comes in, all of the computers on the network solve try to solve the math equation, and whichever computer solves it first is rewarded with some currency as a payment.
But this has incentivized Ethereum “miners” to invest in large numbers of more powerful and energy-intensive computer hardware in order to give them a better chance of making money through mining.
Miners are also pooling their hardware together in what are known as “mining pools.” Much like an office lottery pool can give you a higher chance of winning the grand prize, mining pools operate on the same principle, splitting their profits among their members.
But just three mining pools make up more than half of the computing power on the Ethereum network, leading to concerns that the cryptocurrency is becoming too centralized. If a single mining pool were to gain control of more than 50 per cent of the computing power on the network, they could effectively take over the currency and have the ability to approve fake transactions. This is what’s known as the “51 per cent attack.”
HELLO PROOF-OF-STAKE
Cryptocurrencies like Ethereum have been the target of criticism from environmentalists, who point to the high levels of energy consumption. But after the Merge, Ethereum will transition towards a proof-of-stake system, which is expected to use only 0.05 per cent of the energy the cryptocurrency currently uses.
The current system relies on having millions of high-powered computers trying to solve the same math equations at the same time, and proponents of proof-of-stake say this is an enormous waste of energy.
Under a proof-of-stake system, only one computer is selected to validate the transaction. In order to participate as a validator, a user needs to deposit or “stake” 32 ETH. If the transaction is successfully validated, the validator will receive the transaction fees as a reward.
While it may seem riskier to rely on just one validator, the system does have safeguards. The validations are verified by other computers on the network, and if a validator approves a fraudulent transaction, the validator loses a part of their stake.
Theoretically, a 51 per cent attack can still occur if one entity buys up more than half of all the Ethereum supply, but this is highly impractical as doing so would cost nearly US$100 billion.
The Merge is set to take effect at around 1 a.m. EDT early Thursday morning. It’s unclear what long-term effect the Merge could have on the price of Ethereum. As of Wednesday evening, the cryptocurrency was up around 4.00 per cent since the start of the day.