Amidst the constant buzz surrounding cryptocurrencies, it can often be difficult to pick out what really matters. However, this month, if all goes according to plan, the energy-intensive digital sector will experience its biggest shakeup in years.
Ethereum, the second largest cryptocurrency in the world, is coming tomorrow is expected to initiate a technology transition that, when completed, should result in carbon emissions a drop of 99 percent.
The explosive growth of cryptocurrencies in recent years has been staggering.
Unfortunately, this was also their contribution climate changedue to the huge 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 annually than average-sized countries such as Argentina.
If the move to Ethereum succeeds, Bitcoin and other cryptocurrencies will be under enormous pressure to cope.
Cryptocurrencies are digital currency systems where people make direct online payments to each other.
Unlike traditional currencies, cryptocurrencies are not managed from a single location, such as a central bank. Instead, they are driven by ” blockchain‘: a decentralized global network of powerful computers. These computers are known as “miners”.
Reserve Bank of Australia provides here’s a simple explanation of how it all works (edited for brevity):
Suppose Alice wants to transfer one unit of cryptocurrency to Bob. Alice initiates a transaction by sending an email with her instructions to the network, where all users can see the message.
A transaction sits with a group of other recent transactions waiting to be compiled into a block (or group) of the most recent transactions.
The information from the block is turned into a cryptographic code, and miners compete to solve the code to add a new block of transactions to the blockchain.
After a miner successfully solves a code, other users on the network check the solution and reach agreement that it is valid. A new transaction block is added to the end of the blockchain and Alice’s transaction is confirmed.
This process, which is used by most cryptocurrencies, is called “proof-of-work mining”. The main feature of the design is the use of calculations that require a lot of computer time – and a huge amount of electricity – to perform.
Bitcoin alone consumes around 150 terawatt hours of electricity every year. The production of this energy emits about 65 million tons of carbon dioxide into the atmosphere every year – about the same as Greece.
Studies estimates that bitcoin last year led to emissions that caused about 19,000 deaths in the future.
The proof-of-work approach deliberately wastes energy. Data in the blockchain has no intrinsic value. Its sole purpose is to record the complex but meaningless calculations that provide the basis for the placement of new cryptocurrencies.
Cryptocurrency proponents make many excuses for the appalling power consumption, but none stand up to scrutiny.
Some, for example, try to justify the carbon footprint of the cryptocurrency by saying that some miners use renewable energy sources. That may be true, but they still can to displace other potential energy consumers – some of them will have to use coal or gas energy.
But now Bitcoin’s most successful competitor, Ethereum, is changing course. This month, it promises to switch its computing technology to something far less polluting.
What is a switch
The Ethereum project involves abandoning the “proof of work” model for a new model called “proof of stake”.
Under this model, crypto transactions are confirmed by users who stake a significant amount of blockchain tokens (in this case, Ethereum coins) as collateral. If users act dishonestly, they lose their share.
Importantly, this will mean that the vast network of supercomputers currently used to verify transactions will no longer be needed, as users will do the verification themselves – a relatively easy task. The elimination of computer “miners” will cause Ethereum’s electricity usage to drop by 99 percent.
Some smaller cryptocurrencies – such as the Ada coin traded on the Cardano platform – use proof-of-stake, but to date it has been limited by margins.
Last year Ethereum was running a new model on experimental blockchains. But this month, the model will be integrated into the main platform.
There is no place for cryptocurrency to hide
So what does it all mean?
The Ethereum experiment could fail – if, say, some interested parties find ways to manipulate the system.
But if the transition does succeed, Bitcoin and other cryptocurrencies will be under pressure to abandon the proof-of-work model or go out of business.
This pressure has already begun. Founder of Tesla Elon Musk last year announced his company will no longer accept bitcoin payments for its electric cars because of the currency’s carbon footprint.
New York State Legislature in June passed the bill ban some bitcoin transactions that use carbon energy. (However, the decision would require the signature of New York’s governor and could be vetoed.)
And in March of this year, the European Parliament voted for a proposal to ban the proof-of-work model. There was an offer defeated.
But as Europe heads into cooler months and struggles with an energy crisis caused by Russian gas sanctions, energy-guzzling cryptocurrencies will remain in the firing line.
One thing is clear: as the need to reduce global emissions becomes more pressing, cryptocurrencies will run out of excuses for their outrageous energy use.
John Quigginprofessor of the School of Economics, University of Queensland
This article was originally published Conversation. To read original article.
