Amid the constant hype around cryptocurrencies, it is often difficult to decide what really matters. But this month, if all goes as planned, the power-hungry digital sector will undergo its biggest change in years.
Ethereum, the world’s second largest cryptocurrency, is expected to initiate a technical change that, once completed, is supposed to reduce carbon emissions by 99%.
The rapid growth of cryptocurrencies in recent years has been astounding. Unfortunately, their contribution was also to climate change, given 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 each year than medium-sized countries like Argentina. If the Ethereum switch is successful, Bitcoin and other cryptocurrencies will be under tremendous pressure to deal with this issue.
Why are cryptocurrencies so polluted?
Cryptocurrencies are digital currency systems in which people make direct online payments to each other.
Unlike traditional currencies, cryptocurrencies are not managed from a single place like a central bank. Instead, it is managed by a “blockchain”: a global, decentralized network of high-powered computers. These computers are known as “miners”.
The RBA gives this simple explanation of how it all works (edited for brevity):
Suppose Alice wants to convert 1 unit of cryptocurrency to Bob. Alice begins the transaction by sending an email with her instructions to the network, where all users can see the message.
The transaction occurs with a group of other recent transactions that are waiting to be aggregated into a block (or group) of the most recent transactions. The information from the block is converted into a cryptographic token and miners compete to solve the code to add a new block of transactions to the blockchain.
Once the miner successfully resolves the token, other users of the network examine the solution and come to an agreement 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.” A central design feature is the use of calculations that require a lot of computer time – and huge amounts of electricity – to perform.
Bitcoin alone consumes about 150 TWh of electricity each year. Producing this energy results in about 65 million tons of carbon dioxide into the atmosphere annually – roughly the same emissions as Greece.
Research indicates that Bitcoin last year generated emissions responsible for about 19,000 deaths in the future.
The proof-of-work approach intentionally wastes energy. The data in the blockchain has no inherent meaning. Its sole purpose is to register difficult, but useless accounts, which provide a basis for allocating new digital currencies.
Cryptocurrency advocates have made a variety of excuses for their brutal energy consumption, but no one stands up to scrutiny.
Some, for example, seek to justify the carbon footprint of cryptocurrencies by saying that some miners use renewable energy. This may be true, but by doing so, they can displace other potential energy users – and some of them will have to use coal or gas-fired energy.
But now, Bitcoin’s most successful competitor, Ethereum, is changing course. This month, it promises to transform its computing technology into something much less polluting.
What is the switch about
The Ethereum project includes ditching the Proof of Work model for a new one called Proof of Stake.
Under this model, crypto transactions are validated by users, who share large amounts of blockchain tokens (in this case, Ethereum coins) as collateral. If users act dishonestly, they lose their share.
More importantly, it will mean that the vast network of supercomputers currently used to verify transactions will no longer be required, because the users themselves do the checking – a relatively easy task. Getting rid of the “miners” on the computer will lead to an estimated 99% reduction in the electricity usage of Ethereum.
Some smaller cryptocurrencies – such as Ada, which is traded on the Cardano platform – are using “proof of stake” but have been limited to margins so far.
Over the past year, Ethereum has been running the new model on experimental blockchains. But this month, the model will be integrated into the main platform.
There is no hiding place for cryptocurrency
So what does all this mean? An experiment with Ethereum could fail – if some stakeholders, for example, find ways to manipulate the system. But if this switch is successful, Bitcoin and other cryptocurrencies will be pressured to abandon the Proof of Work model or shut down.
This pressure has already begun. Tesla founder Elon Musk announced last year that his company would no longer accept Bitcoin payments for its electric cars, due to the currency’s carbon footprint.
The New York state legislature in June passed a bill to ban some bitcoin operations that use carbon-based energy. (However, the decision requires exit from the New York governor and may be dismissed.)
And in March of this year, the European Parliament voted on a motion to ban the Proof of Work form. The proposal was rejected. But as Europe approaches the colder months, grappling with an energy crisis stemming from sanctions on Russian gas supplies, energy-intensive cryptocurrencies will remain in the firing line.
One thing is clear: as the need to cut global emissions is more pressing than ever, cryptocurrencies will run out of excuses for their terrible energy use.
John Quiggin, Professor at the School of Economics, University of Queensland
This article has been republished from The Conversation under a Creative Commons license. Read the original article.
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