Will Ethereum’s merge finally solve the crypto industry’s emissions problem?
(Picture: Getty Images)The world’s second-biggest blockchain, Ethereum, announced on Thursday it completed a key update in its technology, known as the “merge”, which will reduce its energy consumption by 99% and pave the way for cheaper crypto transactions.
While this technical change is unlikely to affect the average crypto holder or NFT owner, it will slash Ethereum’s emissions, as multiple miners won’t have to compete at the same time to operate the blockchain. Instead, one operator will be chosen at random to carry out the work based on how many tokens they have staked.
But experts question just how much greener the crypto industry will be, as some of the most popular blockchains, including Bitcoin, will not move a proof-of-stake model.
They also said the merge will have wide-ranging effects on the crypto industry, from opening the door to more applications leveraging the now-greener Ethereum to a potential effect on its promise of decentralisation.
What is the Ethereum merge?
It’s a big update on how Ethereum’s cryptocurrency is created, or “mined”. The blockchain went from a “proof-of-work” mining system to a “proof-of-stake” one.
Blockchains rely on miners to validate each new block of transactions. As a reward for that work, they receive cryptocurrency like Bitcoin or ether.
Miners in proof-of-work systems, like Bitcoin’s, use huge amounts of computing power to compete to solve cryptographic puzzles. Whoever solves the puzzles first, gets to mine the cryptocurrency.
Proof-of-stake, on the other hand, means that operators will deposit, or “stake”, ether tokens into a pool. An operator is then randomly selected from that pool to carry out the work, eliminating the race to solve the puzzles and thus dramatically decreasing energy consumption.
Will Ethereum become greener with this update?
Ethereum’s energy consumption is projected to drop from 8.5GW to 85MW, or more than 99%. For comparison, one megawatt of electricity can power two refrigerators for a year.
NFTs are likely to become greener too, as they largely rely on the Ethereum blockchain. A single NFT transaction used to consume 48kW under the proof-of-work system, or as much as an American household’s energy consumption for a day.
Crypto enthusiasts say the merge finally addresses one of crypto’s biggest problems: its carbon footprint. Estimates say that mining Bitcoin requires as much energy as that used by Argentina.
Ether, as Ethereum’s cryptocurrency is called, was estimated to eat up as much energy as Switzerland, and emit as much carbon dioxide as Denmark or Chile.
But Marc Taverner, advisor to blockchain companies and founding CEO of blockchain trade association INATBA, said that while Ethereum itself will be greener, it’s unclear what will happen to the miners now left with expensive computing equipment.
“There might be an economic incentive for some of the owners of those rigs and data centres, to point that computing power at other chains that still have a proof-of-work element to them,” said Taverner.
What does the merge mean for crypto and NFT holders?
Not much, and that’s good news. If the update goes through without a hitch, ether holders and NFT owners will not feel that anything has changed.
However, new opportunities to earn crypto might open up, said Taverner. That’s because users can now stake ether and get rewarded to the tune of 5-8% on average.
The requirement to become a node operator and earn money from staking is set by the Ethereum Foundation at 35 eth, or £45,000. But eth holders could join staking pools that group together tokens from multiple people to make the minimum threshold, and distribute profits accordingly.
And unlike Bitcoin, which is used as a digital currency, Ethereum has become the bedrock of many applications designed for Web3, often dubbed the next iteration of the internet. This includes the majority of NFTs, as well as metaverse worlds like Decentraland and even certain video games.
Its greener credentials could therefore make blockchain applications “more palatable” to a wider audience, said Taverner.
It is also possible that the notoriously expensive Ethereum gas fees will get cheaper in the future, following this update. However, the merge is designed to make transactions more energy efficient, and nothing more. “The merge is not an expansion of network capacity, and will not result in lower gas fees,” the Ethereum foundation said.
Will Ethereum become less decentralised?
Blockchain applications are built around the concept of decentralisation, which distributes ownership and rewards across multiple entities, instead of concentrating them in the hands of a handful of players. Google and Meta, for example, control large swathes of our current internet space.
With the merge, there is concern that Ethereum will become more “pay-to-play”, and more susceptible to censorship. That’s because a proof-of-stake model leaves the door open for governments to potentially influence blockchains through companies, like crypto exchanges, that are likely to have lots of tokens staked.
“[This creates] quite a large commercial sensitivity to the friction that governments might cause for them if they don’t cooperate,” said Taverner.
Will the price of ether go up?
Maybe. Bank of America predicted last week that the merge is likely to usher in a crowd of institutional investors, such as banks and investment funds, who can now buy up ether without having to worry about its emissions.
This means more competition to purchase ether tokens, which is likely to drive prices upwards.
After the merge, operators are also set to receive smaller ether rewards as they validate blocks. This will keep the supply of ether low in the market and could contribute to a rise in prices.
However, prices of cryptocurrencies tend to swing widely and often are based on pure speculation rather than financial grounding. In the run-up to the merge, ether has risen 75% since its low point in June, even as the wider crypto industry still reeled from the recent crash.
Whether the update will help revive a battered crypto industry remains to be seen, but for now, it will at least be a greener one...
