As ‘the Merge’ draws near, Ethereum takes one big step towards going green

SOMETIME on Thursday (Sep 15), an event dubbed “the Merge” will address one of the biggest impediments to the cryptocurrency revolution – energy wastage.

A change in how Ethereum, the world’s second largest cryptocurrency, is minted could, by some estimates, reduce power usage on the network by as much as 99.5 per cent.

“This is a big moment for the cryptoverse,” said Edward Moya, a senior market analyst at foreign-exchange brokerage Oanda Group. “It could really rejuvenate this battered sector.”

Anticipation of the event is so high among the cultish cryptocurrency crowd that Google has even introduced a countdown clock that pops up whenever anyone searches the term “the Merge”. According to the clock, the transformation is set to happen early on Thursday in the United States.

If the change is successful, “you might see some more exciting initiatives that could spark the next wave of investment,” said Moya.

The designers of Ethereum, including high-profile co-founder Vitaly Buterin, have long promised to migrate to another, more energy-efficient protocol, known as “proof of stake”.

In late 2020, the developers took the first concrete steps in that direction, with the launch of a new version of the second largest cryptocurrency, called the “Beacon Chain”, as a laboratory for the new approach. The blockchain is the inviolable ledger that underpins the cryptocurrency by providing a permanent record of the movement of all money.

Bugs in the Beacon caused successive delays. Now, the Ethereum community is finally confident that the Beacon chain can run as smoothly as the existing blockchain.

The Beacon will be grafted onto the main Ethereum blockchain, its rules becoming the new rules for the whole currency. In the physical money realm, the equivalent might be introducing a new form of banknote and instantaneously taking all the old notes out of circulation.

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Crypto’s energy problem derives from “mining”, which is also known as “proof of work”. Miners receive newly minted Bitcoin as a reward for solving increasingly complex formulae. The solution to these formulae provide the link between the new blocks of transactions and the “blockchain”, the immovable ledger that records all transactions.

To hunt down that link, the miners require armies of supercomputers, effectively spitting out random numbers until one of them sticks. These supercomputers work so hard that the sound of a Bitcoin mine is similar to many fans blaring on all sides.

Mining was initially celebrated as one of the most ingenious innovations of the entire Bitcoin system, and was mimicked by Ethereum and other cryptos that followed.

That, however, was before today’s energy crisis, with most people now describing the electricity wastage as obscene. Many are wondering how a digital monetary system conceived by a small fringe group ended up being one of the biggest users of power in the world. With electricity prices hitting records worldwide, mining is also becoming increasingly expensive.

In 2021, the miners – some of whom, like Riot Blockchain, have grown so large that they are publicly-traded companies – consumed about the same amount of power as major industrial nations such as Chile and Sweden.

In the new proof-of-stake model, an existing owner of the cryptocurrency pledges some of their holdings back to the system. These Ethereum owners cannot sell or otherwise trade this stake until the transaction they are supporting is completed. Instead of having to compete to validate the next block of transactions, as miners do, a group of these volunteers is randomly selected. Their holdings provide enough cryptographic information to validate the new transaction.

This spells bad news for at least one cottage industry: Bitcoin miners. At a stroke, at least 10 per cent of all mining activity will be wiped away. It could also weigh on the sales of graphic chips, one of the prime drivers of growth in the semiconductor industry.

“The migration of Ethereum to proof-of-stake will result in obsolescence of multiple billions of dollars of mining capacity, which will result in a large increase of secondary supply,” said analysts at brokerage Morgan Stanley, in a note to clients.

A successful Merge could put pressure on Bitcoin developers to follow suit. Tesla founder Elon Musk is among many influential figures who have publicly chastised Bitcoin for its energy wastage. Ethereum’s energy efficiency could well help it grow larger in market cap over time, and possibly end up stealing Bitcoin’s crown in the long run.