WHY THIS MATTERS IN BRIEF
Crypto mining is now using more energy than many countries and it’s unsustainable so Ethereum has move to POS to reduce energy use in a move that might also help DeFi establish itself.
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Ethereum, the second largest cryptocurrency, which this year could see transactions exceed $8 Trillion, has completed a plan to reduce its carbon emissions by more than 99% as it follows in the footsteps of Chia which touted itself a while ago as the world’s first “green” cryptocurrency. The software upgrade, known simply as “The Merge”, will change how transactions are managed on the ethereum blockchain, a public and decentralised ledger that underpins the cryptocurrency and generates ether tokens, the world’s most popular cryptocurrency after bitcoin.
Vitalik Buterin, ethereum’s inventor, announced the completion of the plan on Twitter on Thursday morning, tweeting “Happy merge all.”
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The move means that ethereum will no longer be created by an energy intensive process known as “mining”, where banks of computers generate random numbers that validate transactions on the blockchain and generate new ether tokens as part of the process. The process, known as “proof of work” in the cryptocurrency world, will now move to a “proof of stake” system, where individuals and companies act as validators, pledging or “staking” their own ether as a form of guarantee, to win newly created tokens.
Ethereum mining used up as much electricity as Austria, according to the Digiconomist website, at 72 terawatt-hours a year. Alex de Vries, the economist behind the website, estimates that the merge will reduce the carbon emissions linked to ethereum by more than 99%.
De Vries added that the move could represent 0.2% of the world’s electricity consumption disappearing overnight. However, he said bitcoin remained the biggest single contributor to the crypto world’s carbon footprint.
“All eyes will be on bitcoin. It remains the largest polluter in the crypto space. Even today bitcoin is responsible for as much electricity consumption as Sweden. And we know that’s not going to change,” said De Vries.
Ethereum rose 2% to $1,630 (£1,417) after the move, according to website Coinmarketcap, valuing the currency at just under $200bn. Bitcoin’s market cap is worth $387bn, having fallen sharply from its peak of more than $1tn last year.
Carol Alexander, professor of finance at University of Sussex Business School, said the merge was a significant event for the crypto industry.
“The merge is the most important event in blockchain history,” she said. “In my opinion, today marks the beginning of the end of bitcoin’s dominance over crypto assets. Ethereum is achieving something that bitcoin never could because bitcoin is a purely speculative asset and its mining network would never agree to drop that source of income.”
Alexander added that the ethereum blockchain is a key feature of the Web 3.0 world – a catch-all term for the latest iteration of the internet – including its role as a base for Non-Fungible Tokens (NFT).
“It powers the smart contract transactions on Ethereum that underpin web3 and therefore the digital economy today,” she added.