Zining Chen
Ethereum blockchain, the world’s second-largest cryptocurrency, finished The Merge update on September 15th, 2022. This transition, or merge, from the proof-of-work chain to the proof-of-stake chain is where the upgrade got its name. Early in December 2020, the Ethereum development team had already started testing the proof-of-stake method on a parallel chain to the main proof-of-work chain, the Beacon chain. After being tested using the exact same transactions that occurred on the main chain for 1.5 years, the Beacon chain merged with the original execution later of Ethereum with its new proof-of-stake consensus layer in the upgrade, giving birth to Ethereum 2.0. Considerable benefits from this transition are decreased energy consumption in mining Ethereum and increased deinitialization within the network.
Cryptocurrency contributing to global warming?
Mining bitcoins is a very energy-consuming process. The proof-of-work consensus mechanism requires miners to run computers to solve complex hash problems (similar to a math puzzle), costing computational power. The proof-of-work system incentivizes high computational power: the more computational power, the faster your computer does the math, and the more likely you are able to mine the block and be rewarded with cryptocurrency. This led to the creation of mining farms, warehouses full of CPUs, ASICs (Application Specific Integrated Circuit) power supplies, and cooling fans.
Picture of mining farms
A single Bitcoin transaction is estimated to burn 2,292.5 kilowatt hours of electricity, enough to power a typical US household for over 78 days. As cryptocurrency users increase, expanding the blockchain network, the Bitcoin blockchain alone currently uses 204.5 TWh, equivalent to 204.5 trillion watts of electricity per year, comparable to the power consumption of Thailand. The White House Office of Science and Technology has even suggested that cryptocurrency mining operations can hinder the country’s ability to mitigate climate change, by contributing to greenhouse gasses: it is estimated that the electricity consumption of the U.S. cryptocurrency mining industry was responsible for an excess of 27.4 million tons of carbon dioxide (CO2) between mid-2021 and 2022 — or three times as much as emitted by the largest coal plant in the U.S. in 2021. The non-eco-friendly aspect of crypto has become an increasingly pressing issue as it popularizes, and criticisms concerning it have only increased.
Bitcoin energy consumption compared to other countries.
Decreasing in decentralization
The increase in mining pools threatens to decentralize the crypto network. Considering the high prices that come with CPUs and other mining equipment, miners joined together to create mining pools, where they would combine their computational resources to strengthen the probability of successfully mining for cryptocurrency. However, as miners come together in large numbers, the concept of decentralization weakens. Under the proof-of-work system, you can imagine each CPU having one vote. The chain that has the majority of votes (has the most proof-of-work/mining effort invested in it) will become the longest chain, out-competing the other chains. Thus, establishing a valid, or honest, transaction chain. Under the One-CPU-one-vote system, CPUs are assumed to be independent of each other. However, in cases of mining pools, CPUs within a large group are interdependent and will have many votes. Currently, the three largest mining pools, Foundry USA, AntPool, and F2Pool, each own 24.1%, 18.53%, and 19.93% hash rate shares ("votes") consecutively. If the three decide to merge, they will have 62.56% Hash rate shares, well over 50%. Then, they will become the majority and have the power to validate fraudulent transactions (known as the "51% Attack"), decreasing the decentralization of cryptocurrency.
Percentage of hash rate shares owned by different mining pools as of October 2nd, 2022
The Merge Solves it All: Proof of Work vs. Proof of Stake
The original proof-of-work consensus model that verifies valid transactions only allows one miner to succeed out of the competition against millions of other miners to solve the next block. Thus, the energy and computational power of all the other miners have, in a sense, become "wasted": a major reason why the cryptocurrency is so energy consuming. The proof-of-stake method differs in that instead of requiring miners to compete against each other, it randomly chooses one person for such a task. This chosen person becomes the validator (rather than miner) and will mint/forge (rather than mine) the next block. To assure the validator will approve valid transactions, a stake is put in beforehand by the validator and acts as collateral. If the validator approves a fraudulent transaction, the stake will be lost as a punishment. Since only one person is using computational power, compared to the millions before, The Merge upgrade to the proof-of-stake method is estimated to reduce Ethereum’s energy consumption by ~99.5%.
The decentralization of Ethereum is also enhanced by The Merge. The randomization method of picking a single validator breaks up mining pools, decreasing the risk of the "51% attack". Moreover, since miners are not competing against each other using computation power, the system becomes more decentralized as the hardware requirements lower, allowing more people to get involved in the validation process and creating a more diverse client pool.
The Macro Picture
For crypto asset holders, there are no material changes, no actions have to be taken. The Merge sets the groundwork for increased speed in transactions and lowers fees, which in the future will lead to an increased user base. The upgrade was an innovative shift that not only disproved high energy consumption intrinsic to blockchain technology but also added an ESG component to Ethereum, aligning with the worldwide emphasis on sustainability. The action that Ethereum has chosen to take sets itself as an advantage compared to Bitcoin, the largest market capital for cryptocurrency, pushing the crypto world for more innovative adaptations. Unlike most software updates, to date, there are no bugs or hacker attacks on the upgrade. However, The Merge is a continuous operation, and we cannot yet conclude whether the proof-of-work consensus can achieve its set goals before we see it operate through time.
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