Ethereum attempts a risky mutation to green the cryptocurrency

Ethereum plans to change the operation of its “block chain” in mid-September to drastically reduce its energy consumption. (Photo: 123RF)

London — The second largest cryptocurrency, Ethereum, plans to change the functioning of its “block chain” in mid-September to drastically reduce its energy consumption, a revolution for the network on which a large part of the NFTs (non-fungible digital tokens) depend. or other crypto-assets.

How could this technical change that allowed Ethereum to stem the plunge in cryptocurrency prices, could cause demand for electricity to plummet, and why is it controversial?

Why do cryptocurrencies consume so much?

Bitcoin, the first of the cryptocurrencies, was imagined in 2008, in the wake of the financial crisis, to be able to do without banks.

To validate transactions, Bitcoin goes through a “block chain”, a decentralized ledger.

Network actors prove their participation by “mining”, a mechanism called “Proof of Work” or PoW: “they try to guess a random number” and are rewarded in bitcoins, explains Lennart Ante, researcher of the blockchain Research Lab .

With cryptocurrencies taking off—despite a year-to-date dip, the entire industry is still worth US$1 trillion—the business is becoming lucrative, and is done from warehouses full of servers across the world, often near sources of inexpensive electricity.

Bitcoin’s electricity balance: around 95 terawatt hours (TWh) per year, according to an index from the University of Cambridge, almost equivalent to the annual consumption of Pakistan. According to the figures cited by the creators of Ethereum, the second cryptocurrency consumes around 45 TWh per year.

Why Ethereum wants to change?

With a decentralized system, it is difficult to assess the carbon footprint of the different blockchains since the sources of electricity are not always identified, but this mode of operation is “destructive for the environment, expensive, and inefficient”, says Eswar Prasad of Cornell University.

Ethereum is different from Bitcoin: its block chain makes it possible to validate transactions in ether, its cryptocurrency, but also to issue “smart contracts”, that is to say lines of code.

This allows certain “stablecoins”, these cryptocurrencies pegged to the dollar, to use the Ethereum blockchain, like a large part of the issuers of NFTs, these digital tokens which represent, for example, works of art.

Apart from Bitcoin, “everything is based on Ethereum” in the world of cryptocurrencies, summarizes Mr. Ante: “there are other similar platforms, but none with so many projects and developers”.

However, the carbon footprint of the blockchain is pushing some artists and industrialists to boycott it.

The creator of Ethereum Vitalik Buterin and his community therefore defend an evolution of the cryptocurrency towards a system of Proof of Stake (PoS or Proof of stake): participation in the network is no longer proven by the use of electricity, but by placing an Ether bet.

Advantages and disadvantages?

Eliminating “blockchain miners” could reduce Ethereum’s electricity consumption by “99%,” Ante believes: “there is no infrastructure left, just software,” he says. -he.

Also, this process could increase the speed of transactions.

“The Proof of Stake isn’t perfect either,” Mr. Prasad observes: “Liquidity in the market is reduced as some users prefer to use their assets as a stake rather than sell them.”

But above all, “there could be a problem of governance, with a small number of users who would deposit large bets to modify the rules to their advantage”, he warns.

What steps to take?

Ethereum transition started since December 2020, with trial blockchains. This is why market participants speak of “The Merge”: the Ethereum mainnet should be incorporated into the test version on September 15th.

Such an update, which requires decentralized users to keep pace without stopping transactions, is not without risk: some observers compare the exercise to that of replacing a diesel engine with an electric motor on a vehicle in walking.

Investors, in any case, have so far welcomed the project: the price of Ether is resisting the shock that is shaking the cryptocurrency market better than that of Bitcoin.

At US$1,650 per Ether for a capitalization of more than US$200 billion, Ethereum represents nearly 20% of the cryptocurrency market, which is still half as much as Bitcoin.

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