The second largest cryptocurrency, Ethereum, plans to change the functioning of its “blockchain” 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) or other depend. cryptoassets.
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 “blockchain”, a decentralized ledger.
Network actors prove their participation by “mining”, a mechanism called “Proof of Work” or PoW: “they are trying to guess a random number” and are rewarded in Bitcoins, says Blockchain Research Lab researcher Lennart Ante.
With cryptocurrencies taking off – despite a year-to-date dip, the whole industry is still worth $1 trillion – the business is becoming lucrative, and is done from warehouses full of servers across the world. 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 “environmentally destructive, costly, and inefficient”says Eswar Prasad of Cornell University.
Ethereum is different from Bitcoin: its blockchain 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 pushes certain 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 cut Ethereum’s electricity consumption by 99%, Ante estimates: “there is no infrastructure left, just software”he explains.
Also, this process could increase the speed of transactions.
“The Proof of Stake isn’t perfect either”observes Mr. Prasad: “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 governance issue, with a small number of users placing large bets to change 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 $1,650 per Ether for a capitalization of more than $200 billion, Ethereum represents nearly 20% of the cryptocurrency market, which is still half as much as Bitcoin.