(London) The second largest cryptocurrency, Ethereum, plans to change the functioning of its “blockchain” in mid-September to reduce its energy consumption, a revolution for the network on which a large part of the NFTs (non-fungible digital tokens) or d other cryptoassets.
Posted at 1:22 p.m.
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 register.
Network players 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 at the Blockchain Research Lab.
With cryptocurrencies taking off – despite a dip since the start of the year, the whole industry is still worth $1 trillion – the business is becoming lucrative, and is done from warehouses full of servers around the world , often near cheap electricity sources.
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 does Ethereum want 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 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 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 ?
By eliminating “blockchain miners”, we could reduce Ethereum’s electricity consumption by “99%”, estimates Mr. Ante: “there is no infrastructure left, just software”, explains- he.
Also, this process could increase the speed of transactions.
“The Proof of Stake isn’t perfect either,” observes 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 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 players 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 market capitalization of over US$200 billion (just over $260 billion), Ethereum accounts for almost 20% of the cryptocurrency market, which is still half as much as Bitcoin. .