The world’s second-largest cryptocurrency, Ethereum, last week changed the fundamental architecture that governs how it secures its blockchain – an unprecedented demonstration of established crypto platforms’ ability to evolve to changing conditions.
The event, known as “The Merge,” lasted for five years. A few hours after midnight on Thursday, Ethereum switched its blockchain from a configuration called “Proof of Work” – which is also used by Bitcoin – to one called “Proof of Stake”. Matt Nelson, a product manager at Ethereum research and development firm ConsenSys, compared it to changing the engine in a car as it drives down the street.
The switch to the new blockchain style will reduce Ethereum’s energy consumption by 99.95 percent, according to the Ethereum Foundation. That’s significant in an industry so energy-intensive that the White House warned this month that crypto’s growth could make it harder for the US to meet its climate goals. And Ethereum’s good news comes at a difficult time for crypto in general, as major cryptocurrency prices fall, a major crypto lender collapses, and calls for regulation mount.
“As the most widely used smart contract platform in the community, we wanted to be an inspiration to signal stakeholders, regulators and users that we’re ready to change,” said Nelson, who helped coordinate the move. “We are willing to work together as a community to create a technically extremely complex upgrade.”
Ethereum’s transformation shows that the decentralized crypto universe can adapt as it grows. The blockchain concept underlying crypto platforms like Ethereum is based on the idea that once an entry is made, it cannot be changed – which proponents say is transparent and fair. But the merger shows that such an architecture can still successfully undergo major changes, even with millions of user data at stake (and a $180 million market cap). Call it a crypto coming of age.
Proof of Work versus Proof of Stake
That doesn’t mean the merge is without its detractors. A persistent criticism is that Ethereum’s new architecture consolidates control of the currency among a relatively small number of major players.
Before the switch, users could mine Ethereum using math. Under the old proof-of-work blockchain system, computers would attempt to solve complex math problems and log their work—verifying batches of transactions—onto the blockchain. The first machine to solve a given problem is rewarded with Ether (ETH). This process is called “mining” and requires a lot of electricity.
Ethereum’s new blockchain architecture, Proof of Stake, replaces this computational work with purely economic interests. A “staker” or person who uses ETH to use the network locks their funds for a set period of time and gets one vote in return.
Staking a full node requires 32 ETH, or about $45,000. People can pool their coins to fund a node and even stake a percentage of a single ETH. These pools, known as liquidity pools, are offered by a variety of platforms and companies such as: B. the largest cryptocurrency exchange in the USA, Coinbase.
In fact, Coinbase, Binance, and Kraken, some of the largest cryptocurrency exchanges in the world, own 30 percent stakes in the network. And Lido, a community staking collective of 183,975 players, controls over 30 percent. Critics of Proof of Stake fear it will devolve voting control to a handful of key players, contrary to the decentralized ethos of cryptocurrencies. For many people, their original appeal was that there was no central authority that could control them.
“I see a lot of people cheering [proof of stake] as a way to reduce emissions that it makes ETH greener,” said Colin Harper, head of research and content at cryptocurrency mining software and services company Luxor. “These recordings never admit why [proof of work] exists at all, and that is to ensure the censorship resistance and permissionless nature that makes a blockchain valuable to operate or even use. [Proof of stake] Proponents ignore this and say you can have these guarantees without the energy costs, but I don’t think that’s true. There is no free lunch.”
Broader implications
Others say that the environmental benefits of fusion cannot be overstated. The shift reduced the energy consumption associated with mining Ethereum.
“You have this pervasive mentality in many different fields that blockchain is an industry that is negative from a climate and environmental perspective,” said Nick Hotz, vice president of research at Arca, a digital asset management company.
Some estimates put the annual energy consumption from mining another major cryptocurrency, Bitcoin, equals the needs of the entire Argentine country. Other supporters of the merger say it’s important because it shows the flexibility within the growing sector. Mark Lurie, the CEO of Shipyard Software, which develops apps and tools for decentralized finance, said that any technological diversity will make cryptocurrencies more flexible.
“Different technology tradeoffs work best for different use cases,” said Lurie. “I find [proof of work] is probably better for digital gold, like bitcoin, though [proof of stake] is probably better for distributed computing platforms like Ethereum. There are a variety of use cases, and many require different technical trade-offs in terms of scalability, speed, security, and many other dimensions.”
James Key, CEO and founder of the Autonomy Network, a decentralized automation protocol, also sees this as a major benefit for the industry.
“It’s a very optimistic sign that the space can evolve and adapt, even at the size of a chain like Ethereum — people have been concerned about this aspect of crypto as Bitcoin hasn’t been able to,” Key said.
This is just the first of more major upgrades for Ethereum. But Nelson said if another consensus mechanism better than proof of stake emerges in the future, he could see the community deciding to change again. And now they know it’s possible.
“The only constant in life is change itself, so as long as the community can come together and adapt, the technology platform can theoretically last forever,” Lurie said.
Thanks to Lillian Barkley for editing this article.
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