The story so far: September 15 is an important day for crypto trackers as it marked the day the Ethereum blockchain fully transitioned to a new way of processing transactions. Ethereum’s Merge event, as it is known, could change the nature of crypto and Web3 itself. Developers say the transition to what is called a ‘proof-of-stake’ consensus mechanism will cut Ethereum’s energy consumption by 99.95%.
Ethereum is one of the most used platforms by developers to build decentralised apps (dApps), smart contracts, and even crypto tokens. The platform’s currency, Ether is only second to Bitcoin in terms of market capitalisation. The change in the way Ethereum builds the blockchain comes with not just environmental consequences, but also major cyber and financial security implications.
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What is the importance of the new consensus mechanism?
Decentralised transactions are processed on blockchains using consensus mechanisms. Ethereum’s former method, ‘proof-of-work’, which is also used by Bitcoin, needs powerful mining hardware that consumes a lot of electricity and generates enormous amounts of heat to solve extremely difficult mathematical puzzles. The solution would let new transactions be added to the blockchain - and reward the miners with crypto.
Many environmentalists, policy makers, and regulators have strongly criticised the impact of Bitcoin mining on local communities. Common centres for mining included China (before a near total crypto ban), the U.S.A, Russia, and Kazakhstan - countries with cheap electricity rates and colder climates. Ethereum’s website admitted that the crypto’s total annualised power consumption nearly matches that of Finland while its carbon footprint is comparable to Switzerland. For some time, European countries even mulled a crypto mining ban, while China actually carried out a nationwide crackdown on crypto miners, sending them fleeing overseas.
Ethereum decided to switch to a ‘proof-of-stake’ consensus mechanism, where Ether owners will stake their own coins in order to serve as collateral and help process new blockchain transactions, in return for rewards. Crypto experts are divided as to which consensus mechanism offers better protection from hackers. Theoretically, there are ways to hack both verification methods. But Ethereum claims the proof-of-stake consensus mechanism offers better security.
Will Bitcoin switch to a proof-of-stake consensus mechanism?
Highly unlikely! To understand why, we need to look at how Bitcoin and Ethereum are different, in spite of both dominating the crypto space. Satoshi Nakamoto, the pseudonymous creator of Bitcoin, authored a white paper in the late 2000s that explicitly stresses on the importance of the “proof-of-work” mechanism to secure the blockchain. No one knows who Nakamoto is or whether it is a person or an organisation till date.
The paper insists that it’s essential for honest actors to control a majority of CPU power to keep transactions safe from illicit actors. Bitcoin has been praised by decentralisation advocates for its non-interfering founder (or founders) and largely unregulated structure.
Ethereum, on the other hand, was co-founded by Vitalik Buterin, who has an active presence on Twitter. He has also attended various international crypto events. The blockchain is backed by a powerful non-profit organisation to support its activities - the Ethereum Foundation.
Switching to a proof-of-stake consensus mechanism would violate the principles of decentralisation outlined in the Bitcoin white paper. It would also represent losses in the millions of dollars for individual miners and companies trying to solve the puzzles that would reward them with BTC.
Some Bitcoin supporters go so far as to say that miners’ activities, though harmful to the environment now, will help bring about an energy revolution and the faster adoption of solar, wind, gas, and nuclear energy. However, consequences of crypto mining across the globe have included mass electricity blackouts, fire accidents, overburdened grids, struggles between locals and crypto miners for more control over the energy supply, and even crypto mining on indigenous land.
But from now, miners will no longer produce valid blocks for the Ethereum blockchain. In the coming days, the Ethereum community and the media will be tracking how former Ether miners cope with the transition.
Which other cryptocurrencies are changing to proof-of-stake now?
For now, no other top coin is planning an Ethereum-style Merge. After Bitcoin, Dogecoin [DOGE] is the largest proof-of-work based cryptocurrency. It was initially created as a joke by its founders. After that comes Ethereum Classic [ETC], formerly part of Ethereum before a community schism. Ethereum Classic has made it clear that it is loyal to proof-of-work. It invited miners to mine ETC and said stakers are free to choose ETH2.
“May both chains co-exist in their own right providing options for stakers and miners,” Ethereum Classic tweeted on Thursday.
Traders are also watching the markets and charts to see if other proof-of-work coins experience a price lift from new investors who don’t want to support a proof-of-stake Ethereum.
