In a few weeks, Ethereum is set to undergo the most significant change in its seven-year history. Until now, the Ethereum blockchain was secured using a method called “proof of work”, which consumes more electricity than the whole of Belgium. Next month’s move to a new method called “proof-of-stake” is expected to reduce Ethereum’s power consumption by a factor of 1,000.
The stakes are high. A botched transition could spell chaos for the many crypto projects built on top of Ethereum. A smooth transition would be the culmination of years of careful planning by leading Ethereum developers. Over the past year, the developers have repeatedly pushed back the “merger” date to give themselves more time to prepare. They completed a final dress rehearsal on August 10, paving the way for making the change in mid-September.
The most immediate consequence of a successful merger will be to put the world’s Ethereum miners out of work. Over the past seven years, thousands of people have bought high-end graphics cards to help maintain the Ethereum blockchain and earn newly minted Ether in the process. The new Ethereum blockchain update system doesn’t require the same kind of beefy hardware, or the huge electricity bill that comes with it. Thus, the price of used graphics cards could keep falling as Ethereum miners leave the industry.
But the move to proof-of-stake is more than just a power-saving measure, it’s a major overhaul of the Ethereum network. Ethereum founder Vitalik Buterin believes that the merger will lay the groundwork for a series of future upgrades that will allow the network to handle a much larger volume of transactions in the years to come. But critics fear the new system will make the Ethereum network too centralized and therefore vulnerable to government regulation.
From proof of work to proof of stake
At a high level of abstraction, this is how any blockchain works: Someone on the network offers a block containing a list of recent transactions. Then, other network participants verify that the block follows the network rules. If enough other network participants accept the block, it becomes the next “official” block in the chain. As long as most participants in the network are honest, users can be sure that transactions accepted by the majority of the network will not be removed or modified later.
The big challenge for any blockchain project is to prevent a malicious party from creating many puppet accounts to “stuff the ballot boxes”, outvoting honest participants and thus falsifying past transactions. The big idea of pseudonymous Bitcoin founder Satoshi Nakamoto – the one who made bitcoin possible – was that this problem could be solved using the “one hash, one vote” principle. On the bitcoin network, the one with the most computing power, especially the ability to calculate SHA-256 hashes– has the most influence over the blocks added to the blockchain. As long as honest miners have more hashing power than malicious miners, users can be confident in the integrity of the blockchain, and therefore the integrity of payments made using the bitcoin network. (Check out our detailed explanation of bitcoin for details on how this works.)
When Vitalik Buterin launched Ethereum in 2015, he used a variation of Nakamoto’s scheme. At that time, bitcoin mining was already dominated by specialized silicon optimized to calculate a large number of SHA-256 hashes, excluding ordinary bitcoiners from the mining game. So Buterin developed a new mining algorithm designed to be “hard memory” – and therefore difficult to speed up with custom hardware. As a result, Ethereum mining is still largely done using standard graphics cards, allowing ordinary Ethereum users to participate.
But the economy of the two networks is fundamentally similar. As the values of bitcoin and ether have risen, it has become profitable for people to spend more and more money on mining hardware – and electricity – to generate new coins. While this has made the networks safer, it also means that both networks consume astronomical amounts of electricity and therefore generate more and more carbon emissions.
The Bitcoin and Ethereum communities reacted to this issue very differently. Satoshi Nakamoto disappeared from public view in 2011. In his absence, bitcoin culture has become increasingly conservative. Lots of bitcoins to oppose categorically changing Bitcoin’s mining system, fearing that changes would open the door to centralization and ultimate government control. As a result, bitcoin is unlikely to move away from proof of work in the foreseeable future.