how crypto may be about to change for the (slightly) better
Crypto is bad for the planet. It consumes enormous amounts of energy to create virtual tokens being used to find new ways to insert microtransactions into everyday browsing, create Ponzi schemes promoted by influencers, or resurrect the gold standard as a protest against modern central banking. How much? About 250 terawatt hours per year. If there was an entire nation which only mined crypto, it would consume as much electricity as all of Indonesia. And much of that energy comes from fossil fuels, despite the industry’s insistence to the contrary.
But why does crypto demand so much energy? Because to verify the transactions in the large, distributed ledger known as the blockchain, which underpins the entire technology, miners will need to perform intensive calculations to verify the relevant block. The idea is that the more of the blockchain you want to verify, the more computing power you’ll need, so unless you could summon 51% of the global computing power invested in a cryptocurrency, you won’t be able to hijack the blockchain while validating it. This approach is known as proof of work.
Crypto enthusiasts swear by proof of work as the only way to make sure transactions on the blockchain are safe and reliable, and hiss like vampires doused in garlic-laced holy water if you mention the other potential approach to validation of digital tokens: proof of stake. Using this technique, those who run nodes put up their own coins as a sort of collateral. If they validate blocks of transactions correctly, they’re rewarded with a few coins, just like the proof of work miners. But should they fail at their jobs or try to falsify blocks, they’ll lose everything.
Think of it as doing math problems where a mistake empties your bank account. You’ll be very motivated to get your numbers right in the end if you want that account to have anything left, much less be worth anything meaningful. But you could, conceptually, pull off a similar attack like the one intended to overwhelm proof of work. Manage to bet 51% of the total assets of a coin, and you could falsify its blockchain. Well, at least until the custodians of the coin discover your manipulation and strip you of all your digital assets as punishment.
From a practical standpoint, the security offered by proof of work and proof of stake are more or less the same. And since proof of stake also allows for parallel processing of the blockchain, since there is no longer any intense computation required to verify blocks, and reduces energy consumption of the coin by more than 99%, Ethereum switched to proof of stake on September 14th in an event called The Merge. Miners are, understandably, upset about the loss of profits, but the rest of us are likely better off for this switchover.
While crypto markets weren’t taking their orthodoxies being challenged well at first, Ethereum is back to its pre-Merge values, and the conversation about the potential of proof of stake over proof of work is now back in the crypto mainstream after years of being dismissed as an insane notion that needed to be stamped out before it could take root. Requiring far less energy and processing far more transactions faster, with far lower fees, proof of stake blockchains could well be crypto’s path to widespread acceptance and mainstream adoption.
Now, the big question is whether Bitcoin will follow suit. Perhaps the biggest problem there is that large swaths of the crypto community are vehemently opposed to anything that implies a centralized authority of any sort looking after the wellbeing of a currency. But at the same time, its key players are dealing with the fact that centralization seems inevitable for just about every modern currency to function, and that validation by brute force of GPUs isn’t enough to ensure independence from regulators, and also poses problems for adequate throughput.
Ethereum’s overseers seem to understand that the winds are changing, and a new approach is necessary if crypto wants both good PR and technical scalability. It’s actually admirable that the Ethereum Foundation went ahead with what looked like a difficult but correct decision despite years of resistance to it from crypto stalwarts. It still remains to be seen if its new trajectory will yield the expected benefits, but this is a genuinely new and exciting development in the crypto universe, and one that will be worth keeping an eye on in the near future.