Ethereum to reduce emissions as cryptos face climate scrutiny

·Senior City Correspondent, Yahoo Finance UK
·4-min read
Ethereum cryptocurrency logo is displayed on a mobile phone screen photographed for illustration photo. Krakow, Poland on May 12, 2021.  (Photo by Beata Zawrzel/NurPhoto via Getty Images)
Developers who work on ethereum's underlying infrastructure said in a blog post this week that the cryptocurrency would be transitioning to a new method of recording and validating transactions that will reduce carbon emissions by an estimated 99.95%. Photo: Beata Zawrzel/NurPhoto via Getty Images

Ethereum (ETH-USD), the world's second biggest cryptocurrency, is set to get a software upgrade that will drastically reduce its carbon footprint.

Developers who work on ethereum's underlying infrastructure said in a blog post this week that the cryptocurrency would be transitioning to a new method of recording and validating transactions that will reduce carbon emissions by an estimated 99.95%.

The planned overhaul comes amid growing scrutiny of the environmental impact of cryptocurrencies. Last week Tesla (TSLA) boss Elon Musk said his business was abandoning plans to accept bitcoin as payment, citing environmental concerns.

Read more: How bad is bitcoin for the environment?

In a blog post this week, the Ethereum Foundation — a non-profit that works to maintain the network underpinning the digital asset — said it would soon shift ethereum to a new infrastructure that would "end the process of expending a country’s worth of energy on consensus."

Developers plan to shift ethereum from a "proof of work" system to a "proof of stake" system. 

Watch: What are the risks of investing in cryptocurrency?

Under a proof of work system, computers around the world complete cryptographic maths equations to validate and secure transactions on the network. Solving these equations uses up huge amounts of electricity in the form of computing power. The vast power required stops one individual or group from being able to target the network and overpower it, theoretically allowing an entity to write in transactions sending themselves cryptocurrency. 

Under a proof of stake system, participants in the network simply have to prove they hold ethereum to contribute to its underlying operations. Computers "stake" their ethereum and in return can validate and secure transactions on the network. A majority of participants in the network must validate transactions for them to go through, which acts as a check against fraud.

Carl Beekhuizen, a developer at the Ethereum Foundation, said in a blog that while there was no "concrete statistics on energy consumption" for ethereum, his "ballpark" estimates suggested the change in the infrastructure would reduce its energy usage by around 99.95%. 

Read more: Bitcoin, ethereum and the blockchain technology behind decentralised finance

"A Proof-of-Stake Ethereum therefore consumes something on the order of 2.62 megawatt," Beekhuizen wrote. "This is not on the scale of countries, provinces, or even cities, but that of a small town (around 2,100 American homes).

"For reference, Proof-of-Work (PoW) consensus on Ethereum currently consumes the energy equivalent of a medium-sized country."

Analysts at Bank of America said in March that ethereum was estimated to be using the same amount of energy each year as Cuba.

Beekhuizen said a proof of stake system would mean energy usage is uncorrelated with price. Under the current system, ethereum's energy usage rises and falls in line with its price.

The planned transition comes as cryptocurrencies face heightened scrutiny of their environmental impact. Elon Musk was forced to abandon plans for Tesla to accept bitcoin (BTC-USD) as payment, following a backlash linked to the cryptocurrency's environmental impact. 

Bitcoin also uses a proof of work model. Its underlying network uses more energy per year than Ukraine. Analysts at Bank of America said earlier this year that investors had to "pay attention to the enormous environmental costs of Bitcoin".

Read more: Tesla's bitcoin investment has carbon footprint of 1.8 million cars

Beekhuizen said ethereum's new infrastructure means each transaction should use the same amount of electricity as "about 20 minutes of TV."

"By contrast, Ethereum PoW uses the equivalent energy of a house for 2.8 days per transaction and Bitcoin consumes 38 house-days worth," he wrote.

The changes will have major implications for the environmental impact of the broader cryptocurrency space. Ethereum is used as the infrastructure for many other cryptocurrency projects and so-called "decentralized finance" applications.

Shifting ethereum from proof of work to proof of stake has been planned for years but the plan has been beset by political and technical problems. Beekhuizen said the infrastructure was now up and running and being tested. The foundation hopes to complete the shift in the "upcoming months".

Bank of America analysts said earlier this year that the shift to proof of stake "could reduce Ether's carbon footprint" but warned it would "increase both the social and governance risks of this crypto-currency."

News of the looming shift came as ethereum and other cryptocurrencies crashed to the lowest point in months. A broad sell-off hit the market on Wednesday, wiping out billions. Ethereum dropped as much as 40% on the day before recovering on Thursday.

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