This year has been one of the toughest on record when it comes to energy supply and prices. With the hangover of Covid-19 plus the war in Ukraine, the world right now is in the middle of an energy crisis. Add to this the fact that global warming demands that we use less energy as a planet overall, and the news that Ethereum was cutting its energy usage is welcome indeed. We take a look at how the cryptocurrency has done this, and the expected impacts of this move.

Photograph: Stock

While cryptocurrencies have taken the world by storm in the last decade as the future of financial transactions, there is one enormous elephant in the room when it comes to the model’s sustainability. Cryptocurrencies simply use an exorbitant amount of energy.

Last year, the world’s second-largest cryptocurrency, Ethereum, used the equivalent amount of energy as the entire nation of Chile — 78 terawatt hours. In a time when energy prices are through the roof and the need for us to use less is urgent, this is a huge issue. However, Ethereum will no longer be consuming such a large amount of energy. News this quarter is that the cryptocurrency will be slashing 99% of its energy consumption — as much as all of Hong Kong uses in a year — thanks to a shift in its approach.

Regardless of your interest in the digital world, or physical environment, this is a major moment in the history of cryptocurrency. Is Ethereum modeling the new norm here?

Photograph: Stock

Shift From Proof of Work to Proof of Stake Behind Reduction in Energy Consumption

This big shift by Ethereum, known as the merge, is something of an unknown quantity.

To date, Ethereum and other major cryptocurrencies have used what is known as a proof-of-work approach to their transactions. This has required significant amounts of energy because it operates through a large number of machines guessing code in order to win cryptocurrency and transaction fees. This process of crypto-mining has been very lucrative for some, however, as more players enter the market, it becomes less and less efficient. Check out CryptoMeister’s Ethereum guide to understand more of the history behind this shift.

Now, however, Ethereum is moving to a proof-of-stake approach. This involves some holders of Ethereum staking a certain amount of their cryptocurrency, and then this determines who gets to do the work of validating transactions. This will drastically reduce the number of machines operating in the space while maintaining the network’s integrity given that players have staked their own coins against the transactions they’re validating.

Why Ethereum’s Shift Could Be Rendered Pointless

While governments around the world are doing what they can to mitigate the rising cost of energy, the gains made by Ethereum may be short-lived.

Critics are concerned that while Ethereum has drastically slashed 99% of its energy consumption, the reality is all of the machines that were used to mine Ethereum, won’t just vanish into thin air. Chances are, the machines will be repurposed to mine for another cryptocurrency, producing just as much pollution, just in a slightly different context.

Only time will tell whether these critics have a valid point, or whether Ethereum is genuinely transforming the cryptocurrency industry to be much greener.