Ethereum and better-known-rival Bitcoin both operate using a
proof-of-work system that requires a global network of computers running around
the clock. Software developers at Ethereum have been working for years to
transition the blockchain to what’s known as a proof-of-stake system — which
uses a totally different approach to secure the network that also eliminates
the carbon emissions issue.
The change — delayed time and again by complicated technical
setbacks — couldn’t come soon enough for the cryptocurrency world, which
weathered one of its biggest bouts of volatility ever this month after Elon
Musk announced that Tesla Inc. would stop accepting Bitcoin as payment for cars
because of the surging energy use. Bitcoin’s network currently uses more power
per year than Pakistan or the United Arab Emirates, according to the Cambridge
Bitcoin Electricity Consumption Index. The compilers of the index don’t measure
Ethereum energy use.
“Switching to proof of stake has become more urgent for us
because of how crypto and Ethereum have grown over the last year,” Vitalik
Buterin, the inventor of Ethereum, said in an interview. He’s hoping the change
is made by year end, while others say it will be in place by the first half of
2022. That’s about a year earlier than was expected in December.
“I’m definitely very happy that one of the biggest problems
of blockchain will go away when proof of stake is complete,” said Buterin, who
has been advocating for the shift since the blockchain was launched in 2015.
“It’s amazing.”
The change could help boost the price of the cryptocurrency
Ether, which is necessary to use Ethereum, as investors who are environmentally
conscious take note of its vastly smaller carbon footprint. Much of the
criticism of proof of work has come from millennials and investors who value
positive environmental, social and governance, or ESG, standards.
“It’s hard to ignore that the ESG narrative is going to be
big,” said Wilson Withiam, an analyst at Messari who specializes in blockchain
protocols. “If you’re looking at Ether as an investment, it doesn’t have that
looming over it.”
Pantera Capital, an early Bitcoin investment firm, agreed.
“Ethereum has a massive ecosystem of decentralized finance use cases with
rapidly growing adoption,” Dan Morehead, founder of Pantera, wrote in a May 10
note to investors. “Combine these two dynamics and we think Ethereum will keep
gaining market share relative to Bitcoin.”
The transition Ethereum developers are making is a huge
undertaking. They have to create, test and implement an entirely new way of
securing their network while maintaining the existing blockchain. Then when the
time is right, they’ll merge the existing blockchain into the new architecture
that uses proof of stake to verify transactions. The shift will also radically
increase the speed of transactions that Ethereum can process, making it more
competitive with established payment networks like Visa or Mastercard.
Proof of work uses the capital costs of buying and
maintaining computer hardware as well as the electricity to run them as the
economic investments that must be paid by the people who are securing the
network, known as miners. In return, the first miner to verify the latest batch
of Bitcoin or Ethereum transactions is rewarded with free Bitcoin or Ether.
That system has come under fierce criticism for years, most
recently by Musk, who called recent consumption trends “insane.”
In proof of stake, the cryptocurrency Ether replaces
hardware and electricity as the capital cost. A minimum of 32 Ether is required
for a user to stake on the new network. The more Ether a user stakes the better
chance they have of being chosen to secure the next batch of transactions,
which will be rewarded with a free, albeit smaller, amount of Ether just as in
proof of work.
So far, more than 4.6 million Ether have been staked in
what’s called the beacon chain, worth about $11.5 billion at an Ether price of
$2,503. That means once proof of stake is in place, the only electricity cost
will come from the servers that host Ethereum nodes, similar to any company
that uses cloud-based computing.
“Nobody talks about Netflix’s environmental footprint
because they’re only running servers,” said Tim Beiko, who coordinates the
developer work on the new network for the Ethereum Foundation, set up to fund
and oversee development of the Ethereum protocol.
Danny Ryan, a researcher at the foundation, said Ethereum’s
proof of work uses 45,000 gigawatt hours per year. With proof of stake, “you
can verify a blockchain with a consumer laptop,” he said. “My estimates is that
you’d see 1/10,000th of the energy than the current Ethereum network.”
One of the first breakthroughs came when developers created
a system where contracts on Ethereum can be executed off the main chain, what’s
known as roll ups. That takes an enormous amount of pressure and demand off of
the main underlying network, and also means fewer changes to the network need
to be made.
The next leap was linked to roll ups. The move to a new
Ethereum, known as ETH 2.0, has always envisioned the network being broken into
64 geographic regions in what’s called sharding. Transactions on one shard
would then be reconciled with the main network that’s linked to all the other
shards, making the overall network much faster. Yet it was complicated and a
tricky security question and it was slowing down progress.
Once roll ups could be used for transactions, that meant the
shards only needed to house data, Beiko said. In the prior model, the sharding
system would’ve had to be up and running before Ethereum could move to proof of
stake. That’s no longer the case, he said.
“Sharding goes from being very complicated to not too
complicated,” Beiko said. “It’s not a blocker in the road map any more.”
Roll ups are limited by how much data that’s linked to the
blockchain they can contain, Buterin said. This was a problem before developers
realized shards could hold the data.
“If you can publish data on-chain, which you can do with
shards, then the scaling goes up by a lot,” Buterin said.
The progress on proof of stake was shown recently by a test
net where transactions on the existing Ethereum blockchain were successfully
merged onto the proof of stake system, Beiko said.
“I’m more confident than I was a month ago,” he said. “There’s a bunch of non-trivial issues to figure out, but the fundamental architecture is set and pretty promising.”
-Matthew Leising (Bloomberg)