The world’s second-largest cryptocurrency, Ethereum, last week transformed the fundamental architecture governing how it secures its blockchain — an unprecedented demonstration of established crypto platforms’ ability to evolve to changing conditions.
The event, known as “the Merge,” was five years in the making. A few hours after midnight on Thursday, Ethereum shifted its blockchain from a configuration called “proof of work” — also used by Bitcoin — to one called “proof of stake.” Matt Nelson, a product manager at the Ethereum research and development firm ConsenSys, compared it to changing the engine in a car while driving it down the road.
The move to the new style of blockchain will reduce Ethereum’s energy use by 99.95 percent, according to the Ethereum Foundation. That’s significant in an industry that is so energy-intensive the White House warned this month that the growth of crypto could make it harder for the U.S. to meet its climate goals. And Ethereum’s good news comes at a tough time for crypto generally, with the prices of major cryptocurrencies dropping, the a major crypto lender collapsing and calls for regulation growing.
“We wanted to be an inspiration, as the most-used smart contract platform in the community, to signal to actors, regulators and users that we were willing to change,” said Nelson, who helped coordinate the switch. “We’re willing to work together as a community to create an extremely technically complex upgrade.”
Ethereum’s transformation shows that the decentralized crypto universe can adapt as it grows. The blockchain concept that underlies crypto platforms like Ethereum is built on the idea that an entry cannot be altered once it is made — which proponents argue makes it transparent and fair. But the Merge demonstrates that such architecture can still undergo major changes successfully, even with millions of users’ data in play (and a $180 million market cap). Call it a crypto coming of age.
Proof of work versus proof of stake
That doesn’t mean the Merge is without its critics. One persistent criticism is that Ethereum’s new architecture consolidates control of the currency among a relatively small number of major players.
Before the switch, users could mine Ethereum by using math. Under the old proof-of-work blockchain system, computers would race to solve complex math problems and log their work — verifying batches of transactions — to the blockchain. The first machine to answer a particular problem is rewarded with Ether (ETH). This process is known as “mining,” and it requires a lot of electricity.
Ethereum’s new blockchain architecture, proof of stake, replaces that computational work with pure economic interests. A “staker,” or person who puts up ETH to stake to the network, locks their money up for a set period of time and receives a vote for doing so.
Staking a full node requires 32 ETH, or around $45,000. People can pool their coins to fund a node, even staking a percentage of a single ETH. These pools, known as liquidity pools, are offered by a wide array of platforms and companies, such as the largest cryptocurrency exchange in the U.S., Coinbase.
In fact, Coinbase, Binance and Kraken, some of the largest cryptocurrency exchanges in the world, own 30 percent of the network’s stake. And Lido, a community staking collective of 183,975 stakers, controls over 30 percent. Critics of proof of stake are concerned that this puts voting control in a handful of major players, contrary to the decentralized ethos of cryptocurrencies. For many people, their original appeal was that no central entity that could control them.
“I see many cheering on [proof of stake] as a way to reduce emissions, that it makes ETH greener,” said Colin Harper, head of research and content at cryptocurrency mining software and services company Luxor. “These takes never acknowledge why [proof of work] exists in the first place, and that is to ensure the censorship resistance and permissionless nature that makes a blockchain worth running or using at all. [Proof of stake] proponents turn a blind eye to this and say that you can have those guarantees without the energy cost, but I don’t think that’s true. There’s no free lunch.”
Others say the environmental benefits of the Merge can’t be overstated. The shift slashed the energy use associated with mining Ethereum.
“You have this pervasive mentality in many different spaces that blockchain is an industry that’s negative from a climate and environmental standpoint,” said Nick Hotz, vice president of research at Arca, a digital assent management firm.
Some estimates put the annual energy consumed by mining another major cryptocurrency, Bitcoin, on par with the demand from the entire country of Argentina. Other supporters of the Merge say it matters because it shows flexibility within the growing sector. Mark Lurie, the CEO of Shipyard Software, which builds apps and tools for decentralized finance, said that any diversity in technology will make cryptocurrencies more flexible.
“Different technology trade-offs are best for different use cases,” said Lurie. “I think [proof of work] is probably better for digital gold, like Bitcoin, but [proof of stake] is probably better for distributed computing platforms like Ethereum. There are a huge variety of use cases, and many will demand different technical trade-offs in scalability, speed, security and many other dimensions.”
James Key, CEO and founder of the Autonomy Network, a decentralized automation protocol, also sees it as a positive for the industry writ large.
“It’s a very bullish sign that the space can continue to evolve and adapt, even with the size of a chain like Ethereum — people have been worried about this aspect of crypto since Bitcoin has so far not been able to do so,” said Key.
This is only the first of what will be other substantive upgrades to Ethereum. But Nelson said that, if some other consensus mechanism that’s better than proof of stake comes along in the future, he could see the community deciding to change again. And now, they know it’s possible.
“The only constant in life is change itself, so as long as the community is capable of coming together and adapting, the technology platform, it can, in theory, persist forever,” said Lurie.
Thanks to Lillian Barkley for copy editing this article.