Ethereum recently shifted from PoW (Proof-of-Work) mining to PoS (Proof-of-stake) mining through a historical event called ‘The Merge’. This article explores the implication of the Merge on cryptocurrency as well as the latest notions on sustainable mining.
First, a brief explanation on what mining is- Cryptocurrency transactions are stored on the blockchain, which is essentially a digital ledger. A copy of this ledger is stored across thousands of devices that are called ‘miners’. These miners collect and update transactions in real-time, receiving crypto rewards for their service of validating and securing the network. This entire process is known as crypto currency mining.
The method of mining used by Bitcoin is called Proof-of-Work (PoW). Essentially, this form of mining uses sophisticated hardware that can secure the network through complex computations. While this method offers an extremely high level of security, it also consumes a high amount of power- the energy usage of the Bitcoin network is more than the energy consumed by all of Finland!
Fortunately, most mining farms are beginning to operate on renewable sources like hydro, solar, wind and geothermal energy. It is estimated that nearly 60% of Bitcoin mining happens through renewable energy.
There also exist alternative methods of mining such as Proof-of-Stake and Proof-of-History, which consume far less energy than Bitcoin. In fact, coin networks that use these methods are actually much faster than Bitcoin, with some coins boasting of a processing capacity of fifty thousand transactions per second!
The main drawback is that, while these networks are much lighter, they are also less secure. Most ‘eco-friendly networks’ are managed by only a few parties, leaving them vulnerable to hacks or bad actors.The primary challenge for creating an eco-friendly cryptocurrency is keeping its decentralized aspect. Thus, balancing sustainability with security is an ongoing challenge in the crypto space.
To resolve the sustainability-security problem, Ethereum tried a novel approach this year. To put things in context, Ethereum first used a Proof-of-Work model similar to Bitcoin for nearly 7 years. This made Ethereum’s network quite secure.
Then, in late 2022, Ethereum held its historic upgrade event called ‘The Merge’. During The Merge, Ethereum shifted to a Proof-of-Stake (PoS) model in real-time. This was an extremely complex feat- one that can only be compared to changing a car’s engine while on a highway!
This change of car engine brought about some phenomenal results.
- Firstly, it reduced the energy consumption of the Ethereum mining network by 99.8%!
- It also reduced the production of new ETH by nearly 90%, making it mostly deflationary. This means that ETH supply will now reduce over time (thus pushing up its price long term)
Another advantage of PoS mining is that the only requirement to ‘mine’ ETH is to stake ETH. Users no longer have to purchase costly equipment and set up farms. Anybody with 32 ETH (still a large sum!) can simply lock up their tokens to secure the network, earning ETH rewards in the process.
And this is just the first of ETH’s upgrade plans. Future events like Surge, Verge, Purge, and Splurge (these are actual terms) will improve scalability and security of the network while keeping energy costs at a minimum.
As seen with Bitcoin’s green mining approach and Ethereum’s radical upgrade, there is a big push in the crypto space for sustainable growth and long-term development. Cryptocurrencies are starting to become more than just profit machines. They are now emerging as instruments that could help secure the world’s economy, and ecology!
(The author is Mr. Akshay Bajaj, CEO and Co-Founder of DeFiVerse and the views expressed in this article are his own)