Ethereum has smashed through previous all-time highs to repeatedly new record prices throughout 2021. Blockchain and cryptocurrency are entering the financial and tech mainstream in a major way. But this renewed interest in cryptocurrency has brought lots of negative attention to the huge amounts of energy being used to secure the blockchain.
There is already a solution to the cryptocurrency energy consumption crisis on the horizon. Ethereum 2.0 will radically change the way its blockchain network works and drastically reduce its energy impact. Here is everything you need to now about the energy problem posed by cryptocurrency mining and the solution of Ethereum 2.0’s staking mechanism.
The Proof of Work Problem
All transactions on the Ethereum network are currently verified by cryptocurrency miners. These miners use computers to solve complex mathematical problems. Whichever miner arrives at a solution to the problem first gets to write the next block on the blockchain, receiving cryptocurrency rewards in the process. Miners with the greatest computing power are able to arrive at these answers most quickly.
This cryptocurrency mining mechanism is known as “proof of work.” Proof of work helps secure blockchains as it would take an incredible amount of computing power to overwrite the network and make fraudulent transactions.
Bitcoin introduced the proof of work mechanism when it was created in 2009. Most cryptocurrencies launched in the years since then have used a similar proof of work mining mechanism, including Ethereum.
Cryptocurrency mining used to be possible on an ordinary home computer but as the major blockchain networks have grown in size, so too has the power required to mine cryptocurrency. Cryptocurrency mining operations now consist of huge warehouses filled with hardware dedicated to providing the highest possible mining power, or hashrate.
The energy used in cryptocurrency has become a contentious topic. News reports regularly compare the energy consumption of cryptocurrency mining to that of mid-sized countries. Research from the Cambridge Centre for Alternative Finance in March 2021 found that if Bitcoin was a country, it would have the world’s 29th highest rate of energy consumption. This puts up above nations such as Norway and Bangladesh. The same research found that Bitcoin’s energy consumption was 1,708% higher than that of Google. Bitcoin mining consumes energy equivalent to 61% of all the world’s data centers.
Ethereum mining is responsible for less energy consumption than Bitcoin but the figures may still surprise you. Digiconomist’s Ethereum energy consumption tracker showed in May 2021 that Ethereum mining was using energy equivalent to the nation of Qatar. A single Ethereum transaction used as much energy as the average American household uses over 2.78 days. The carbon footprint of each Ethereum transaction is equivalent to watching 6,505 hours of YouTube or conducting 86,504 VISA transactions.
The NFT Energy Backlash
Non-fungible tokens (NFTs) have been a big factor in the recent surge in interest in Ethereum. NFTs are used to represent unique assets such as digital artworks on the blockchain. Most NFTs are secured on the Ethereum network.
In 2020, the market for NFTs tripled in size to reach a total value above $250 million. 2021 brought a flurry of high-profile NFT sales including the sale of a digital art piece by Beeple through prestigious auction house Christie’s for over $69 million.
French artist Joanie Lemercier discovered that NFTs he launched of his artworks consumed the equivalent of his art studio’s energy consumption over a two year period. The online digital art marketplace ArtStation cancelled plans to launch NFTs after receiving a backlash from artists regarding their energy use.
One of 2021’s biggest NFT success stories has been the NBA Top Shot platform. NFTs of NBA clips sold through NBA Top Shot have generated more than $370 million. The most expensive single clip of a LeBron James dunk sold for $208,000.
NBA Top Shot was created by Dapper Labs, the company responsible for creating the first NFT application on Ethereum to gain significant traction. Dapper Labs’ Crypto Kitties game was so popular on launch in 2017 that transactions related briefly ground the Ethereum network to a halt. For NBA Top Shot, Dapper Labs has moved away from Ethereum to the alternative Flow blockchain. Instead of Ethereum and Bitcoin’s proof of work mining mechanism, the Flow blockchain is secured using proof of stake.
The Proof of Stake Solution
The Ethereum network is continually upgraded to improve its functionality and efficiency. Upgrades are currently progressing toward the eventual launch of Ethereum 2.0 which will abandon proof of work in favor of a proof of stake consensus mechanism.
Instead of issuing Ethereum rewards based on mining power, proof of stake will instead see rewards distributed to nodes which verify transactions based on the amount of Ether that they commit to the network. This staking process will drastically cut Ethereum’s energy consumption.
For Ethereum holders, staking Ether can be compared to putting traditional money into a savings account and receiving interest on it. To receive staking rewards, it is necessary to hold at least 32 Ethereum and maintain a node connected to the blockchain capable of verifying transactions.
Major cryptocurrency exchanges including Coinbase and Binance have announced they will allow users to stake Ethereum through their platforms. This will allow anyone with even a fraction of one Ethereum to gain staking rewards.
Ethereum 2.0 is expected to go live by the end of 2022. This will bring a fundamental change to the world of cryptocurrency. While Bitcoin will retain its proof of work mining mechanism, Ethereum mining will become a thing of the past.
The solution to the cryptocurrency energy crisis is coming. Ethereum 2.0 could help the second largest cryptocurrency move closer to matching Bitcoin’s market dominance.