FT Cryptofinance: Ethereum prepares to ditch its energy-guzzling blockchain

In crypto land, breathless pitches about technologies that will transform the industry are 10-a-penny. For once, one that might partially justify the hype is around the corner.

In the past few years conversations about the future of crypto usually alight on a semi-mythical event at an undetermined date known as the “Merge”, and involves Ethereum, one of the industry’s premier blockchain networks.

It matters because it confronts one of the sharpest criticisms of crypto: that the industry guzzles vast amounts of energy when the planet desperately needs to reduce its consumption.

After years of talk, the Merge is tentatively pegged for mid-September.

There’s a bit to unpack, so first, the basics. The Ethereum blockchain is one of crypto’s great hopes because it aims to make digital ledgers more than a simple database for transactions. But like the bitcoin blockchain, it sucks up a lot of energy. The developers behind Ethereum have long talked about their solution, which is to change the way the transactions on the blockchain are verified.

To use the industry jargon, it would move from a proof-of-work to a proof-of-stake blockchain. Ethereum would no longer be secured by energy-intensive mining, but by individuals (called “validators”) dedicating their own capital on the network itself. But will the shift work as intended?

Alex de Vries — better known by his “Digiconomist” moniker — has high hopes, telling me “it’s hard to say how things will look . . . but a 99 per cent reduction in energy use seems realistic”. De Vries estimates that the Ethereum network’s carbon footprint is currently comparable to Finland’s.

These hefty climate costs have prompted regulators to slam the proof-of-work system that underpins both Ethereum and bitcoin. Last year, EU lawmakers almost banned cryptocurrency mining outright, and should the Merge come off without a hitch, regulators in Sweden are already waiting in the wings to retrain their sights on the controversial industry.

“Regulators are literally waiting for Ethereum to be successful in moving to proof of stake before cracking down on proof of work”, de Vries said.

A meeting between Sweden’s financial services watchdog and environmental agency last year hints at some of the thinking.

“If Ethereum is able to shift, we could legitimately request the same from bitcoin. We need to protect other crypto coins that are sustainable,” the minutes read, according to freedom of information requests* by news site netzpolitik.org.

But it might be easier said than done. Bitcoin — which still uses a proof-of-work system — is by far the world’s most actively traded crypto token and, despite the recent crash, there are plenty of bitcoin defenders.

Then, of course, bitcoin’s apparent success as a secure network has to be considered. In a crowded field of security failures, bitcoin has never been hacked, unlike a series of proof-of-stake cryptocurrencies that allegedly represent the greener future of the industry.

So it is not impossible that the Merge is a success but the criticism of crypto’s environmental impact doesn’t go away. It may even sharpen scrutiny laid down by regulators.

I’d like to hear from you. Will the Merge change your view on Ethereum? And what does it mean for bitcoin’s future? Email me at [email protected].

This week’s highlights

• It’s been a difficult week for those who preach the immutable resistance of blockchains. After one digital token protocol called Nomad was compromised to the tune of $190mn, thousands of crypto wallets linked to the Solana network were “drained”.

• Crypto exchange Coinbase forged a deal with BlackRock, giving the asset management giant’s clients greater access to crypto. The partnership is the latest sign of traditional investors pivoting to digital assets, even after a dramatic sell-off across the crypto market.

• At a time when the likes of Robinhood and Coinbase are cutting back staff, Ripple is going full speed ahead on recruitment. After starting the year with roughly 500 employees, the company aims to increase its headcount to 850 by year-end. “The last 18 months or so have been our most successful and fastest growth period to date,” Ripple’s Europe managing director Sendi Young told me this week.

• Bitcoin maximalist Michael Saylor is stepping down from his role as chief executive of MicroStrategy after the software company reported a near $1bn impairment charge on account of its relentless bitcoin purchases over the past couple of years. Saylor believes his new role as executive chair will help him “focus more on our bitcoin acquisition strategy”.

Soundbite of the week: If you’ve recently lost your life savings to crypto . . . “stay strong”.

Sandeep Nailwal, co-founder of prominent crypto platform Polygon, had some choice words that likely offered little comfort to those who lost funds in this week’s hack of wallets linked to Solana.

“My heart goes out to Solana community members who lost their life savings in the ongoing attack. Stay strong, these are the growing pains the entire blockchain industry has to go through. These moments, if handled correctly, lead to a lot of strength for any ecosystem.”

Data mining

The Ethereum Merge looks set for next month, and crypto prices have risen in recent weeks. In the past month, bitcoin and ether, the native token on the Ethereum blockchain, have rallied by about 15 per cent and 45 per cent respectively.

These points make this a good week to take stock of how much of the broader crypto market bitcoin and ether represent. According to data compiled by Crypto Compare, the industry’s two flagship cryptocurrencies make up 62 per cent of the broader crypto market.

Interestingly, the crypto crash has done little to change things. Bitcoin remains firmly in the top spot with 43 per cent of market share, just as it was at the start of the year. Ethereum is at 19 per cent, down 2 percentage points year to date.

*This newsletter has been amended to clarify that the meeting minutes became public as a result of freedom of information requests by netzpolitik.org.