Why Crypto’s Big ‘Merger’ Is Causing Big Headaches – Business
The biggest software upgrade in the cryptocurrency’s short history has fulfilled its promise to wipe out more than 99 percent of the electricity used by the second-largest cryptocurrency, experts have told AFP.
That’s no mean feat, given that the Ethereum blockchain burned through about as much electricity as New Zealand.
Skeptics had expected glitches with the upgrade, known as the “merger”, but it ended up being a “quite boring event”, according to Alex de Vries of the Free University in Amsterdam.
De Vries, whose Digiconomist website models the energy use of Bitcoin and Ethereum, said consumption had actually dropped by more than 99 percent on Ethereum.
Moritz Platt, a researcher specializing in crypto at King’s College London, said the 99 percent estimates were realistic and heralded a positive step towards “sustainable cryptocurrency”.
So the Ethereum blockchain, which supports billions of dollars in trade in games, tokens, art and the ether currency, has cleaned up.
But there are complications.
Ethereum is facing bitter opposition from those who lost out on the merger, and it may also face greater scrutiny from regulators.
‘Astronomical’ growth
The old system, known as “proof of work,” relied on people and firms to “mine” new coins — an industry worth $22 million a day before the merger, according to de Vries.
The miners used huge power-guzzling computer rigs to compete with each other to solve complex equations, and the winner was awarded the prize of adding entries to the blockchain and generating coins.
The merger wiped out their business model overnight.
“These rigs don’t magically return invested capital,” said a crypto miner known only as “J” who operates between Singapore and Hong Kong.
He said it was costing him between $30,000 and $40,000 a month to keep his staff and equipment idle while he thinks about his next move.
Many miners have sold off their kit, while others are putting their rigs to work on less profitable blockchains that still use the old system.
A miner using the name Leon Ravencoin, for example, has been tweeting constantly about the “astronomical” growth of Ravencoin, one of the currencies to get a boost after the merger.
The combined computing power used by these coins is around a fifth of the pre-merger Ethereum blockchain.
However, de Vries said they only generated about $500,000 in daily revenue, so only the most energy-efficient machines with the lowest energy costs would be able to make money.
As a result, a fifth of the computing power will extract far less than a fifth of the power consumption.
“Designed to be Centralized”
Aside from the problem with miners, the new system, known as “proof of stake”, has several problems baked into it.
Anyone willing to stake a large amount of ether can now “validate” new entries on the blockchain.
The more you bet, the more chance you have to update the chain and earn coins.
The system gives an advantage to the biggest players, and just three companies now account for more than half of the “validators”, according to research from Dune Analytics.
Cryptocurrencies were envisioned as a decentralized alternative to the banks, corporations and governments that failed so spectacularly during the 2008 global crash.
But crypto miner J said the new Ethereum was “designed to be more centralized” and suggested it no longer had a real purpose.
Regulators have also begun to pay attention, with US Securities and Exchange Commission Chairman Gary Gensler suggesting that proof-of-stake looked like a securities market that would fall under his mandate.
The disaster scenario for Ethereum would be that enough disgruntled purists switch to one of the gas-guzzling proof-of-work alternatives, with Ethereum Classic being the main one.
“There is nothing capping the prices of Ethereum Classic,” de Vries said, meaning miners could potentially make good money if the market changed.
A rush from the greener blockchain was “theoretically definitely possible”, he said.
