Ethereum's switch and sustainability debate
THE BIG SWITCH
This week, Ethereum, the world’s second-largest blockchain network, is upgrading its software in a move that would massively reduce its large carbon footprint. The upgrade entails switching its entire network from a Proof-of-Work (POW) verification method to a Proof-of-Stake (POS) verification method. There is online literature on POW and POS design specifications, but from an energy perspective, this switch will reportedly slash Ethereum’s network’s energy consumption by 99.95% [1].
Will this switch make Ethereum energy efficient or a sustainable blockchain? Or do we need to consider additional environmental, social, and governance dimensions for it to be truly called sustainable blockchain?
PUTTING ETHEREUM’S ENERGY CONSUMPTION IN THE CONTEXT
Any blockchain technology is inherently energy intensive. The system currently used for verification by most cryptocurrencies, including Bitcoin and Ethereum, is POW, the most energy-hungry validation or mining method.
According to Ethereum Energy Consumption Index, developed by Digiconomist, the Ethereum network consumes 83.16 TWh of energy per year, comparable to the power consumption of Chile. This translates into carbon emissions of 46.38 Mt CO2 [2].
ANNUALIZED TOTAL BITCOIN ETHEREUM FOOTPRINTS
Source: Ethereum Energy Consumption Index - Digiconomist, Blockchain Energy Consumption Index - Digiconomist
At a unit level, an energy footprint from a single Ethereum transaction is 213.52 kWh, equivalent to the power consumption of an average U.S. household over 7.22 days. This translates into a 119.09 kgCO2 equivalent to the carbon footprint of 263,945 VISA transactions or 19,848 hours of watching YouTube, according to Digiconomist. Mainstreaming efforts for blockchain validation using POW means the energy demand will increase exponentially.
SINGLE BITCOIN & ETHEREUM TRANSACTION FOOTPRINTS
Source: Ethereum Energy Consumption Index - Digiconomist, Blockchain Energy Consumption Index - Digiconomist
BUT DO ALTERNATIVE BLOCKCHAIN VALIDATION MODELS GENERATE A LESSER FOOTPRINT?
Some blockchain technologies are based on alternative design systems with very little computing power. These include Proof-of-stake, Delegated-proof-of-stake, Peer-review protocol, voting-based system, and so on. The energy costs per transaction are given below [3].
Source: beincrypto.com
If the Ethereum blockchain can reduce the network’s energy consumption by 99.95%, as claimed on its official site, it would translate into 10.676 kWh of energy per transaction.
Massively reducing energy consumption for any process is a welcome move and even more impactful for an energy-guzzling technology such as blockchain.
But what about other considerations beyond energy efficiency, including environmental, social, and governance?
1) THE OTHER "E" BEYOND ENERGY (ELECTRONIC WASTE)
The end of life of the infrastructure is another critical issue that is often ignored. According to Digconomist, although the Ethereum blockchain’s e-waste details are not available, the Bitcoin blockchain, which also uses POW, generates 407.20 grams of electronic waste per transaction, equivalent to the weight of 2.47 iPhones or 0.83 iPads. How this end-of-life infrastructure is disposed of – incineration, landfill, reuse, or recycling – would further determine the level of carbon emissions.
2) THE SOCIAL DIMENSION
In our view, transaction costs are one of the fundamental considerations of being a financial intermediary, which blockchain and cryptos are trying to achieve. Financial inclusion of the unbanked is a noble cause, but still, transaction costs need to be lower. A recent Morningstar study, “2022 Cryptocurrency Landscape”, highlights that per-transaction fees can range from free to upward of 6% depending on the trade conditions [4].
COSTS TO TRANSACT ON DIFFERENT CRYPTOCURRENCY EXCHANGES
Source: Morningstar “2022 Cryptocurrency Landscape” Report
One could argue that the faster the mining speeds, the lower energy costs per transaction, translating into the lower blockchain validation costs. However, all this needs to be still seen.
3) GOVERNANCE CONSIDERATIONS
The governance aspects around network security, compliance, and risk management practices are as important as the energy efficiency of the blockchain itself. These include protecting consumer interests, cyber security, preventing illicit financing, maintaining the market’s integrity, and fostering innovation. According to the World Economic Forum’s Global Future Council on Cryptocurrencies, there has been no internationally coordinated regulation of cryptocurrencies. Each country has been taking a different approach towards regulation but needs closer global coordination and universal standards for managing risks associated with blockchain technology.
FINAL TAKE
From an energy perspective, it is a welcome move towards reducing energy and related emissions. Ethereum’s energy footprint is still much higher than the energy-efficient blockchains using alternative methods for validation. But given its market leadership, Ethereum’s efforts will help gain more confidence from wider stakeholders. It will be a silver lining if this translates into lower transaction costs, which are yet to be seen. Still, like any other crypto, Ethereum must win the debate on Crypto’s core value as an asset class by comprehensively addressing governance issues, which can alone make it the most sustainable blockchain.
AN AFTERTHOUGHT: FINANCIAL MARKET AND SOCIAL MEDIA SENTIMENT REACTION
Ethereum’s price increased by 61% in the past two months, and the Twitter sentiment remained mainly neutral to positive in the last seven days [5].
Source: CoinDesk
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References:
[3] Top 9 Eco-Friendly Cryptocurrencies To Invest In (beincrypto.com)
[4]Morningstar “2022 Cryptocurrency Landscape” Report
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