Ethereum has moved to proof-of-stake. Why can’t Bitcoin?

Bitcoin mining, the computationally intensive process by which bitcoin is created and accounted for, has become a global concern. After China cracked down on bitcoin mining in mid-2021, miners sought out other parts of the world where energy was cheap, but not always clean. In places like Kazakhstan, miners are putting pressure on the power grid, which relies heavily on carbon-intensive coal-fired power plants, causing localized blackouts and contributing to civil unrest. In upstate New York, where miners have taken over shuttered factories and empty warehouses, residents have complained of rising energy bills and the high-frequency whine of data center fans. – and worry about the environmental consequences of mining. The United States currently hosts 38% of all bitcoin mining operations.

A single Bitcoin transaction uses the same amount of energy as a single US household for almost a month. But should it be so? The Bitcoin community has always been fiercely resistant to change, but pressure from regulators and environmentalists who are fed up with Bitcoin’s massive carbon footprint may force them to rethink that stance.

Various other countries, including Kazakhstan, Iran, and Singapore, have also set limits on crypto mining. In April 2023, the European Parliament is expected to pass a landmark crypto bill called Markets in Crypto Assets (MiCA), which imposes environmental disclosures on crypto companies. The law is expected to come into force in 2024.

This may be just the start for the EU: the European Central Bank has previously said it cannot imagine a world where governments ban petrol cars in favor of electric vehicles, but take no action. not for bitcoin to keep pumping CO2. “Some members of the European Parliament are already wondering why Bitcoin isn’t keeping up with Ethereum,” Alex de Vries, the data scientist behind Digiconomist, a website that tracks the energy consumption of cryptocurrencies, told MIT Technology Review.

Efforts to clamp down on bitcoin junk are also gaining momentum in the United States. In November, New York became the first state to enact a temporary ban on new cryptocurrency mining permits at fossil fuel plants. The new law also requires New York to study the impact of crypto mining on the state’s efforts to reduce its greenhouse gas emissions.

So what would it take to make a change?

Proof of Work vs Proof of Stake

Cryptocurrencies do not have a central custodian, like a bank, to oversee their public ledgers – the shared digital record of every transaction on the blockchain. Instead, they rely on consensus mechanisms to agree on updates. As proof-of-work, the approach that Bitcoin relies on, a global network of computers – known as “miners” – expend electricity to try and win some sort of lottery. Whoever wins can add the next block and collect new coins in the process. The chance of winning is directly proportional to the number of calculations performed by a miner. As a result, massive server farms have sprung up all over the world dedicated solely to winning the Bitcoin lottery.

Proof of Stake, the approach that Ethereum now uses, removes massive energy consumption. Instead of miners, proof-of-stake systems employ large amounts of “validators”. To become a validator, you must deposit or “stake” a fixed amount of coins – 32 ether, in the case of Ethereum. Staking gives validators the ability to verify new blocks of transactions and add them to the blockchain so they can earn rewards on top of their staked coins. The more coins you bet, the better your chances of being chosen to add the next block of transactions to the chain.