Crypto

“Green” Ethereum Crypto Wins Applause in Brussels, Washington

Cryptocurrencies are under intense scrutiny from lawmakers on both sides of the Atlantic. But the shift of one of the largest cryptonets, Ethereum, to more environmentally friendly processing techniques is being welcomed by lawmakers.

While most cryptocurrencies rely on power-intensive “mining” to authenticate transactions, Ethereum – the second most valuable cryptocurrency behind Bitcoin – completes the transition to a less demanding process on Thursday.

Under its old system, Ethereum required as much electricity like Chile done in a year to run its software to process and record crypto transactions on a public online ledger, known as blockchain. Producing this amount of electricity comes with a significant carbon footprint. Bitcoin, the most traded cryptocurrency, is even more voracious.

But after years of planning, Ethereum operators are moving to a new system that uses a tiny fraction of the energy consumed by the old one, without taking the network offline.

This change – or “merger”, as enthusiasts call it – was widely anticipated by lawmakers in Europe and the United States, who worry about the massive carbon footprint of cryptocurrencies and the energy demand at a time when energy prices are skyrocketing.

The merger, which is expected to reduce Ethereum’s power consumption by 99.95%, could serve as a catalyst for other cryptocurrencies to follow in its path, winning cautious applause from policymakers.

“At a time when we’re talking about energy, energy, energy and reducing consumption and concerns about blockchain, that’s positive,” the Commission’s financial policy chief told POLITICO. European, Mairead McGuinness. “Anything that reduces consumption in this area is welcome and the magnitude of the potential cost is quite huge and necessary.”

So-called proof-of-work systems to authenticate blockchain transactions have a bad reputation with lawmakers – so much so that a group of lawmakers in the European Parliament tried to push through an EU ban on the software earlier. This year.

This initiative failed. But Brussels lawmakers have continued to seek ways to limit the carbon footprint of crypto, agreeing that crypto companies must disclose how much energy they use under the EU’s single regulation for industry, which will come into force in 2024.

Policymakers in the United States are also closely watching Ethereum’s transition to new authentication, known as “proof-of-stake,” as they assess new legislation and potential rulemaking that addresses energy consumption of cryptography.

On Thursday, Senate leaders will hold a hearing on a bill that would give the Commodity Futures Trading Commission new powers over Bitcoin and Ethereum markets. The measure includes a requirement for the CFTC to produce regular reports on energy consumption in digital commodity markets.

“Let this decision serve as proof that the blockchain and crypto industries have better and more responsible options, and that straining our power grid and worsening the climate crisis is neither acceptable nor necessary,” said Rep. Frank Pallone, a New Jersey Democrat who chairs the House Energy and Commerce Committee, said in a statement Tuesday.

The White House also weighed in. A new report from the Office of Science and Technology Policy has found that the industry could hamper the country’s goal of limiting emissions and improving grid stability if it continues to grow unchecked without clear standards or regulations.

“Depending on the energy intensity of the technology used, crypto-assets could impede broader efforts to achieve net-zero carbon pollution consistent with U.S. climate commitments and goals,” the report said.

Mine collapse

Within the crypto community, where people were making a lot of money mining in the old system, Ethereum’s move to proof-of-stake has come under criticism.

Under the old system, people earn rewards for validating crypto transactions on the blockchain, a process known as mining that consumes a lot of energy and requires specialized computers to solve the equations.

The miner who gets the answer right is rewarded with a handful of digital coins, which in the case of Ethereum are currently worth around $1,500 each. The more computers a miner has, the better their chances of getting the right result – and a big payout.

This system encourages many people to participate in the blockchain, decentralizing the system. But it has also created an arms race between large-scale mining operations to fill warehouses with computer servers alongside cheap energy supplies. As industry leaders say this could boost demand for renewable energy sources, some operators have brought old coal and gas-fired power plants back into service to power their rigs.

The enormous energy needs of these warehouses have infuriated lawmakers. Top Democrats like Pallone and Massachusetts Democratic Sen. Elizabeth Warren, for example, have launched investigations into the amount of electricity required by mining startups – with a particular focus on groups that have restarted old fossil fuel power plants. to fuel their efforts.

Ethereum’s new proof-of-stake blockchain requires much simpler software on a normal computer and therefore consumes much less electricity.

The incentive structure for running the software is built on a quasi-lottery program that proportionally rewards individuals or businesses, based on how much of the platform’s native cryptocurrency they hold, called Ether.

This won’t help proof-of-work veterans in the Ethereum ecosystem, whose hardware is now useless and mining companies are dead.

“It’s basically the apocalypse,” said BitPro chief executive Mark D’Aria, whose US company specializes in reselling used hardware from Ether miners. “I don’t see how it can’t be bad depending on where it’s headed.”

Banks take note

Ethereum miners may be licking their wounds on the merger, but banks sense an opportunity.

Crypto’s popularity skyrocketed during the pandemic as people stayed indoors with little to do, with money coming in from government handouts.

It wasn’t long before some traditional online fund managers, bankers and exchanges got in on the action, though most stayed away due to concerns about crypto’s power consumption and its unregulated markets.

Ethereum’s green shift may soon encourage traditional investors to look into cryptocurrencies again, says Teunis Brosenschief economist at ING Bank in the Netherlands.

Policymakers’ enthusiasm for the merger could make Ethereum a safe bet for climate-conscious investors.

“Many banks have made sustainability a strategic objective. Offering crypto services running on power-hungry proof-of-work is uncomfortable with that,” said Brosens, who specializes in digital finance and regulation. “By focusing on proof-of-stake in Ethereum, banks can avoid difficult discussions with their customers and investors.”

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