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Ethereum’s merger just ratcheted up the pressure on Bitcoin’s energy consumption


The merger showed that there is a new path Bitcoin can take that governments will love and Bitcoiners will hate.

By James Edwards

Earlier this month, the White House released a 46-page report on “Climate and Energy Implications of Crypto-Assets.” It’s a deep dive into blockchains’ energy consumption, their carbon emissions, as well as the strain they put on local energy sources – a growing concern given the current energy crisis.

It is one of nine reports that make up the White House’s “Comprehensive Framework for Responsible Development of Digital Assets” released last week. The recommendations presented in this report are likely to shape the future of cryptocurrency in the United States for the next decade. And under the ‘Advancing Responsible Innovation’ pillar, the Global Framework Report clearly identified mitigating energy consumption and environmental damage.

The effort that the US government has put into researching the regulation of digital assets is unprecedented. The accompanying fact sheet makes it clear that the recommendations it contains could become law, whether the Bitcoin community likes it or not.

The primary focus of the climate and energy report was proof-of-work (PoW), which was not discussed sympathetically. On the other hand, he flagged Proof of Stake (PoS) as a potential solution to many – if not all – PoW problems. As such, the report clearly favored a future for cryptocurrencies where power-efficient PoS chains are the norm.

Ethereum having recently completed the merger with PoS and reduced its power consumption by around 99.95% (which is maybe 0.2% if measured globally), it is clear that a new alternative for PoW blockchains is here. And with the following three government recommendations, it looks like retaining the PoW will become increasingly difficult to defend, both morally and legally.

1. US law will soon require Bitcoin to be climate-friendly

The main takeaway from the climate and energy report is that blockchains must reduce their carbon footprint and overall power usage, identifying PoW chains as the main culprit.

Regarding Bitcoin in particular, the report states: As of August 2022, Bitcoin is estimated to make up 60% to 77% … of total global electricity consumption of crypto-assets.”

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Crypto Assets and Climate Report | whitehouse.gov

The report immediately points to PoS as a solution to this problem, and the numbers are staggering compared to PoW.

The global electricity consumption for the analyzed PoS crypto-assets has been estimated at less than 0.28 billion kWh per year, which is less than 0.001% of global electricity consumptionAnd about 0.25% of the lower limit of the total global electricity consumption PoW.

Even though the climate and energy report was commissioned before the successful merger went live, it was used as evidence that an existing PoW chain can migrate to a less power-hungry PoS model. It is said:

Current discussions on reducing the electricity consumption of crypto-assets mainly focus on PoW blockchains, especially Bitcoin. There have been growing calls for PoW blockchains to adopt less energy-intensive consensus mechanisms.”

Industries around the world have had to go green, and there is no reason for any government to exclude blockchains from this list. But if going green isn’t enough, the gross amount of energy consumed remains a major threat to government policy and climate goals.

2. Bitcoin must reduce its total energy consumption

While most criticism of blockchain power consumption tends to be traced back to carbon emissions, the Global Framework report points out that raw power consumption is also a major issue.

The report identifies several risks resulting from US-based mining operations that rely on local power grids:

  • High consumption. Renewables have a low supply limit, which creates an increased demand for carbon-producing energy sources.
  • Always on. Miners operate on the network 24/7, which creates problems during times of high user demand and depletes the infrastructure faster.
  • Miners can drive up energy prices, which is bad for local consumers.

Simply fueling Bitcoin with green sources will no longer be enough to offset the wider impact of its huge energy consumptionespecially as the world faces a new energy crisis.

3. Bitcoin must recover quickly – if not

Where the report really flexes its legislative potential – and where Bitcoiners really need to start paying attention – is the rhetoric about existing chains shifting to PoS and what can happen if they fail to limit their emissions by other ways.

If these measures prove ineffective in reducing the impacts, the administration should explore executive branch actions, and Congress could consider legislation, to limit or eliminate energy-intensive use consensus mechanisms for mining crypto-assets.”

The main conclusion is the possibility of eliminating or legislating against specific consensus mechanisms. This threat is not isolated either – it is contextualized as necessary to ensure the United States meets its mandated climate goals, secures reliable energy, and minimizes climate-related harm to American citizens.

You might think the solution is simple: just move mining operations offshore. This has been done many times before, such as when Chinese miners had to pack up and move.

But banning PoW outright could have far wider implications than affecting where miners operate.

For example, what will prevent governments from prohibiting the use, sale or transfer of assets that use a prohibited consensus mechanism – assuming these actions are performed through a centralized platform? If this were to happen, would the scholarships be rolled over and compliant? Would they move abroad? Or would they pressure the bitcoin community to consider switching to PoS?

After all, Bitcoin remains by far the most valuable crypto asset, and losing it from the US-based crypto economy would be financially devastating for many related businesses.

It’s not like they can go anywhere else either – The EU is already planning to introduce environmental requirements for crypto assets within two years. And China has already cited environmental impact as one of the reasons it shut down mining. As environmental disasters increase, it is likely that other countries will follow.

Fortunately, however, the report offers an olive branch. He is in no way aggressive towards crypto-assets or blockchains, but is instead deeply concerned about their environmental footprint.

To achieve this, the climate and energy report says government agencies – such as the Environmental Protection Agency (EPA) and other major bodies – should work in consultation with climate stakeholders. industry for develop effective and evidence-based ways to operate blockchains in a climate-friendly way.

The PoW door is therefore not yet closed, but it will take a long time to keep it open.

Won’t anyone think about the profits?

The Bitcoin community as a whole has made it clear many times that PoW is the hill it will die on, but if the pot of gold on top of that hill starts to dry up, things could change.

While some Bitcoiners claim the price is unimportant, many others see it as a one-way ticket to the moon. And let’s face it, the market isn’t as big as it is today due to investor interest in both individuals and institutions.

According to prominent blockchain law expert Michael Bacina, the PoW sector is going to become increasingly problematic for institutional adoption, which in turn has clear price implications.

There is a growing emphasis on ESG, especially in the financial sector. Government review of energy efficiency and social pressures…is almost certain to add greater pressure on PoW blockchains over time. This problem is not going away as we see growing energy instability and rising prices.”

Joe Lubin, the creator of Ethereum incubator ConsenSys had similar things to say about Ethereum’s PoW days. In an interview with Time.com, Lubin claimed that several “large financial institutions” he spoke to were waiting for Ethereum to move to PoS before they could “meaningfully get involved.”

And last but not least: retail investors are also increasingly climate-conscious. Witness the rise of green ETFs, climate-conscious pension schemes and grassroots movements to get banks to divest from fossil fuels.

So when you consider buying Bitcoin, Ethereum, or any other asset, Bitcoin will shoot itself in the foot if it hopes to gain value while remaining in the dark age of carbon emissions and dogmatic philosophies.

People change, technology changes and staying rigid doesn’t help either. It’s time for the Bitcoin community to sit down calmly, have a coffee, invite their Ethereum neighbors, and finally discuss the possibility of PoS.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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