Ethereum’s move away from mining isn’t environmentally friendly

Ethereum's move away from mining isn't environmentally friendly

The Ethereum Merge: A Major Milestone in the Blockchain Industry

Last September, the Ethereum network underwent a significant upgrade known as “the Merge.” This long-awaited transition marked the shift from proof-of-work (PoW) to proof-of-stake (PoS) consensus mechanism. Previously, Ethereum’s security relied on the same technology powering Bitcoin – PoW. However, with the Merge, Ethereum’s security is now ensured by the collective stake of hundreds of thousands of validators. These validators are held accountable and can be penalized if they go offline or engage in any malicious behavior, such as double-signing transactions.

The Ethereum Merge is often portrayed as a monumental accomplishment, primarily for its ability to retire PoW mining. By doing so, Ethereum has significantly reduced its energy consumption, addressing concerns around the environmental impact of cryptocurrency mining. The upgrade has been positioned as the “greenification” of Ethereum, attracting institutional investors who previously hesitated to invest in Bitcoin.

As a former Ethereum core developer who worked on the technologies behind the Merge, I have mixed feelings about the upgrade. While I acknowledge its technical advancements and benefits for Ethereum, I strongly disagree with the economic justifications put forth. Let’s delve deeper into the claims surrounding the Ethereum Merge and assess them one by one.

Claim #1: Proof-of-Stake is Less Wasteful

A central argument supporting the Ethereum Merge is the claim that it has reduced energy consumption by approximately 99.5%. However, this figure can be misleading when assessing the overall energy impact. While Ethereum’s PoW miners may have reduced their energy consumption, the GPUs that powered the mining operations did not disappear overnight. Many of these GPUs have found alternative applications, such as mining other PoW-based cryptocurrencies or driving AI applications. Additionally, older GPU models with limited versatility have been discarded, contributing to electronic waste.

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Moreover, the Ethereum network now relies on nearly 700,000 validators running on the proof-of-stake Beacon Chain. Although these validators consume less energy individually, their collective presence suggests there are likely more validators than there were miners. The rise of the market for maximal extractable value (MEV) further intensifies computational power consumption. MEV incentivizes sophisticated actors to exploit arbitrage opportunities and influence block producers for transaction prioritization. Therefore, when examining the energy consumption of the Ethereum network holistically, it becomes evident that claiming a 99.5% reduction in energy is an oversimplification.

Claim #2: Proof-of-Stake is More Secure

Another primary claim made in support of proof-of-stake is its enhanced security compared to proof-of-work. Advocates argue that proof-of-stake networks can respond to attacks by surgically targeting adversaries through coordination and removing their staked capital. In contrast, proof-of-work networks face the challenge of rendering both adversary and honest miners’ hardware ineffective when defending against a 51% attack.

However, this argument falls short due to several reasons. In proof-of-stake, a cartel controlling more than half of the stake can silently and permanently take control of the entire network. Furthermore, attacking a proof-of-stake chain is easier as it doesn’t necessitate specialized hardware or electricity. An attacker can acquire former validators’ keys or operate a substantial number of validators to carry out a simulation attack. This attack undermines the integrity of the blockchain, appearing equally valid to the canonical chain. Ethereum developers refer to this problem as “weak subjectivity,” highlighting its reliance on social information rather than mathematical and cryptographic principles.

While subjective social coordination plays a role in defending against attacks, Bitcoin’s “longest chain wins” rule offers a more neutral and credible approach. Additionally, proof-of-stake introduces costless adversarial forks, making attacks more feasible and increasing subjectivity. Therefore, the notion that proof-of-stake is inherently more secure than proof-of-work becomes questionable.

Claim #3: Proof-of-Stake Increases Profitability

With the Ethereum Merge, the overall block subsidy has substantially decreased, resulting in a deflationary nature for the Ethereum network during periods of high demand. This phenomenon, often referred to as “Ultrasound Money,” implies that Ethereum’s monetary policy aims to reduce inflation. However, the concept of sound money extends beyond this definition, and Ethereum’s frequently changing monetary policies undermine its status as sound money.

Maintaining network security in a decentralized system requires compensating miners or validators appropriately. Attempts to reduce compensation can only lead to two outcomes: decreased security due to miners seeking more profitable alternatives or alternative forms of compensation. The latter, referred to as “Obscured PoW,” is evident in the Ethereum network. The opportunity cost of locked capital and the rise of MEV contribute to the hidden costs borne by network users.

MEV represents the money extracted from unsophisticated users through arbitrage and transaction prioritization. The reduced spending on security under proof-of-stake leads to the consolidation of miners and a decline in available MEV opportunities. Consequently, everyday users end up paying hidden transaction fees due to MEV. With over $1 billion worth of MEV estimated on the Ethereum network alone, the issue of hidden costs becomes significant.

In conclusion, the Ethereum Merge represents a milestone in the blockchain industry’s development towards public, permissionless distributed systems and consensus mechanisms. While it offers improvements over other consensus mechanisms, claims of it being inherently better than proof-of-work must be scrutinized. The energy reduction claim deserves a broader assessment of the network’s social cost, including the opportunity cost of locked capital and the rise of MEV. Similarly, the security and profitability claims face significant challenges and must be evaluated in light of real-world outcomes. Awareness of the limitations and nuances surrounding the Ethereum Merge is essential for understanding the implications and advancements within the blockchain industry.