On September 15, the Ethereum blockchain plans to shut down its mining rigs. If this happens, it should reduce the carbon emissions of the entire Ethereum ecosystem by an order of magnitude overnight, leaving bitcoin as the only major cryptocurrency to be built on the destructive concept of proof of work. But the switch could also throw some of the biggest institutions in the industry into chaos, and looks likely to evolve into a cold war between the new version of Ethereum and die-hard followers of the old. And that’s if it happens at all.

A little reminder about crypto-currencies. The two largest in the world, Ethereum and Bitcoin, are based on an idea called proof of work. This – and I am simplifying this – involves the networks outsourcing their security to a decentralized network of miners, who compete to burn ridiculous amounts of electrical energy to generate lottery tickets. Every time a winning lottery ticket is generated, the miner who made it receives a reward (for bitcoin, which is currently 6.25 BTC – around £110,000), and can check any transactions that have occurred since the last winner, packing them into a clean block and adding them to the chain made up of all the previous blocks. They stamp the block with their lottery number and the process begins again.

Almost the whole paragraph above is wrong, so please don’t write to me. That’s true enough for the following: this proof-of-work model is the basis of everything you’ve heard about the environmental impact of cryptocurrencies. And Ethereum plans to drop it.

The replacement is called proof of stake. Conceptually it’s more complex, but with the same broad brush strokes, we can describe it like this: rather than burning electricity to generate lottery tickets, you instead use your ethereum to buy premium bonds, and the system chooses a winner in proportion to the amount. of bonds they bought, who then has to do all the validation work as usual. You can cash in your premium bonds, but the process is slow, so you’re motivated not to abuse your validation privileges.

A version of Ethereum has been operating on these principles for some time. It has had various names over the years, from testnet to Eth2, but on September 15 it will simply become ethereum. This switchover, dubbed “the merger” – because the old and new network will be merged – has a good chance of being the biggest tech event ever in the crypto space. Which means he has a good chance of being messy.

To begin with, there is the date. If you noticed a hint of skepticism, it’s because I’ve been burned before. I wrote that the upcoming merger was “months away” – in May 2021:

The move to proof of stake has been planned for several years, with a host of issues, both technical and organizational, delaying implementation. But now, according to Carl Beekhuizen, a research and development staff member at the Ethereum Foundation … the change will be complete “in the coming months”.

It was not.

But this time, the changeover is rather definitive. On the one hand, there is a real difficult date; on the other hand, the preparation for the merger is now live in the code that runs the Ethereum network. This could still be delayed, but the default case, if no further action is taken, is that the merger will occur as planned.

What’s at stake

This does not mean that the fusion will be smooth. The first stumbling block will be forks: clones of the older version of Ethereum, created to keep the proof-of-work system alive.

It won’t be the first time this has happened. There are countless bitcoin forks, with names like bitcoin cash, bitcoin satoshi vision, bitcoin classic, and bitcoin gold, but none have ever topped the dominance of the original.

So why might the Ethereum fork have better luck? Because it will almost certainly have the support of a powerful constituency: Ethereum miners. After years at the center of the Ethereum infrastructure, miners are facing the deactivation of their industry overnight, and many of them are not happy with this proposition. They have real, physical assets invested in the pursuit of proof-of-work cryptocurrency, from expensive graphics cards to electrical hookups, and it’s not easy to reuse them for anything else.

Due to the open source nature of cryptocurrencies, it’s pretty easy for miners to just pick up where they left off and continue running Nu-thereum, or whatever it’s called, on September 16th, as if the merger had never taken place. The question is, what happens next?

Anyone with an ETH balance will suddenly find that they have two balances, one on each blockchain. And anyone who has a smart contract running on ETH will suddenly find that they also have two: there will be the proof-of-work version of Bored Ape NFTs, and the proof-of-stake version, and so on.

Some of these duplicates can coexist happily. Others might try to denounce the forked version, but never really kill it – how much would someone who wants to own an NFT killer pay for an “unofficial” version on the forked channel? If it’s not zero, then the trade could continue for a while, even if the monkey developers renege on the forks.

But for other projects, there can only be one. Each USDC token is backed by $1 of durable assets held by Circle, the company that develops the stablecoin. If there is suddenly twice as much USDC because of the fork, Circle doesn’t have twice as much money, and it will have to choose one network to support and the other to reject.

It seems unlikely that major stablecoins, like USDC and Tether, will support the rebel chain. And that, in turn, means the entire Rebel ecosystem will come into existence in a slow-motion collapse, as bifurcated projects fail one by one. But it will always provide a foundation for a new creation, and one that’s ultimately more similar to the Ethereum developers that Ethereum developers know and love than the eco-friendly version it’s about to morph into. .

And after

Upstart miners do not act solely out of self-interest. There is also a point of principle at play, which is the decentralization that underpins the crypto-economy. This decentralization is, basically, the only real reason cryptocurrencies exist: a centralized conventional database is faster, cheaper, and more secure to run, but requires you to trust whoever is running it.

A decentralized cryptocurrency cannot be interfered with by big business or big government, making them ideal for — well, crime and evasion of government regulations, by and large, but also loftier concepts like “permissionless innovation” and “uncensored speech”.

Some of the proponents of the proof-of-work (PoW) concept – including bitcoin “maximalists” who despise even upstarts like Ethereum – fear that proof-of-stake (PoS) will eventually end up in Dino: decentralization in name only. The nature of the system involves giving control of the network to those who hold the most money within the network. Worse, it gives extra power to those who deal with other people’s money: centralized exchanges like Coinbase or Binance, and centralized non-banks like Celsius or Voyager, had they survived that long. These exchanges may offer “staking” services where they do the hard technical work of showing participation work (buying the premium bonds, in terms of my fantastic analogy), and their clients get the rewards.

The rise of the Dinos is more than just a theoretical concern. In a post-Tornado Cash world – still grappling with the fallout from North Korea’s favorite decentralized app, accused of money laundering and sanctioned by the US Office of Foreign Assets Control (OFAC) – it is not at all clear whether it is legal under US law for a “validator”, the point-of-sale stand-in for minors, to approve a block containing a transaction to or from a sanctioned address.

Ethereum developers are trying to force it, to propose a “credible commitment to punish the censors”. It’s not yet clear what this means, but the hope is that it doesn’t have to be – that credible staking means organizations that have to comply with OFAC simply don’t stake Ethereum. in the first place.

It’s not entirely clear what Ethereum would look like without validators trying to stay compliant with US sanctions. But that’s the world we’re heading towards.

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