Ethereum prepares its great "green" transformation

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Wednesday, May 25, 2022

This is one of the major projects to come in the world of cryptocurrencies. This summer, the Ethereum blockchain, which is the 2nd largest in terms of capitalisation ($238 billion), will migrate to a system that is supposed to be much more energy-efficient, as its founder, Vitálik Buterin, announced a few days ago. It's a move that comes just at the right time, as criticism of the environmental impact of cryptocurrencies continues to mount.

Cryptocurrencies work with what is known as a consensus system. Since its creation in 2015, Ethereum has been based on the "proof-of-work" system, a method that involves expending energy (via highly complex computer calculations) to validate transactions and protect the network. The biggest cryptocurrency on the planet, Bitcoin, also works with proof-of-work.

Around August, Ethereum, which is best known for enabling the emergence of NFTs (non-fungible tokens), will switch to proof-of-stake. Ethereum will no longer work with "miners" who secure the network with their ultra-powerful computers, but with "validators". Rather than using their energy-guzzling machines, validators will simply immobilise ethers (Ethereum's cryptocurrency) in the protocol to make it work. Given that this process does not require any significant computing power (a simple smartphone is all that is needed), this will mechanically help to reduce energy expenditure.

"This event is like changing a diesel engine into an electric one," explains Barnabé Monnot, a researcher at the Ethereum Foundation, the structure supporting the development of the protocol. "It's a colossal task for the engineers involved in this stage of development. There are a huge number of teams to coordinate, and changing an aircraft engine mid-flight is a titanic challenge", he continues. Because Ethereum will not stop while the modification is being made. The task will be all the more complicated because Ethereum is used by hundreds of thousands of people around the planet...

Should we fear a technical problem at the moment of truth? "A consensus bug can always happen, even if the probability is very low, because we have worked out all the possible scenarios and considered contingency plans to restore operation," Barnabé Monnot wants to believe.

Don't expect a drop in transaction fees

Will this change have impacts other than energy? "It's only the consensus model that's changing, not the execution model," warns Barnabé Monnot. So all those who regularly complain about network congestion and soaring transaction fees (they have been as high as $50 per transaction in recent months) will have to wait.

Users can rejoice, however. Because after the move to proof-of-stake, another update to Ethereum with EIP 4844 should add an extra layer of storage in Ethereum, allowing "layer 2s" (subnets that lighten the main chain) to send more data. In other words, Arbitrum, Optimism, Loopring, ZkSync and StarkNet will mechanically be able to process more transactions per second before sending them to Ethereum.

"With EIP 4844, we should be able to increase the number of transactions from layers 2 by a factor of 10, which could take us to more than 1,000 transactions per second on the Ethereum ecosystem once its implementation is complete," estimates Barnabé Monnot. Currently, Ethereum (excluding layers 2) can only process 13 transactions per second.

"Research work has highlighted the fact that layers 2 need to be further amplified to improve Ethereum's scaling," emphasises Barnabé Monnot. It is therefore likely that community efforts will focus on these sub-networks in the coming months so that Ethereum can become the "decentralised global computer" it aspires to be.

This analysis is not investment advice. It has been prepared without taking into account your personal situation, particularly your financial situation, risk profile, and investment objectives.

Before investing in any product, investors should fully understand the risks involved and consult their own legal, tax, financial, and accounting advisors.

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