In one of the most impressive feats in the history of computer science, the Ethereum blockchain just completed the “Merge”, a key development in humanity’s fight against the climate crisis. In this edition, we’ll cover what the Merge is, what it does, and the way in which this event represents one of the most important steps in the fight for our future. 👇
What is the Merge & What Does It Do?
In technical terms, the Merge is a hard fork of the Ethereum blockchain that switches the consensus protocol from proof-of-work (PoW) to proof-of-stake (PoS).
In English, the Merge is an upgrade of Ethereum that allows it to be more scalable, more equitable, and—perhaps most notably—more sustainable.
Below, we explore the benefits of the Merge, and detail how it acts as a primary catalyst for the growth of carbon markets and—by extension—our odds in the fight against the climate crisis. ⬇️
Before the Merge, Ethereum used the same consensus protocol, proof-of-work, as its more famous predecessor Bitcoin.
Essentially, PoW systems work by having everyone who wants rewards use their computer to solve a complicated math problem, with the winner being awarded the tokens. These systems are incredibly secure, but are wildly energy inefficient.
Since everyone is using energy to power their computers, but only one person gets the reward, most of the power used in these systems is wasted energy. 🛢
That fact, along with the fact that rising prices of cryptocurrencies spurred rampant competition to earn these rewards, meant that PoW systems started burning insane amounts of energy. To truly understand the ridiculous energy output that PoW systems use, take a look at these stats:
- Pre-merge, it’s estimated that the Bitcoin and Ethereum blockchains accounted for over 1% of the entire world’s energy use.
- Google, the company that powers the world’s largest search engine, countless other tools and workspaces, and is one of the world’s largest cloud infrastructure providers, uses just 10% of the energy that the Bitcoin blockchain alone uses.
- A single Bitcoin transaction in 2021 could power a US household for 62.5 days.
- Less than 40% of all mining is done using renewable energy, despite misleading claims from certain miners.
Even in peacetime, these numbers are indefensible, and as the world braces for an energy crisis stemming from the Russian invasion of Ukraine, it’s clear that the energy use of blockchains needs to be dramatically reduced.
Ethereum’s incredible network effect makes it the world’s most popular blockchain by a wide margin. Despite being significantly slower and more expensive to use than many of its counterparts, about 60% of all locked capital resides on Ethereum, with that number jumping over 70% when including other chains in its ecosystem.
Before the Merge, this dominance represented extravagant energy use.
Post-upgrade, this chart represents the largest win for sustainability in the history of blockchains—an annual usage reduction equivalent to the entire country of Portugal’s energy output. 👏
Mainstream media has done well in documenting the energy usage reduction, but has often failed to talk about the scalability aspect of the Merge, which is the most important one regarding the fight against the climate crisis.
Earlier, I mentioned the immense popularity of Ethereum and the fact that it was a significantly worse blockchain in terms of speed and cost. These are related concepts; since there is so much demand, the network becomes crowded and slow while forcing people into bidding wars to use it.
Fortunately, recent advances in cryptography, along with years and years of research and planning, have allowed for this problem to be solved and Ethereum to be able to properly scale (for those interested in an in-depth explanation, read here).
As far as carbon markets are concerned, the important thing to know is that the traffic jam now has the infrastructure for infinite lanes to be built, allowing everyone to get where they are going cheaply and rapidly.
What It Means for the Carbon Markets
The alignment of financial incentives that the carbon markets create is the most vital tool that we currently have in our efforts to slow, and eventually solve, the climate crisis.
Despite a surge in recent demand, including massive offset purchases from some of the world’s largest and most influential companies, the carbon markets have not taken off in the parabolic fashion required to make a significant dent in the climate crisis.
Why is this?
The legacy carbon markets, operated by a small group of private firms, do not provide the necessary market dynamics required to effectively fight the climate crisis.
Important data about the origin, quality, and ownership history of offsets is kept under lock and key, both buyers and sellers are funneled into a small, cumbersome, illiquid set of private actors, and, of course, there are the high fees collected on both ends of the transaction that not only cut into the buyers’ budget but also the sellers’ profit, which is money that goes towards financing future emissions removal efforts. 🤦♂️
All in all, the carbon markets are far from where they need to be.
Luckily, markets built on blockchains can solve all of those problems. The open ledger aspect of a blockchain immediately solves all issues pertaining to offset data availability, while simultaneously allowing for highly liquid markets that are available 24/7/365.
That fact is precisely why the Merge is so important. The on-chain carbon markets wouldn’t be much better than the state of the legacy carbon markets if the underlying infrastructure made them slow and expensive.
Now that the groundwork is laid for scaling the capability of blockchains at orders of magnitude above what would be necessary, the final external hurdle of scaling carbon markets has been cleared. 🏃♂️
From this point, it’s all on us. We have the right incentive models and incredible technology with an incredible network effect to build them on. From here on out, we just need to sit down, strap in, and get to work building the future our species needs.
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