Ethereum upgrades to proof of stake, why can't Bitcoin?

Original Title: "Ethereum Upgrades to Proof of Stake, Why Can't Bitcoin?"

Original Author: Amy Castorarchive

Translated by: Block unicorn

Last year, Ethereum took a green and environmentally friendly route. The world's second most popular crypto blockchain transitioned to Proof of Stake (POS), an energy-efficient framework for adding new transaction blocks, NFTs, and other information to the blockchain. When Ethereum completed its upgrade in September last year, known as "The Merge," it directly reduced energy consumption by 99%. Meanwhile, Bitcoin, which continues to develop, consumes energy equivalent to that of the entire nation of the Philippines.

Bitcoin mining is a computationally intensive process through which new bitcoins are created and calculated, and it has become a global concern. After China cracked down on this process in mid-2021, miners began seeking cheap energy elsewhere in the world, but not necessarily environmentally friendly energy. In places like Kazakhstan, miners have put pressure on power grids that heavily rely on carbon-intensive coal-fired power plants, leading to localized blackouts and civil unrest. In upstate New York, miners have taken over closed factories and vacant warehouses, with locals complaining about rising energy bills and the high-pitched hum of data center fans, worrying about the environmental damage caused by mining. The U.S. currently accounts for over 38% of Bitcoin mining operations.

The energy consumed by a single Bitcoin transaction platform is equivalent to that of an average American household for nearly a month. But does it have to be this way? The Bitcoin community has historically resisted change fiercely, but pressure from regulators and environmentalists frustrated by Bitcoin's massive carbon footprint may force them to rethink this stance.

Various countries, including Kazakhstan, Iran, and Singapore, have also imposed restrictions on cryptocurrency mining. In April 2023, the European Parliament is set to pass a landmark cryptocurrency bill called the "Markets in Crypto-Assets" (MiCA), which mandates that cryptocurrency companies disclose environmental information, and the law is expected to take effect sometime in 2024.

This may just be the beginning for the EU: the European Central Bank has previously stated that it cannot imagine governments banning gasoline-powered cars in favor of electric vehicles while taking no action against Bitcoin's ongoing carbon dioxide emissions. Alex de Vries, a data scientist behind the cryptocurrency energy usage tracking website Digiconomist, told MIT Technology Review: "Some members of the European Parliament are already wondering why Bitcoin hasn't followed Ethereum."

In the U.S., efforts to combat Bitcoin's energy waste are also increasing. In November, New York became the first state to enact a temporary ban on issuing new cryptocurrency mining licenses at fossil fuel plants, and the new law also requires New York State to study the impacts of cryptocurrency mining and work to reduce greenhouse gas emissions.

So, what can be done to change the status quo?

Proof of Work (POW) vs. Proof of Stake (POS)

Cryptocurrencies do not have a central guardian like banks to oversee their public ledgers—every transaction data on the blockchain is shared on-chain. Instead, they rely on consensus mechanisms to agree on updates.

In the Proof of Work method that Bitcoin relies on, a global network of computers known as "miners" consumes electricity to earn Bitcoin rewards; whoever calculates the cryptographic puzzle first gets to add the next block and collects new bitcoins in the process. The chances of earning Bitcoin are proportional to the miner's computational power (the more computational power, the greater the chance of receiving rewards, meaning the more mining machines, the higher the likelihood of earning Bitcoin rewards). As a result, there are a large number of Bitcoin network nodes globally, all vying to earn Bitcoin rewards.

Ethereum's current Proof of Stake method eliminates the massive energy consumption of Proof of Work. The staking validation system does not use miners but instead employs a large number of "validators." To become a validator, you must deposit or "stake" a certain amount of tokens—32 Ethereum, in Ethereum's case. The staking validation system allows validators to check new transaction blocks and add them to the blockchain, enabling them to earn rewards on their staked tokens. The more tokens you stake, the greater your chances of being selected to add the next transaction block to the chain.

Both systems strive to achieve the same goal, with one system (Bitcoin) using a nation's electricity while the other system (Ethereum) only requires participants to stake tokens. Both are theoretically decentralized, but not in practice. Today, the vast majority of Bitcoin mining is done by five major mining pools; in Proof of Stake (POS), those who hold the majority of tokens control the blockchain.

Ethereum Faces Different Pressures

Bitcoin is just one cryptocurrency. It has a set of developers and a group of miners. But Ethereum is a smart contract platform for decentralized applications, with many projects, cryptocurrencies, NFTs, and NFT platforms running on it.

Ethereum's creator, Vitalik Buterin, has always hoped for Ethereum to use Proof of Stake. However, when Buterin realized that developing a Proof of Stake algorithm to achieve a meaningful decentralized system was "very important"—he once wrote that some said it was impossible—he decided to let Ethereum use Proof of Work while gradually addressing the issue, with Proof of Stake ultimately taking seven years to implement.

Many major projects on Ethereum, including cryptocurrency exchange platform Coinbase, stablecoin companies Circle and Tether, as well as NFT projects Yuga Labs and OpenSea, have publicly supported Ethereum's transition to Proof of Stake. Compared to Proof of Work, it has attractive advantages. In addition to being more environmentally friendly, network transaction fees would also decrease. When Ethereum finally migrated, these projects led the way. The battle was already won before the Ethereum Foundation (the nonprofit organization that helps oversee the platform) pressed the red button.

There is always a risk that Ethereum miners could create competing chains and maintain the Proof of Work version. All smart contracts, tokens, and NFTs currently on the chain would automatically "fork" or replicate onto the original chain. However, despite some efforts to create competing versions of Ethereum, these attempts have not gained traction, and the Proof of Stake version prevailed.

There Are Political Issues

In principle, a small group of people could seize control and convert Bitcoin to Proof of Stake. As it is an open-source project, Bitcoin's development relies on community decisions, theoretically including anyone who wants to participate. However, updates to Bitcoin's code are actually controlled by a small core development team known as "maintainers," whose salaries are privately funded by some influential groups, such as the Bitcoin startup Blockstream; Coinbase, the largest cryptocurrency exchange in the U.S.; and the MIT Media Lab's hosted research project, the MIT Digital Currency Initiative.

These maintainers could switch like Ethereum, but they are a conservative group. Bitcoin is the original Proof of Work cryptocurrency. Although Bitcoin's code has undergone adjustments and updates, it has changed little compared to the original vision from 2009.

Emin Gn Sirer, founder of Ethereum competitor Avalanche, told MIT Technology Review that among Bitcoin purists, there are concerns about fundamental changes occurring. He said, "This fear partly comes from not wanting to take any risks, and partly from the concern that such changes could ultimately erode confidence in other algorithmic constraints." These constraints also include other fundamental features, such as the maximum number of bitcoins that can be mined, which was initially fixed at 21 million.

Jorge Stolfi, a computer science professor at the State University of Campinas in Brazil, has closely followed Bitcoin since its early days. He explained to MIT Technology Review: "There are no technical barriers to converting Bitcoin to Proof of Stake."

But Stolfi noted that the core maintainers cannot accomplish the conversion alone. They need the support of miners, who currently collect 900 new bitcoins (worth over $20 million) daily, along with transaction fees from the new blocks they mine. Stolfi said, "Faced with the possibility of abandoning this business model, miners may try to retain the Proof of Work branch of Bitcoin and insist that they are the real Bitcoin, while the Proof of Stake branch is just another altcoin."

Stolfi stated, "Ultimately, the struggle between the new Proof of Stake branch and the 'traditional' Proof of Work branch will be determined by how Bitcoin's price is distributed between the two currencies, which entirely depends on marketing."

Bitcoin Cash (BCH): A Historical Lesson

The last time someone attempted to make a significant change to Bitcoin was with Bitcoin Cash, an effort to increase the block size so that Bitcoin could scale and become a more useful currency.

Since 2015, Bitcoin's one-megabyte blocks have been filled with transactions. The network has become congested, leading to longer processing times for transactions and rising transaction fees. A group of developers and miners proposed a simple solution: increase the block size to 2 or 8 megabytes so that Bitcoin could handle more transactions per second.

But this is easier said than done. As David Gerard, author of "51% Attack on Blockchain," wrote, "Even this simple suggestion led to community splits, code forks, retaliatory DDoS attacks, death threats, divisions between Chinese miners and American core programmers, and other evidence that this problem and other issues in the Bitcoin protocol can never be resolved through consensus processes."

In August 2017, Bitcoin Cash was launched as a fork of Bitcoin software. However, most miners and developers chose to stick with the traditional Bitcoin blockchain, and Bitcoin Cash became another derivative of Bitcoin. Even today, Bitcoin OGs still refer to Bitcoin Cash as "rebellion" and "corporate takeover," rather than a sincere effort to improve Bitcoin's usability.

Proof of Stake would represent a more significant change, and on the surface, there seems to be no reason to expect Bitcoin to adopt it. Nicholas Weaver, a researcher at the University of California, Berkeley, and a vocal cryptocurrency critic, believes this will never happen. Weaver said that as long as Bitcoin miners can profit from Proof of Work, they will choose Proof of Work: "The only way to reduce Bitcoin's criminal energy consumption is to destroy the value of Bitcoin itself. If Bitcoin becomes worthless, then Bitcoin mining will stop."

Bitcoin may not want to change, but if it does not, governments and communities may become increasingly intolerant of its energy waste, and it may be forced to become irrelevant.

De Vries from Digiconomist said, "Those who will never change Bitcoin are fighting a losing battle, and the sooner they realize this, the sooner we all benefit."