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

There’s no technical barrier to making the notoriously energy-hungry cryptocurrency significantly more efficient, just a social one.

Last year, Ethereum went green. 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 the upgrade last September, known as the "merge," it reduced its energy consumption by 99%. Meanwhile, Bitcoin, which continues to grow, consumes as much energy as the entire country of the Philippines.

Bitcoin mining, a computationally intensive process by which new bitcoins are created and calculated, has become a global concern. After China cracked down on the process in mid-2021, miners began looking elsewhere in the world for cheaper, but not necessarily environmentally friendly, energy sources. In places like Kazakhstan, miners have strained grids that rely heavily on carbon-intensive coal-fired power stations, causing local blackouts and sparking civil unrest. In upstate New York, where miners have taken over shuttered factories and vacant warehouses, locals have complained about rising energy bills and the high-frequency hum of data center fans, and worried about the environmental damage mining is causing. The U.S. now has more than 38% of bitcoin mining operations.

One bitcoin transaction uses as much energy as an American household does in nearly a month. But does it have to be this way? The bitcoin community has historically been fiercely resistant to change, but pressure from regulators and environmentalists fed up with bitcoin’s huge carbon footprint may force them to rethink that stance.

Various other countries, including Kazakhstan, Iran, and Singapore, have also placed restrictions on cryptocurrency mining. In April 2023, the European Parliament will pass a landmark cryptocurrency bill called "Markets in Crypto-Assets" (MiCA), which will require cryptocurrency companies to disclose environmental information. The bill is expected to come into effect sometime in 2024.

This could be just the beginning for the EU: The ECB has previously said it can’t imagine governments banning gasoline-powered cars in favor of electric cars, but taking no action against Bitcoin’s continued CO2 emissions. “Some members of the European Parliament are already wondering why Bitcoin hasn’t followed Ethereum,” Alex de Vries, the data scientist behind Digiconomist, a website that tracks cryptocurrency energy use, told MIT Technology Review.

Efforts to combat Bitcoin’s wasteful energy use are also growing in the United States. In November, New York became the first state to enact a temporary ban on issuing new cryptocurrency mining licenses at fossil fuel plants. The new law also requires the state to study the impact of cryptocurrency mining and work to reduce greenhouse gas emissions.

So, what can we do to change the current situation?

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

Cryptocurrencies don’t have a central guardian like a bank to oversee their public ledgers — the blockchain where every transaction is shared. Instead, they rely on a consensus mechanism to agree on updates.

In the proof-of-work method that Bitcoin relies on, a global network of computers called "miners" consume electricity in order to receive Bitcoin rewards. Whoever solves the cryptographic puzzle first can add the next block and collect new Bitcoins in the process. The chance of getting Bitcoin is proportional to the miner's computing power (the more computing power, the greater the chance of getting a reward, that is, the more mining machines, the greater the chance of getting a Bitcoin reward). As a result, a large number of Bitcoin network nodes have appeared around the world, and they are scrambling to get Bitcoin rewards.

The proof-of-stake method that Ethereum now uses does away with the massive energy consumption of proof-of-work. Instead of using miners, the staked proof-of-stake system uses a large number of “validators.” To become a validator, you must deposit or “stake” a certain amount of tokens — 32 ether, in Ethereum’s case. The staked proof-of-stake system gives validators the opportunity to check new blocks of transactions and add them to the blockchain, so they can earn rewards on their staked tokens. The more tokens you stake, the greater your chance of being selected to add the next block of transactions to the chain.

Both systems are trying to achieve the same goal, one system (Bitcoin) uses the electricity of a country, while the other system (Ethereum) only requires participants to stake tokens. Both are decentralized in theory, but not in practice. Today, the vast majority of Bitcoin mining is done by five major mining pools; in Proof of Stake (POS), whoever owns the majority of tokens controls the blockchain.

Ethereum faces different pressures

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

Ethereum creator Vitalik Buterin had always wanted Ethereum to use proof of stake. But when Buterin realized that developing a proof of stake algorithm to achieve a meaningfully decentralized system was “so nontrivial” — so much so, he once wrote, that some people said it was impossible — he decided to make Ethereum use proof of work while he gradually worked on the problem, which ultimately took seven years.

Many major projects on Ethereum, including cryptocurrency exchange Coinbase, stablecoin companies Circle and Tether, and NFT projects Yuga Labs and OpenSea, have publicly supported Ethereum's transition to proof-of-stake. It has attractive advantages over proof-of-work. In addition to the advantage of being more environmentally friendly, network transaction fees will also be reduced. When Ethereum finally migrated, these projects led the way. Before the Ethereum Foundation, the nonprofit that helps oversee the platform, pressed the red button, the battle had already been won.

There is always a risk that Ethereum miners will create a competing chain and keep the proof-of-work version. All smart contracts, tokens, and NFTs that exist on the current chain will automatically "fork" or copy to the original chain. However, despite some efforts to create competing versions of Ethereum, these efforts have not gained traction and the proof-of-stake version has won out.

There are political problems

In principle, a small group of people could seize control and convert Bitcoin to proof-of-stake. Because it’s an open-source project, Bitcoin’s development relies on decisions made by the community, which in theory includes anyone who wants to participate. But updates to the Bitcoin code are actually controlled by a small core team of developers known as “maintainers,” whose salaries are privately funded by influential groups such as Blockstream, a Bitcoin startup; Coinbase, the largest U.S. cryptocurrency exchange; and the MIT Digital Currency Initiative, a research program hosted by the MIT Media Lab.

These maintainers could make the switch, as Ethereum did, but they are a conservative bunch. Bitcoin is the original proof-of-work cryptocurrency. While Bitcoin’s code has been tweaked and updated over time, it has barely changed from its original vision in 2009.

Emin Gün Sirer, founder of Ethereum competitor Avalanche, told MIT Technology Review that among Bitcoin purists there is fear of radical change. “Part of this fear comes from not wanting to take any risk, and part of it comes from the fear that this change might end up eroding confidence in other limits of the algorithm,” he said. Those limits 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 professor of computer science at the State University of Campinas in Brazil who has followed Bitcoin closely since its early days, explained to MIT Technology Review that “there are no technical barriers to converting Bitcoin to proof-of-stake.”

But Stolfi said the core maintainers can’t make the switch alone. They need the support of miners, who currently collect 900 new bitcoins a day (worth more than $20 million), plus transaction fees from the new blocks they mine. “Faced with the possibility of abandoning this business model, miners may try to keep the proof-of-work branch of Bitcoin and insist that they are the real Bitcoin and the proof-of-stake branch is just another shitcoin,” Stolfi said.

“Ultimately, the battle between the new proof-of-stake forks and the ‘traditional’ proof-of-work forks will be decided by how the price of Bitcoin is distributed between the two currencies, and that’s all about marketing,” Stolfi said.

Bitcoin Cash (BCH): A Lesson from History

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

Since 2015, Bitcoin's one-megabyte blocks have been filled with transactions. The network was becoming congested, and as a result, transactions were taking longer to process and transaction fees were increasing. A group of developers and miners came up with a simple solution: increase the size of transaction blocks to 2 or 8 megabytes so that Bitcoin could process more transactions per second.

But this is easier said than done. As David Gerard, author of The 51% Attack on Blockchain, writes, "Even this simple suggestion has led to community divisions, code forks, retaliatory DDOS attacks, death threats, schisms between Chinese miners and hardcore American programmers, and other evidence that this and other problems in the Bitcoin protocol can never be solved through the consensus process."

In August 2017, Bitcoin Cash was launched as a fork of the Bitcoin software. But most miners and developers stuck with the legacy Bitcoin blockchain, and Bitcoin Cash became another derivative of Bitcoin. Even today, Bitcoin OGs call Bitcoin Cash a “rebellion” and a “corporate takeover” rather than a sincere effort to improve Bitcoin’s usability.

Proof of Stake would represent a much bigger change, and on the surface, there seems little reason to expect Bitcoin to adopt it. Nicholas Weaver, a researcher at the University of California, Berkeley, and an outspoken critic of cryptocurrency, believes it 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 doesn’t, governments and communities may become increasingly intolerant of its energy waste, and it may be forced into irrelevance.

“Those who will never change Bitcoin are fighting a losing battle, and the sooner they realize that, the sooner we will all benefit,” said Digiconomist’s De Vries.