You may have seen the headlines about something called ‘The Merge’. But when you realised it was related to Ethereum and the world of cryptocurrencies, you may have tuned out.
But, it’s actually big news, and that’s because the world’s second largest blockchain network has made a major change to its core systems, and it’s immediately cut electricity use by a whopping 99.988%.
The network was previously using about 23 million megawatt-hours per year. Moving forward, it’s expected to use just over 2,600 megawatt-hours per year.
The network’s climate pollution drops from roughly 11,000,000 tons of CO2 emissions a year to a now insignificant level of 870 tons.
OnImpact explores what this all means for those wanting to invest for impact. And we spoke to Guy Dickinson, founder of BetaCarbon, to get the lowdown on what the merge means for those running business on top of the Ethereum network, and market moves in the Aussie carbon credit industry.
What is Eth anyway, and what’s the big deal with ‘The Merge’?
Essentially Ethereum is a complex database (with transaction capabilities that make it similar to a bank) but rather than have one central bank manager agreeing to your transactions, they have thousands of ethereum ‘miners’ who all have access to the same accounting ledger, and they commit their computer resources to confirming transactions through updating said ledger.
What’s the incentive for these ‘miners’ to put in so much effort? Well, in the past, they could receive freshly minted Ether tokens for solving endless, complex (and pointless) math problems, this was called proof-of-work.
The more computing work you do, and the more power you use, the more Ether you receive. (Note this is also how Bitcoin operates.)
But for the Ethereum network, that ALL changed last Thursday.
Now… ethereum operates on a proof-of-stake model.
In this new system the community, a network of ‘nodes’, are made up of those with a demonstrated ‘stake’ in the system itself. This stake essentially means the individuals have committed a large chunk of their Ether tokens to the system, hence the moniker, proof-of-stake.
An assumption is made that people who have committed their Ether tokens are also committed to the prosperity of the network, ie. they have a stake in its longevity.
Ethereum miners have now been replaced by validators.
This may sound like a simple enough concept, but the complexity of shifting the underlying incentives of a global network, while keeping it live and operating the entire time, boggles the mind.
And, as a result of no longer requiring many thousands of computers to be humming, and burring and sucking up electricity all day and all night, to solve pointless cryptographic puzzles; the energy consumption of the network has been cut by an astounding 99.988%.
The system still needs validators to run nodes, in order to manage the accounting ledger, but they will be only a fraction as energy hungry as the previous system.
It was estimated that prior to the merge, the ethereum network used as much electricity in a year as Bangladesh, and now, it will use less than that of 100 average American households.
BetaCarbon Puts Carbon Credits on the Blockchain
Now that we all understand a little more about the Ethereum system, let’s look at how the thing can actually be useful.
For Guy Dickinson the Ethereum blockchain is the rails that his business runs on. BetaCarbon makes Australian carbon credits (ACCUs) available as digital tokens, verified on Ethereum.
By tokenising carbon credits they can be easily traded by people who otherwise wouldn’t have access to the government issued carbon credits.
For Guy and BetaCarbon, the Merge achieved what it intended to, and now the sky’s the limit.
“From a functionality perspective, it’s the same same system, which was what most people wanted. You can mint tokens, buy gas to transfer and hold tokens in wallets.”
“But also, I think an environmental narrative died that day. The Merge has led to a 0.2% reduction in global emissions, overnight! That’s massive! It’s meaningful. There’s no other single action that could have such an impact, so quickly.” Guy says.
For a long time, the naysayers (ie. the incumbent finance industry) derided the emergence of blockchain as being a heavily polluting waste of time. But now, the environment has shifted, very suddenly.
“The old story said that a traditional credit card transaction was 1,000 times less damaging than an Eth trade. But now, it’s actually gone the other way. So a visa transaction emits way more than an Eth transaction, which is fascinating.” Guy says.
Sustainable Investors Returning to Ethereum
Cryptocurrencies have always been power hungry, and this led many self-professed sustainable investors to avoid the assets in an effort to avoid exposure to the financed emissions.
But now that ethereum has made a stunning reversal of its energy use, there is one less reason for people to become engaged.
In fact, Guy has recognised a unique trait inherent to carbon tokens, and that’s people willingness to hold on to them, despite a falling price.
The impact of the token is that it deprives a polluting company of one extra token, it increases scarcity and pushes up the price. And when other assets are liquidated in a falling market, the ‘impact’ value may drive retention.
“It changes the narrative around why they own it. The impact value is enough for them not to sell, which is a really interesting. It something you just don’t see elsewhere.” Guy says.
Aussie Carbon Market is Maturing
OnImpact originally spoke to Guy in January, and since then, a lot has changed.
We’ve seen a change in government, the ACCU market is undergoing the scrutiny of the Chubb report, the Climate Change Authority has looked into overseas credits, and Climate Active is increasing the mandated percentage of offsets that must be ACCU’s in order to be certified carbon neutral.
For BetaCarbon, that’s all contributing to a more transparent market, with pressure on prices as dodgy credits are squeezed out of the system.
“The oversight will have an impact. You’ll find that the supply of those voluntary markets is extremely tight. The whole world wants credits, and it’s only a billion dollar market. And now we’ve taken out 80% of the cheap stuff, so the expensive stuff will only get more expensive, it’s happening very quickly.” Guys says.
And in terms of the Chubb report, he thinks it will impact the operations of certain methodologies, but it will only be minor.
“I don’t think it will be catastrophic for the market. Right now I estimate we’ve got some 140 million odd future credits, contracted through the ERF, becoming availabel over the next seven or eight years.” Guys says.
“So if some methodologies are called into question, it will only be one or two around the edges. If 10-20% are pushed out, then it will only serve to further limit supply, and push prices up.”