- Digital Currency
The First Shoe Is About to Drop on Ethereum's Infamous Power Consumption
Ethereum is the second-largest cryptocurrency by market cap after Bitcoin, and like Bitcoin, it uses a consensus algorithm called proof of work (PoW). PoW is responsible for a vast amount of electricity consumption globally. Utilities and utility commissions around the world are taking steps to curb the establishment of digital currency mining (DCM) farms in their territories to protect their infrastructure and ratepayers.
A key problem for utilities is that the power consumption associated with PoW-based cryptocurrencies is volatile and unpredictable, and it is influenced by trends in the value of digital currencies, the regulatory environment surrounding DCM, and developments in technology. This makes it difficult for utilities to form a partnership or accommodation with DCM companies that could appear one day and be gone the next, taking their data-center-magnitude electricity demand with them.
The Upcoming Ethereum Hard Fork Will Hurt DCM Companies
Ethereum differs from Bitcoin in that its community has planned to move away from PoW to the less energy-intensive Proof of Stake (PoS) since the early days of the network. The Ethereum community is preparing for a change in network protocols called Constantinople—a "hard fork"—that is the penultimate step in this process, though it does not yet implement PoS.
The first change is a decrease in the amount of ether awarded to the miner that wins the right to publish each new block to the Ethereum blockchain, from 3 to 2 ether. This will immediately reduce the revenue potential of mining operations by 33%, irrespective of the value of Ethereum, and may force mining farms that operate on thin margins to downsize.
The second, more serious change is that after Constantinople, ASIC machines (commonly used to mine both bitcoin and Ethereum) will no longer be able to mine ether do to a change in the PoW protocol. This change is specifically designed to de-incentivize the large-scale mining farms that are driving the high electricity consumption associated with the network. It also means that companies like Bitmain that have invested huge amounts of money in ASIC hardware will lose a key revenue stream.
Constantinople comes at a time where companies like Bitmain are planning for initial public offerings and trying to convince investors that their long-term business models are sustainable. Bitmain will be hit twice here, because in addition to mining bitcoin, Ethereum, and other currencies, it also sells ASIC machines to other miners and mining companies.
The DCM Industry’s Reaction Will Be Key to Future Energy Consumption
The Constantinople hard fork is an excellent example of how technology evolution can affect the profitability (and associated power consumption) of the DCM industry virtually overnight. However, it is only one part of the story. Miners who have invested in ASIC machines, particularly at the scale of mining farms, have a huge incentive to resist the changes so they can continue to use their hardware and receive the larger ether reward. This is the essence of what it means to hard fork a distributed network: one group of the community chooses to move to the new protocols, effectively forming a new and separate network, and the other group stays with the existing rules.
At first glance, this might seem to be bad news for electricity consumption—shouldn't total electricity demand nearly double, since there are now two networks instead of one? In Part 2 of this blog series, I will take a more detailed look at how hard forks have influenced the big picture of electricity demand when they have happened in the past, with the goal of understanding how changes like this will affect the future of electricity consumption in the industry.