- Digital Currency
What Will Happen When Large Cryptocurrencies Ditch Proof of Work
The Ethereum network's upcoming Constantinople hard fork is poised to completely change the dynamics of the network’s electricity consumption. Among other changes, it institutes a protocol shift that bars Antminer devices—the dedicated digital currency mining hardware favored by large-scale mining companies—from participating in Ethereum’s proof of work consensus process.
The most instructive part of the story for understanding how technology shifts are likely to affect utility systems will be how the community reacts to the change. Though Ethereum prices have fallen to about $100 per Ether, cutting it off as a revenue source will significantly influence mining operations. This is one reason utilities are unlikely to see massive digital currency mining loads persist over the long term; technology and regulatory changes tend to exert downward pressure on mining revenue, making large-scale farms less cost-effective.
On the other hand, blockchain networks like Ethereum are decentralized, with no single point of control—meaning there cannot be a forced adoption of the changes proposed in Constantinople. Hence the term hard fork; one branch stays with the existing rules, one branch upgrades, and two new networks form from one old network. Digital currency miners have little incentive to adopt the new protocols because the old protocols give them access to Ether as a revenue source.
A significant percentage of miners may refuse to update and instead form a new branch of the network in which Antminers are allowed to continue mining. If this happens, a new digital currency will be born—call it Ethereum Legacy—and miners will continue to plug away, earning Legacy Ether instead of Ether.
Why Electricity Consumption Will Go Down
It is reasonable to assume that if miners create a new digital currency, electricity consumption will not change. That would only be the case, however, if Legacy Ether maintained valuation equal to the original currency. It is the fiat value of a digital currency that creates an incentive to mine, so higher valuation leads to higher electricity consumption in the long term. So the first question to ask in the event of a hard fork is: what will the new currency be worth?
Hard forks have happened before, most notably when a hacker stole $70 million worth of Ether from the DAO. One group argued that code is law and that the hacker did not commit a crime. The other implemented a hard fork to undo the theft. This mitosis created Ethereum Classic, a new currency that exists alongside Ethereum.
Unfortunately for the purists, Ethereum Classic never caught on. At the time of this writing, one Classic Ether is worth just over $3, while one original Ether is worth $107. A similar split happened with bitcoin in 2017 after disagreements about protocol changes. The rebel, Bitcoin Cash, now trades at $115 to Bitcoin’s $3,500.
Technology moves fast, and digital currencies are already moving past proof of work and the electricity consumption it entails. When Ethereum moves to proof of stake later in 2019, miners with sunk costs are sure to put up a fight and probably force a hard fork—but it will be a losing battle for them and few will survive the hit to their revenue. It’s possible, even likely, that something similar will happen with bitcoin. If that happens, utilities won’t have to plan around a volatile and energy-intensive digital currency mining industry—because that industry will cease to exist.