There seems to be no certainty on how Bitcoin, the dominant cryptocurrency, will be affected as Ethereum, the second-largest digital currency, completes its upgrade to a more energy-efficient network.
Ethereum founder Vitalik Buterin has said the upgrade, known as The Merge - which took place on September 15 - will conclude the shift from the energy-guzzling Proof Of Work (PoW) consensus to the Proof of Stake (PoS) validation method.
Ethereum, with a market capitalisation of $204 billion – half that of Bitcoin – started the first phase of the upgrade last week as it targets building a dependable decentralised ecosystem for the financial future.
In the PoS system, participants known as validators lock in their holdings of cryptocurrency or crypto token (their stake) to the blockchain to validate new transactions and earn rewards. However, they could lose their stake if their validation is inaccurate or fraudulent.
This contrasts with PoW, which uses a lot of energy to mine tokens by using computers to solve mathematical equations. The high energy consumption is a serious drawback for PoW, which continues to be the foundation of Bitcoin mining.
Pressure on Bitcoin
The energy issue is not the only macroeconomic risk for the crypto ecosystem. Other matters such as political unrest, high inflation rates, and hawkish national monetary policies are said to also have led to the present bear market.
Bitcoin reached an all-time high price of $69,000 in November 2021. Since then, the world economy has been struggling and this has caused a sharp decline in the price of Bitcoin (almost 70 percent) and other cryptocurrencies.
The short-term price forecast for the most popular cryptocurrency is still unclear as Bitcoin’s price fluctuates and hovers around $21,000 per coin.
While it is not clear what might aid Bitcoin’s recovery, Ethereum’s network upgrade, which seeks to position its ecosystem as the currency of the future, may put even more pressure on Bitcoin’s usefulness as volatility continues to alarm mainstream investors.
According to Anndy Lian, the author of NFT: From Zero to Hero, the shift to PoS does add pressure to Bitcoin’s energy consumption issue.
“Green experts will find ways to scrutinise Bitcoin. The regulators will find ways to control Bitcoin and targeting PoW seems to be the right move,” Lian said.
He added that over the course of the next three decades, when Bitcoin issuance is near zero, another problem will be how the blockchain stays secure.
“This issue (of Bitcoin’s PoW consensus) will become a spotlight and can indirectly give the perception that Bitcoin will be unstable and will not be a real asset in the future. In my humble opinion, we need to solve the issues step by step. Perhaps new protocol innovation can change that,” Lian said.
“Bitcoin isn’t likely to become more sustainable any time soon,” said Digiconomist, a science and technology publication that tracks Bitcoin energy consumption. The findings gained support after China tightened down on cryptocurrency mining, which sharply reduced the proportion of renewable energy sources used to run the network.
According to Alex de Vries, a researcher and critic of cryptocurrencies, “Bitcoin got dirtier after the Chinese mining crackdown in 2021.”
Hard to change
Ali Merchant, lead developer relations engineer at Akash Network, which works in cloud computing, said that as lucrative as it may sound, changing Bitcoin from PoW to PoS is technically very challenging.
“Even if a group of people decided to implement that change, it would be very difficult to get more than 51 percent of the votes on a network. Pair that up with Bitcoin Maxis who think that PoS could compromise the decentralisation of Bitcoin. To add to that, people who make tons of money out of Bitcoin farming will most likely oppose this kind of proposal,” he said.
This would be true of the Ethereum network, too. Ethereum will also be forked, with one chain continuing to PoW-based validation. Thus, it would be naive to conclude that all PoW chains can be migrated to PoS.
Should Bitcoin too migrate to PoS, it would make some people very upset, although there could be increased adoption of the coin as it would be more eco-friendly.
“Bitcoin migration isn’t coming anytime soon. If it does, it might just see a spike in trading volumes,” Merchant said.
After the Ethereum integration, only 23 percent of the total crypto volumes will be based on PoW, mostly Bitcoin. Regulators will now search for ways to regulate cryptocurrency, with the apparent first step being to target PoW.
Bitcoin’s reputation as a power hog continues to be one of its weaknesses.
In contrast to PoW, which cannot be utilised for the metaverse or non-fungible tokens (NFTs), Ethereum is establishing the framework for PoS. However, other cryptocurrencies may create new protocols and governance models.
With Bitcoin’s future being uncertain, competition, regulation, and energy issues are only a few of the elements at play.
“If we look at investor trends, however, no one holds their bigger capital in Ethereum – people will hold big capital in Bitcoin,” said Raj Kapoor, founder of the India Blockchain Alliance. “Bitcoin will always be like digital gold and Ethereum like fiat money, so while there would be a dip in Bitcoin prices, there would not be much of an impact.”
However, Kapoor said a sharp dip could be expected in the immediate term. The fear that the Bitcoin network may be “regulated away” may also cause the price of Bitcoin to move lower, he said.
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