FT Cryptofinance: Ethereum is preparing to abandon its energy-guzzling blockchain

In crypto-land, breathless pitches about technologies that will change the industry cost 10 cents. For once, one is just around the corner that could partially justify the hype.

In recent years, conversations about the future of crypto have typically descended into a semi-mythical event at an unspecified point in time known as a “merge,” affecting Ethereum, one of the industry’s leading blockchain networks.

It's important because it faces one of the harshest criticisms of crypto: that the industry is gobbling up huge amounts of energy when the planet desperately needs to reduce its consumption.

After years of talk, the merge is tentatively scheduled for mid-September.

There's a bit to unpack, so first the basics. The Ethereum blockchain is one of crypto's great hopes because it aims to make digital ledgers more than a simple database of transactions. But like the Bitcoin blockchain, it consumes a lot of energy. The developers behind Ethereum have long talked about their solution, which aims to change the way transactions are verified on the blockchain.

To use industry jargon, it would move from a proof-of-work to a proof-of-stake blockchain. Ethereum would no longer be secured by energy-intensive mining, but rather by individuals (called “validators”) staking their own capital on the network itself. But will the layer work as intended?

Alex de Vries - better known by his nickname "Digiconomist" - has high hopes, telling me: "It's hard to say what things will look like... but a 99 percent reduction in energy consumption seems realistic." De Vries estimates that the Ethereum network’s carbon footprint is currently comparable to that of Finland.

These high climate costs have led regulators to criticize the proof-of-work system that underpins both Ethereum and Bitcoin. Last year, EU lawmakers almost completely banned cryptocurrency mining, and if the merger goes smoothly, regulators in Sweden are waiting in the wings to turn their attention to the controversial industry.

“Regulators are literally waiting for Ethereum to successfully transition to Proof of Stake before cracking down on Proof of Work,” said de Vries.

A meeting between the Swedish Financial Services Authority and the Environment Agency last year hints at some of the thinking.

"If Ethereum is able to shift, we could demand the same from Bitcoin. We must protect other sustainable cryptocoins," the minutes said.

But it might be easier said than done. Bitcoin – which still uses a proof-of-work system – is by far the world's most actively traded crypto token, and despite the recent crash, there are many Bitcoin defenders.

Then of course the obvious success of Bitcoin as a secure network must be taken into account. In a crowded field of security failures, Bitcoin has never been hacked, unlike a number of proof-of-stake cryptocurrencies that supposedly represent the industry's greener future.

So it's not out of the question that the merge will be a success, but criticism of crypto's environmental impact doesn't go away. It may even increase the scrutiny set by regulators.

I would like to hear from you. Will the merger change your view of Ethereum? And what does this mean for the future of Bitcoin? Email me at scott.chipolina@ft.com.

This week's highlights

• It's been a difficult week for those who preach the immutable resistance of blockchains. After a digital token protocol called Nomad raised $190 million

• Crypto exchange Coinbase forged a deal with BlackRock that will give the asset management giant's customers greater access to crypto. The partnership is the latest sign that traditional investors are turning to digital assets even after a dramatic sell-off across the crypto market.

• At a time when companies like Robinhood and Coinbase are cutting staff, Ripple is in full swing on recruiting. After starting the year with around 500 employees, the company wants to increase its number of employees to 850 by the end of the year. “The last 18 months or so have been our most successful and fastest growth period to date,” Ripple’s European managing director Sendi Young told me this week.

• Bitcoin maximalist Michael Saylor is stepping down from his role as chief executive of MicroStrategy after the software company reported a nearly $1 billion impairment due to its relentless Bitcoin purchases in recent years. Saylor believes his new role as CEO will help him “focus more on our Bitcoin acquisition strategy.”

Soundbite of the Week: If you recently lost your life savings to crypto. . . “remain steadfast.”

Sandeep Nailwal, co-founder of popular crypto platform Polygon, had some choice words that likely offered little comfort to those who lost money in this week's Solana-related wallet hack.

"My heart goes out to the members of the Solana community who lost their life savings in the ongoing attack. Stay strong, these are the growing pains that the entire blockchain industry must go through. These moments, if handled properly, result in a lot of strength for any ecosystem."

Data mining

The Ethereum merger appears set for next month, and crypto prices have been rising in recent weeks. Over the past month, Bitcoin and Ether, the native tokens on the Ethereum blockchain, have gained about 15 percent and 45 percent, respectively.

These points make this a good week to take stock of how much of the broader crypto market Bitcoin and Ether make up. According to data from Crypto Compare, the industry's two flagship cryptocurrencies account for 62 percent of the broader crypto market.

Interestingly, the crypto crash did little to change things. Bitcoin remains firmly at the top with 43 percent market share, just like it did at the beginning of the year. Ethereum is at 19 percent, down 2 percentage points year to date.