New algorithm pushes energy consumption: Dirty Bitcoin, clean Ethereum: Why the second largest cryptocurrency is more sustainable
The energy consumption of digital currencies is a big problem – and has raised enormous doubts about the environmental sustainability of Bitcoin. The number two on the market, Ethereum, has been converting to a new algorithm since the beginning of August and is thus massively reducing consumption. This could significantly increase the attractiveness of the cryptocurrency again.
Bitcoin is on everyone’s lips. Hardly a day goes by without headlines about meaning, sustainability or the price development of the world’s largest crypto currency. Not quite as popular as the Bitcoin is the second largest cryptocurrency: Ethereum .
There is a misunderstanding here. Ethereum is not a digital motto. Rather, it is a foundation based in Zug, Switzerland. The purpose of the Ethereum Foundation (EM) is to provide an open technology that is accessible to all (“open source”), which aims to develop and operate decentralized applications. A separate blockchain programmed by EM serves as the basis for this.
The project was first presented in 2013 by its inventor, the Canadian-Russian programmer Vitalik Buterin. In contrast to Bitcoin, whose creator Natoshi Sakamoto apparently only stands as a pseudonym for an anonymous group of people, Ethereum can be assigned real names and real faces. Vitalik Buterin and his partners Gavin Wood and Jeffrey Wilcke intended to offer an alternative to the classic client-server concept, in which data and applications are stored centrally on servers. Since then, Ethereum has served as a platform for decentralized blockchain projects of all kinds and thus goes well beyond that of a pure payment system (as with Bitcoin) in terms of functionality.
The cryptocurrency of the Ethereum network is called Ether (ETH). It serves as an internal means of payment, so it is calculated as a fee for the use of Ethereum applications or the transfer from ETH. After Bitcoin with a market capitalization of around 850 billion US dollars, ether has the second largest value of all cryptocurrencies at just under 360 billion US dollars. Like other digital currencies, ETH can also be bought via crypto exchanges and stored securely in an electronic wallet on the smartphone or PC without being monitored by third parties.
Smart contracts are the secret of the success of the second largest cryptocurrency
The secret of Ethereum’s success are the so-called smart contracts. These “clever contracts” are “if-then rules” stored on a blockchain, which automatically execute transactions as soon as predetermined conditions are met. This saves time and money, for example with interest payments or dividend payments. Once a certain key date has been reached, the corresponding cash flows are automatically generated.
If several of these smart contracts are logically linked to one another, one speaks of a DAPP (Distributed App). The special thing about these applications is that they are operated decentrally by the entire Ethereum network and not – as is usually the case – by a single company. After installation on the blockchain, DAPPs can no longer be changed or removed, everything is fully automated. For example, if Twitter were a DAPP, it would be virtually impossible to delete tweets or freeze accounts.
Today, DAPPs find practical and useful application possibilities, especially in the field of digital financial services. The DAPP Agave, for example, enables cryptocurrencies to be granted or borrowed without providing personal data. The work of clerks is also not required.
Another useful solution that Ethereum offers are the so-called Non Fungible Tokens (NFT). NFTs are digital values that can be clearly assigned to a real, existing object. All NFTs are unique and cannot be copied and are used wherever virtual objects are collected and traded as one-off goods. For example in the art scene. With the help of NFTs, it is possible for the first time to trade digital art in the same way as painting, sculptures or photographs – and to achieve correspondingly high sales. The most spectacular example at the moment is the purely digital image Everydays: The first 5000 days by US artist Mike Winkelmann, who changed hands through Christie’s auction house for an unbelievable $ 69 million.
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The Ethereum platform offers great potential for the international financial industry. The first steps in this direction are already being made. In April, for example, the European Investment Bank (EIB) and three syndicate banks issued a digital bond via the Ethereum blockchain. The advantages are great: fewer intermediaries are involved, the fixed costs are considerably cheaper and the processing speed is significantly faster.
Ethereum relies on a new, more economical algorithm
But now the Ethereum network is facing another milestone: Since August 4, 2021, the switch from the current, very energy-intensive proof-of-work to the much more economical proof-of-stake algorithm has been taking place. The difference lies in how a transaction is controlled and confirmed on the blockchain. In the proof-of-work, miners compete to be the first to solve increasingly difficult arithmetic tasks in order to create new blockchain blocks and thus new coins or tokens. This requires huge, ever larger server capacities, which results in immense energy consumption. A problem for which Bitcoin has also been heavily criticized for some time, especially since many Bitcoin miners are based in countries such as China, where electricity is still largely generated using fossil fuels.
With the proof-of-stake (proof of share), the path is different. It is not the fastest miners who win here, but all those who own shares in a crypto currency and make them available. In the case of ether, this means that anyone who owns two percent of it can theoretically validate two percent of all ether transactions. There is also no reward in the form of new tokens, but the Ethereowners determine beforehand the transaction fee that they charge for their use. According to experts, the switch to the PoS method can theoretically reduce energy costs by up to 99.95 percent. In the long term, this could also increase the transaction capacity from the current 15 transactions per second to several thousand.
A very current example from Germany shows how much the Ethereum concept has already arrived in the real world and is actively used there: The cryptographically encrypted data of our digital vaccination pass is compared with the help of the Ethereum blockchain.
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