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Posted 1 year ago | 5 minute read
What is the Ethereum Merge and why does it matter?
Efficiency and energy consumption have been long-held criticisms of how blockchain processes transactions. The Ethereum Merge seeks to change this.
Ethereum is the network that runs Ether, the world’s second-most-valuable digital currency. The Merge is expected to occur on September 15. One of the features of 2.0 is that it will move Ethereum away from the energy-intensive “proof-of-work” system it currently uses to “proof of stake”. It is estimated that the move could lower Ethereum’s energy use by 99.95%.
Proof-of-work is the original cryptocurrency “consensus mechanism.” Originating with Bitcoin, it allows many computers across a decentralised network to agree on which transactions are legitimate. Currently, it’s also the process Ethereum uses to mint new coins. The problem with proof-of-work is that it requires a huge amount of processing power, which comes from virtual “miners” around the world who compete to solve a time-consuming math puzzle. The winner gets to update the blockchain with the latest block of verified transactions and is rewarded with a predetermined number of new tokens.
Essentially, proof-of-stake is a system that aims to make the network more energy efficient, while also increasing security and processing speeds. Proof-of-stake blockchains are designed to be faster, less resource-intensive, and theoretically more secure. Instead of requiring energy-intensive miners, proof-of-stake networks rely on “validators.” These validators contribute their own coins to a “staking pool” to give themselves a chance of updating the blockchain with the latest verified transactions. If they’re chosen, they earn newly minted tokens and a share of the transaction fees.
Ethereum’s upcoming upgrade will combine the current proof-of-work blockchain with a proof-of-stake blockchain. Right now, all you can do on the Beacon Chain is stake your tokens. But, hundreds of thousands of validators have already staked more than 10 million ETH — and with the upgrade, the Beacon Chain will merge with the existing proof-of-work chain. When this happens, it will begin taking over the work of validating new transactions and issuing new ETH. Ethereum’s proof-of-work blockchain will then begin operating more slowly, which is meant to incentivize existing miners to become validators on the new blockchain.
While the move to a more energy efficient blockchain is to be welcomed as a positive step forward for the crypto industry in reaching net zero, cryptocurrency miners have significant potential beyond just mining.
Energy costs can account for over 80% of mines’ operational expenses, so they are often more sensitive to electricity prices than other industrial customers. If the price of electricity suddenly spikes during the afternoon peak, for example, this can incentivise Bitcoin mines to shut off operations temporarily. If grid operators have highly predictable, reliable, scalable loads, they can use these assets to manage peak demand.
One notable benefit of miners is that they operate around the clock, they can be used at any time of day to decrease load, for example during a sudden cold snap or evening peak. Crypto currency miners have a constant energy requirement. A miner will, once turned on, not be switched off until it either breaks down or becomes unprofitable. As long as the price/kWh paid by the utility to miners for demand response is above their expected value for Bitcoin/kWh mined, then it always makes sense to shut down miners.
In a recent study, Ark Invest modelled how cryptocurrency mining could encourage investment in solar systems and batteries. It concluded that integrated bitcoin mining could “transfigure intermittent power resources into baseload-capable generation stations” and suggested utility-scale storage developers could augment their current battery offerings with bitcoin miners as a mechanism to increase the overall market for renewable and intermittent power sources.
The investment case behind this is that miners could be used to increase demand during renewable curtailment events in a way that is not feasible with current demand response resources. As more renewables are connected to the grid, there is an increasing risk of negative electricity prices.
By ramping up demand cryptocurrency miners could become the buyer of last resort – essentially setting the price floor for electricity, making it easier for both grid and utilities operators to plan investments, which ultimately increases market efficiency.
Value from energy markets
Cryptocurrency miners have significant potential beyond just mining. As with crypto currency markets, energy market prices are volatile. But in some instances, the price/kWh paid can be above the value for Bitcoin/kWh mined.
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Energy services for crypto miners
Cryptocurrency miners have significant potential beyond just mining but there several variables are at play, including the price of the cryptocurrency itself. As with crypto currency markets, energy market prices are volatile. But in some instances, the price/kWh paid can be above the value for currency/kWh mined.Learn more
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