A public policy miracle happened two weeks ago and we should not let it pass quietly just because it went smoothly.
Ethereum, one of the most popular blockchains on the planet, reduced its energy consumption by about 99% and increased its cyber resilience by overhauling the way network participants validate transactions – a milestone called “The Merge.”
Now, instead of using about as much energy as all the televisions and computers in America combined annually (100 billion kilowatt hours, according to the Biden administration), Ethereum will use as much energy on an annual basis as Gibraltar, which has just 30,000 residents, all while supporting billions of dollars worth of transactions daily.
Jared A. Favole is a senior director of communications and policy at Circle, the principal operator of USD coin (USDC).
Instead of continuing to use a proof-of-work consensus mechanism, where high-end computers perform and solve energy-intensive mathematical proofs to validate transactions, Ethereum now uses a proof-of-stake model. Using proof-of-stake means network participants will instead deposit ether, the native token of Ethereum, as collateral to validate transactions. (The process to “mine” or validate transactions on the Bitcoin network still uses proof-of-work.)
The Merge is a great example of the benefits of blockchain technology. If we want better, cheaper, faster and programmable payments, constantly upgradable financial infrastructure will get us there.
The Merge also has important public policy implications that deserve attention, such as how to regulate decentralized organizations that do not have headquarters and/or employees like a traditional corporation.
The Merge could not have come at a more critical time for the blockchain and digital assets industry. The digital asset economy has lost about $2 trillion in value this year, several companies have filed for bankruptcy and a once-popular synthetic derivative that was supposed to have a stable price melted down in dramatic fashion.
See also: How the Ethereum Merge Could Lead to Improved On-Chain Privacy | Opinion
All of this is forcing lawmakers in the U.S., not to mention globally, to act with a sense of urgency. On Sept. 16, multiple executive branch agencies in the U.S. released a wave of reports as part of the Biden Administration’s Executive Order on digital assets – most of which highlighted the risks of digital assets, including to the environment.
Congress is actively considering a range of bills that would regulate nearly every aspect of blockchain technology. Executive branch agencies, notably the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), are jockeying for oversight of the industry.
And yet, judging by the early reaction from lawmakers, Ethereum’s Merge is going largely unnoticed despite climate change and cybersecurity being global priorities. At a hearing on digital assets two weeks ago that started just hours after Ethereum successfully transitioned to proof-of-stake, members of Congress spent hours grilling SEC Chairman Gary Gensler on, among other topics, climate change and digital assets. The Merge did not come up.
At another hearing on the same day, where members pressed CFTC Chairman Rostin Behnam on a range of topics, proof-of-stake was discussed, thanks to some questions from Sens. Corey Booker (D-N.J.) and John Boozman (R-Ariz.), but only briefly.
See also: A Call to the SEC: Treat Crypto Assets as if Clients Matter | Opinion
This is surprising because the energy used by Bitcoin and Ethereum has been a central concern of lawmakers. The House Energy and Commerce Committee held a hearing on the topic earlier this year titled, “Cleaning Up Cryptocurrency: The Energy Impacts of Blockchains.” On the same day as the Merge, Sen. Elizabeth Warren (D-Mass.) sent a letter to Treasury Secretary Janet Yellen detailing environmental concerns associated with crypto. The letter referenced nine earlier letters she has penned raising concerns about digital assets, but Ethereum’s Merge nor proof-of-stake was not mentioned in any of them – even though Ethereum’s transition has been years in the making.
The White House did tout the benefits of proof-of-stake in its recent report “Climate and Energy Implications of Crypto-assets in the United States,” but a few mentions in one report is not enough to make up for the lack of attention from policymakers to Ethereum’s Merge. So I encourage lawmakers to hold a hearing about the benefits of having constantly upgradable financial infrastructure like Ethereum.
Right now, the U.S. government is focusing mostly on regulating through enforcement. But if we are only going after bad actors and bad actions, how much can we learn? Yes, bad actors deserve no home, but real policymaking leads to repeatable processes from which entrepreneurs can innovate, create jobs and support the U.S. economy.
It is notable that the Merge was unprompted by any regulations. But some essential questions deserve attention: What can we learn from the Merge that others can copy? What does it mean to have payment rails that can be upgraded quickly instead of over decades? What does it say about the process of generating good public policy outcomes? Was the negative attention lawmakers gave to the environmental concerns of blockchain technology enough to effect change?
It is unclear. What is clear is that the Merge is a great example of the benefits of blockchain technology. Imagine if the credit bureaus, which have been subject to multiple hacks exposing millions of people’s critical personal information, overnight instituted a change to make their business dramatically more cyber resilient as Ethereum is now because of the Merge? Or if a major credit card network instituted a change to make transactions 99% less energy intensive? Lawmakers would surely cheer them on.
I am sure lawmakers will hail the years-long introduction of FedNow, the government’s proposed real-time payments network. It is expected to be launched next year. While it does nothing to reduce energy consumption, it is expected to lead to the same sort of real-time payments already available over public blockchains like Ethereum.
The scrappy, decentralized developers who coordinated online to make the Merge such a success have pointed a way forward that we need to study. Public blockchains like Ethereum are the payment rails of the future and are nimble enough to change to fit society’s needs. Congress should not just hold hearings when something goes wrong.
As a society, we should learn from our mistakes. But we should learn from our successes, too.