8 minute read 24 Oct 2022
engineer wearing vr glasses

How does the Ethereum Merge help the real and virtual world save energy?

Authors
Benjamin Banusch

Disruptive Technologies Lead Switzerland

Experienced Technology Strategy Advisor, supporting organizations to face the opportunities and implications of emerging technologies such as DLT/Crypto Assets and Quantum Computing.

Benjamin Teufel

Partner, Head of EY Sustainability | EY Switzerland

Accompanies the transformation of businesses to more sustainable models. Meets current challenges with a positive attitude and focus on solutions.

Maximilian Schmidt

Metaverse Lead Switzerland

From the Swiss Mountains to the Metaverse. Passionate about Emerging Technologies, especially Crypto and Blockchain related topics.

8 minute read 24 Oct 2022

The Ethereum Merge opens up new dimensions for sustainability in the Metaverse for enterprises across the globe to leverage in various forms.

In brief
  • Ethereum completed its long-anticipated “Merge” on 15 September 2022 as the network transitioned from proof-of-work (PoW) to proof-of-stake (PoS)
  • The transition drastically reduces Ethereum’s energy consumption, addressing one of the biggest criticisms POW based blockchains currently face: their environmental impact
  • The Merge also increases the sustainability of operations within Ethereum-based metaverse platforms, as demonstrated by EY’s recruiting events on Decentraland

As Web3 comes of age and stakeholders look for ways to leverage the Metaverse, both opportunities and uncertainties arise. Before we look at how Ethereum – one of the world’s leading blockchains – has slashed its energy consumption through “the Merge” and what this means for the Metaverse, we first have to understand more about the underlying blockchain technology. Public blockchains are decentralized, distributed digital ledgers (databases) used to record transactions. This requires a consensus mechanism, i.e., a means by which a peer-to-peer computer network can validate transactions between participants before they are stored on the blockchain indefinitely. Currently, there are two common consensus mechanisms:

  • Proof-of-work (PoW)

    PoW requires that members of the network, so called miners, solve challenging tasks using computational power. Submitting proof of this allows miners to add new transactions to the blockchain, for which they get rewarded in the form of freshly minted coins (block reward) and a fraction of the transaction fees. The more independent active miners there are, the greater the security of the network, since it is unlikely that all operators will be down at the same time. Corresponding business ecosystem: Mining (incl. pooling), rent of computational power, facilitating hardware and software.

  • Proof-of-stake (PoS)

    PoS requires “validators” as opposed to “miners”. To become a validator, members of the network must stake (deposit) a certain amount of the blockchain’s native asset (cryptocurrency). The network then uses a random election process to decide which node (e.g., computer) will validate the next block. If a node is chosen to validate the next block, it will validate all transactions within this block and if it does so successfully, it will receive a staking reward in the form of freshly minted coins and a fraction of the transaction fees. Although staking larger amounts of the native token helps increase the probability that a node is selected, there are protocols in place to ensure that the wealthiest node will not always be chosen as a validator. In order to ensure the honest action of the validators, parts of the staked coins are destroyed, so called slashing, in the event of a violation.

About the Merge

The Merge was one of the most anticipated events in Ethereum’s history, representing the network’s transition from PoW to PoS. This eliminates the need for energy-intensive mining and instead secures the network with staked Ether/ETH (the cryptocurrency used by Ethereum). According to Vitalik Buterin – one of Ethereum’s creators – the use of a PoS consensus mechanism on the Ethereum blockchain had been planned from the outset. Although the concept of PoS has been around longer than Ethereum itself, a practical implementation required almost seven years of planning and testing to go from a theoretical solution to a working practical version.

Energy consumption

The primary benefits of using PoS – as opposed to PoW – are of environmental nature. A single transaction on the former PoW-based Ethereum blockchain required roughly as much energy as the average American household uses on a weekly basis, resulting in a carbon footprint of 109.71 kg of CO2. That’s equivalent to the energy needed to power 243,155 VISA credit card transactions. Consequently, the Ethereum network previously used as much energy as the country of Bangladesh. By eliminating the need for mining, a transition to PoS has reduced this amount significantly.

A boost to energy efficiency

99.95%

Reduction in Ethereum’s energy after the switch to proof-of-stake

Tests run on the Beacon Chain prior to the Merge suggested that the transition would lower Ethereum’s energy use by 99.95%, making proof-of-stake roughly ~2000x more energy-efficient than proof-of-work. This has indeed been the case as the carbon footprint of a single transaction on the Ethereum network decreased from 109.71 kg to 0.01 kg (recorded on 20 September 2022).

Scalability and gas fees

A popular misconception is that the Merge directly reduces gas fees (paid per transaction). This is not the case; gas fees are dependent on block space demand. The Merge does not decrease the demand for block space, nor does it increase block size. However, it does set the groundwork for “sharding”, which will spread out computational workload across the Ethereum network so that each node is no longer responsible for processing the entire network’s transactional load, but rather a small portion of it. These shards (parts of the database) take less computational power to manage, allowing the network’s transaction throughout to scale almost indefinitely at relatively low costs. For reference, the PoW-based Ethereum network could handle 10 - 30 transactions per second (tx/s). This has not changed as a direct result of the Merge. However, the “final” sharded version of Ethereum is expected to be capable of handling ~100k tx/s, according to Vitalik Buterin. This would exceed the 24k tx/s transactions that the Visa network can process.

Concerns regarding decentralization

The primary concern behind the Merge is that a transition to PoS increases the centralization of Ethereum. Recent US regulations banning Tornado Cash – a service used to anonymize Ethereum transactions – has reiterated the extent to which governments can influence a decentralized system. The concern with PoS is that a select few corporations, including Lido, Coinbase, Kraken and Binance are responsible for a large amount of staked ETH. Indeed, these four corporations control a combined total of 54% of staked ETH, which some argue makes the network more vulnerable to changes in government regulation, threatening the idea of an open, free and decentralized system.

The Merge and its effect on EY’s operations on Decentraland

The metaverse envisions a convergence between virtually enhanced physical and digital realities into a decentralized but interconnected internet economy where individuals and organizations across the globe can interact in real time. This represents an evolution of our current mobile internet to allow for more immersive virtual experiences, additional opportunities for user participation, greater interoperability and improved data portability. 

Consequently, the metaverse holds the promise of substantially improving our carbon footprint by substituting physical goods and experiences with virtual ones, allowing for the optimization and showcasing of digital twins and replacing real world presence with virtual interactions. The environmental benefits of a PoS system discussed above take us one step closer to realizing this promise: the Merge enhances the sustainability of 3,000+ decentralized apps (dapps) currently running on Ethereum, including various metaverse platforms like Decentraland and The Sandbox.

This also applies to EY’s presence in the metaverse, although we have taken a slightly different approach from the outset. Over a year ago, we started building some of our metaverse projects on Decentraland, but to avoid the excessive carbon footprint associated with PoW, we chose to operate on Polygon – a layer two scaling solution on the Ethereum Mainnet, which combines proof of stake and proof o -authority to validate transactions. A single transaction on Polygon therefore creates as little as 430 grams of CO2 – approximately 272 times less than a transaction on the Ethereum Mainnet.

The significance of this difference can be demonstrated with respect to EY’s Talent Tree, launched in May 2022 for virtual recruiting events on Decentraland. Its creation, a single transaction on the Ethereum Mainnet, was responsible for approximately 72 kg of CO2 emissions. For reference the average gasoline-powered car would have to drive 380 km to produce the equivalent amount. 

By leveraging Polygon, a single EY recruiting event in on Decentraland for 50 people – all of whom receive NFT wearables – created as little as 21kg in CO2 emissions in May 2022
Benjamin Banusch
Disruptive Technologies Lead Switzerland

Considering the emissions associated with a single transaction, it was clear that running continuous metaverse operations directly on the Ethereum Mainnet was not sustainable in the long term. But by operating on Polygon and minting NFT wearables directly into the user’s wallet, EY reduced its environmental footprint significantly. Indeed, by leveraging Polygon, a single EY recruiting event on Decentraland in May 2022 for 50 people – all of whom receive NFT wearables – created as little as 21 kg in CO2 emissions. Notably, this number is expected to drop further to just 2 kg as a result of the Merge since Polygon requires that certain transactions take place on the Ethereum Mainnet which was PoW-based at the time. For comparison, a video conference for the same number of participants would create roughly 331 kg of CO2. Moreover, the corresponding in-person event would create over 9,680 kg in CO2 emissions, not accounting for air travel.

*Estimate based on the CO2 emissions associated with a single transaction on the Ethereum PoW network (50 of which would be required for the distribution of NFT hoodies at our recruiting events

It should be noted that due to our Polygon approach, the Merge will not impact EY’s operations on Decentraland to the extent it will affect those who operate on the Ethereum Mainnet. However, it will ensure that all transactions on the platform will now be associated with a significantly lower environmental footprint.

Summary

The Merge represents a feat in computational engineering and a milestone in the adoption of Web3 technologies. It enhances the metaverse’s potential as a sustainability driver during a time of growing environmental consciousness around the globe and consequently increases the importance of establishing company presence in the metaverse. We look forward to exploring the space further and guiding it in a direction where it can positively transform businesses across various industries.

Acknowledgement

We thank Jonatan Frederik Siegmund, Julian Porzelt and Gian Jäger for their valuable contributions to this article.

About this article

Authors
Benjamin Banusch

Disruptive Technologies Lead Switzerland

Experienced Technology Strategy Advisor, supporting organizations to face the opportunities and implications of emerging technologies such as DLT/Crypto Assets and Quantum Computing.

Benjamin Teufel

Partner, Head of EY Sustainability | EY Switzerland

Accompanies the transformation of businesses to more sustainable models. Meets current challenges with a positive attitude and focus on solutions.

Maximilian Schmidt

Metaverse Lead Switzerland

From the Swiss Mountains to the Metaverse. Passionate about Emerging Technologies, especially Crypto and Blockchain related topics.