The Merge - crypto meets ESG

20 September 2022

The much-hyped “Merge”, whereby the Ethereum blockchain merges with a system called Beacon Chain, has finally happened. 

The change moves Ethereum from the “proof-of-work” system to the “proof-of-stake” system, and thereby could reduce Ethereum’s energy consumption by around 99%, as the former is extremely energy intensive. The most well-known cryptocurrency, Bitcoin, also currently runs on a proof-of-work blockchain. In fact, research by Cambridge University’s Centre for Alternative Finance suggests Bitcoin uses more electricity in an average year than Finland or Belgium. This has led to criticism that cryptocurrencies and blockchain technology are generally not compatible with a greener future.

For companies curious about whether they should adopt blockchain technology, the worry that it is incompatible with their ESG goals may well have held them back from adoption. If claims that the Merge may reduce Ethereum’s energy consumption by up to 99% prove correct, this could radically alter the landscape. There can be little doubt that if blockchain technology is the future, it needs to be compatible with the increasing prominence of ESG goals for companies serving climate-conscious consumers. It is easy to imagine that if the Merge is successful, the long-term future of the old proof-of-work model is probably at risk, with scrupulous companies and individuals avoiding proof-of-work technology as environmentally unacceptable. 

Of course, the Merge is not without its risks – there is no guarantee it will work from a technical perspective, and some crypto purists question whether proof-of-stake can truly align with the goal of decentralisation, given the way verification works on this model. Nevertheless, it would be a bold move for a company with ESG in mind to adopt the blockchain equivalent of an old diesel engine if a much greener alternative presents itself.