Ethereum, the second largest blockchain behind Bitcoin has completed its upgrade from being a proof of work model to now a proof of stake model.
Dubbed as “The Merge,” Ethereum is switching to a more energy-efficient method of validating transactions that take place on the platform, known as proof of stake. The upgrade is similar to how we transition away from using dial-up modems to fiber optics for our internet, offering us a lot of use-cases such as video gaming, online storage and music streaming, says Greg King, founder and CEO of Osprey Funds.
What does The Merge really mean to us and how will it affect the crypto space? Let’s all find out in this article.
Impact on the environment
The upgrade is certainly a big win, not just for us but also for the environment. Ethereum should now consume 99.9% or so less energy. It’s like Finland has suddenly shut off its power grid, according to one estimate. Ethereum should now consume 99.9% or so less energy. It’s like Finland has suddenly shut off its power grid, according to one estimate.
Currently, Ethereum’s carbon emissions are on par with Singapore and its total energy consumption is comparable to the Netherlands, according to its website.
It’s a significant difference that will surely change the world.
Goodbye, miners. Hello, stakers
Ethereum, introduced in 2015, expanded upon the core concepts of Bitcoin with smart contracts — or computer programs that effectively use the blockchain as a global supercomputer, recording data onto its network. That innovation was the essential ingredient behind decentralized finance (DeFi) and NFTs — the main catalysts of the most recent crypto boom.
The Merge, however, retires Ethereum’s proof-of-work system, where crypto miners compete to write transactions to its ledger, and earn rewards for doing so, by solving cryptographic puzzles.
Most crypto mining today happens in “farms,” though they may be more aptly described as factories. Picture massive warehouses lined with rows of computers stacked on top of one another like shelves of books at a university library — each computer hot to the touch as it strains to pump out cryptocurrency.
This system, which was pioneered by Bitcoin, is what caused Ethereum to guzzle so much energy and is responsible for fueling the blockchain sector’s reputation as an environmental menace.
Crypto mining farms or factories are now put to rest as Ethereum is now moving to the proof-of-stake system.
In this system, miners are replaced by people called validators who “stake” at least 32 ETH by sending them to an address on the Ethereum network where they cannot be bought or sold. These staked ETH tokens act like lottery tickets: The more ETH a validator stakes, the more likely one of its tickets will be drawn, granting it the ability to write a “block” of transactions to Ethereum’s digital ledger.
Ethereum introduced a proof-of-stake network in 2020 called the Beacon Chain, but until the Merge it was just a staging area for validators to get set up for the switch. Ethereum’s transition to proof-of-stake involved merging the Beacon Chain with Ethereum’s main network.
Incentives to look forward to
Ethereum’s proof-of-stake system introduces a new set of incentives for those people operating these computers to follow a set of rules, thereby securing the ledger from any unwanted tampering.
Although Ethereum had thousands of individual miners operating and securing its proof-of-work network, computers from just three mining pools dominated a majority of the network’s hashrate, a measure of the collective computing power of all miners.
If a few of Ethereum’s big mining firms colluded to amass a majority of the network’s hashrate, they would have been able to execute a so-called 51% attack, making it difficult or impossible for anyone else to update the ledger.
In proof-of-stake, the amount of ETH one stakes, not the amount of energy one expends, dictates control over the network. Proof-of-stake boosters say this makes attacks more expensive and self-defeating: attackers can have their staked ETH slashed, or reduced, as punishment for trying to harm the network.
Trading after the Merge
In crypto markets, the Merge had become an object of speculation since at least mid-July, with traders initially viewing the event as a catalyst for a steep rally in the price of ETH. The market for ETH options started pricing in post-Merge gains, a welcome respite following the crash in digital-asset markets earlier in the year.
The prospect of a fork of the Ethereum blockchain by irate crypto miners spurred a wave of new activity, this time as traders tried to lock in value from the theoretical airdrop of a new “ETHPOW” token.
In general, it is impossible to predict with certainty how the markets will react to a successful Merge. The upgrade has been on Ethereum’s roadmap since its inception, so there’s the possibility that it has already, by-and-large, been priced in by the market.
How did the market react?
Crypto markets actually slumped by the end of the day after the Merge, with Ethereum 5.5% lower despite the Merge going smoothly.
“This has been a long time coming, and it has so far run smoothly. Price action in the short term has been muted, and I think this will continue due to the immense amount of option interest that has been opened recently,” said Richard Usher, head of over-the-counter trading at the London-based crypto company BCB Group.
He added, “My feeling is that today is a hugely significant step forwards in the usability of cryptocurrency going forwards. Whilst it may not directly affect BTC (Bitcoin)etc, it will underpin the future of all crypto assets moving forwards.”
The volatile crypto market has been under pressure in recent months in what has been called crypto-winter where the value of cryptos such as Bitcoin has taken a hit.
How does it affect Web3 in general?
According to Conor Svensson, CEO and Founder of Web3 Labs, the Merge will not change much for Web3 in the near term.
“The merge event has been on the minds of the Ethereum community for multiple years now and there’s been confidence in the inevitability of it with the various teams building on top of Ethereum technology,” he told Euronews Next.
Svensson said the challenge for Ethereum now is that it needs to continue its updates, such as for security or speed, to still keep ahead of its competitors. But he is confident of Ethereum’s place in Web3 is the building block for most Web3 technologies, such as NFTs.
“These decentralized autonomous organizations, all of these are appearing first on Ethereum and that has been what’s brought all of these projects onto it,” he said, adding: “Where is the main innovation in Web3 happening? Still mainly happening on Ethereum”.
