One of the most important shifts in Crypto’s history will occur when the Ethereum blockchain completes a software update known as a “merge.
The merger, tentatively scheduled for September 15, will drastically reduce ethereum’s energy usage, making it more environmentally friendly than bitcoin. The merger could also have a range of far-reaching effects, for better or worse: it could lead to a collapse or a surge in the price of ether; spur mainstream adoption or reduce confidence in Crypto; reduce some security risks, or exacerbate others. The layman should know the following about this transition.
How the Ethereum blockchain will work — and why it matters
To understand mergers, it is first necessary to understand why people use blockchain. One of the most important ideas of this technology is that no central authority can control it. For example, while a government can manipulate a central bank at will, blockchain should not be affected by this pressure. It should be self-sustaining and decentralized in power.
For years, Bitcoin and Ethereum — the two largest blockchains — have operated without a controlling entity, thanks to a process called Proof of Work . In this mechanism, the blockchain is operated and secured by “miners” who approve new valid transactions by solving complex mathematical puzzles and are rewarded in the “currency” of the blockchain. The complexity of these mathematical puzzles makes it difficult for a hacker or tamper to cheat in the system.
But solving these puzzles requires enormous amounts of energy. Miners have built giant computing devices around the world that run day and night, consuming vast amounts of electricity while solving these puzzles. Research estimates that Bitcoin mining consumes more electricity globally each year than most countries, including the Philippines and Kazakhstan.
The enormous power consumption of proof-of-work — which is also built into the mechanism — has drawn widespread criticism from environmental groups, especially as countries try to reduce greenhouse gas emissions to combat climate change. Some engineers believe that proof-of-work also has design issues in terms of security and scalability. So when Ethereum’s first developers started building the network based on Proof of Work in 2014, they were already thinking about eventually switching to a new, untested system – Proof of Stake (Proof of Stake).
In Proof-of-Stake, energy-hungry miners are replaced by gatekeepers called “validators” who deposit large amounts of funds (32 ETH, roughly $50,000 at the time of writing) into the Ethereum network , to be able to approve or reject the transaction. Just like miners, they earn financial rewards for doing so. Under this system, hackers or malicious actors need to invest large sums of money in the system and in the process risk losing those funds if they are caught doing bad things and get kicked out of the system.
Core Ethereum developers have been working on this transition for years. But they encountered countless challenges that forced them to delay again and again, making the status of the merger a running joke. The developers explained that updating the operating system, which is essentially the ethereum network, is extremely difficult, especially given that the network will be running all the time: it’s like changing the gasoline engine while the car is driving at full speed on the highway. like an electric motor.
Potential positive effects of the merger
Developers hope the risky move is worth it for several reasons. The first is environmental issues. As miners no longer have an economic incentive to keep computers running 24 hours a day, the network’s energy usage will drop by more than 99 percent, according to researchers at the Ethereum Foundation. In a statement to Time magazine, Mike Brune, the head of the climate change movement “Change the Code/Not the climate,” wrote that the merger is an important step in the right direction, and he hopes bitcoin will go too on the same path. He wrote:
“As fires rage around the world and historic floods destroy lives and livelihoods, state and federal government leaders and corporate executives are racing to decarbonize as quickly as possible.” “Ethereum has shown that it is possible to switch to energy-efficient protocols , and will significantly reduce pollution to the climate, air and water pollution.”
Increased energy efficiency could be good for business. Many traditional companies and financial institutions have expressed concerns about going all-in on Ethereum due to its huge carbon footprint. Ethereum founder Vitalik Buterin acknowledged this in February and actually encouraged skeptics to wait for the blockchain to be used until it was less damaging to the environment.
If the merger goes well, adoption by businesses, especially those with environmental, social and governance (ESG) requirements, is likely to accelerate. Joe Lubin, co-founder of ethereum and founder of blockchain firm Consensys, told TIME that he has spoken to several “major financial institutions” that have been waiting to merge to “significantly participate” in ether in the workshop.
Due to Ethereum’s high fees and congestion, many other potential users have stayed away from it. The network isn’t ready for a dramatic increase in users in 2021, forcing some to pay hundreds of dollars in transaction fees.
The merger won’t eliminate these fees, but ethereum’s developers say the completion of the merger will set the stage for them to roll out new technologies to expand the ethereum network. The most critical tool is called sharding, which splits network data into smaller partitions, making the network faster and cheaper to use. Sharding could eventually bring fees down to around 5 cents, Vitalik Buterin said in February, and bring back many Crypto users who ditched ethereum for other cheaper blockchains like Solana and Avalanche.
“It will take time to get there, but it’s basically taking us into a throughput architecture of infinite transactions per second,” said Joe Lubin. “It’s about to reach internet scale.”
Ethereum’s developers also believe that moving to proof-of-stake will improve security and make the network more resistant to attacks. A Consensys report said it would take more than $11 billion for attackers to take control of 51 percent of the network — which would allow them to rewrite parts of the blockchain to their will.
But there are also many risks
But mergers also come with huge risks. Ethereum is the main network behind the boom in Crypto activity that has emerged over the past two years, including NFTs, Decentralized Finance (DeFi), and Decentralized Autonomous Organizations (DAOs). If anything goes wrong during this transition, the wealth of all these apps and organizations — which collectively manage more than $50 billion in user funds — will be in jeopardy.
Regardless, Joe Lubin predicts that the merger will be seamless and non-disruptive for users. “It’s like Apple updating the iPhone’s operating system overnight, and you turn on the computer in the morning and you don’t even know what’s going on,” he said.
The merger could also lead to a split in the Ethereum user base. Given that Ethereum is decentralized, no one will force users to switch to the new system. If enough users or platforms decide to stick with the old proof-of-work version of Ethereum, there could be massive confusion and confusion about where the token’s true value lies. Some proof-of-work miners have said they intend to resist the merger and have started jumping back to an older version of the Ethereum blockchain, now known as Ethereum Classic.
However, many of these miners are just looking for their bottom line, as the mining equipment they invest in will quickly become useless to Ethereum once it switches to proof-of-stake. Almost every other ethereum user said they would switch to the proof-of-stake chain, making a full-blown civil war unlikely.
Lubin said: “I think at least a temporary fork is possible: a quick opportunity to get ETH, and there are a lot of opportunists. But I can’t imagine being fundamentally broken and abandoned in a line with so many things build anything on the old chain, or put anything of great value on it.”
Finally, some worry that the merger will make Ethereum more vulnerable to scrutiny in the larger battle between cryptocurrencies and the U.S. government. Last month, the U.S. Treasury Department banned Americans from using Tornado Cash, a service that helps Crypto owners protect their anonymity. Any user who interacts with Tornado Cash-related addresses is at risk of violating U.S. sanctions. Therefore, a large-scale proof-of-stake validator like Coinbase may choose to censor any Tornado Cash-related transactions to comply with government requirements. And such an action would run counter to Crypto’s idea of decentralization.
But Coinbase CEO Brian Armstrong said he would rather his company shut down its staking operations than enable censorship. Collins Belton, a prominent Crypto lawyer and managing partner at Brookwood LLP, told TIME that he was skeptical that the merger would have much of an impact on the U.S. government’s regulatory strategy. “I don’t think it’s likely to hold up to the claim that stakes are so different that the U.S. government is going to change its approach and start locking up validators,” he said. “I think that’s an overstatement of what the U.S. government is really analyzing about these The ability to make technical arguments.”
what happens next
Over the past few years, Ethereum developers have been rolling out merged beta versions, searching their code for possible glitches and bugs. On Tuesday, the final test run of the merger, known as the Bellatrix upgrade, was successfully activated, clearing the way for a real merger. The merger is expected to take place on September 15, though a complex set of technical factors could delay it again. At that point, experts will be watching the market closely to see if older versions of ethereum will soar in usage or drop to zero. Regardless, the merger marks the beginning of a new chapter for Ethereum and Crypto.