Why the Ethereum Merge Matters

Youn about a week, one of the most significant shifts in crypto’s history will happen when the blockchain Ethereum completes a software update known as “the merge.”

The merge, which is tentatively scheduled for Sept. 15, will drastically reduce Ethereum’s energy usage, making it much more environmentally-friendly than Bitcoin. A variety of other effects could result from the merger, including a drop in Ether’s value, a boost to mainstream adoption, reducing confidence in cryptocurrency, and minimizing security threats. Here’s what a layperson should know about the transition.

How Ethereum’s blockchain will work—and why it’s so important

To understand the merge, it’s important to understand why people use blockchains in the first place. The technology’s most fundamental principle is that it can be controlled by no one. A central authority might have the power to control a bank, but a blockchain is not. The blockchain should be self-sustaining, and its power distributed.

And for years, Bitcoin and Ethereum—the two biggest blockchains—have operated without controlling bodies thanks to a process called Proof of Work. In it, the blockchain is operated and safeguarded by “miners,” who approve new and valid transactions by solving complex math puzzles, and get rewarded for their efforts in the blockchain’s currency. It is expected that hackers and tamperers will find it difficult to hack the system because of its complexity.

Solving these problems requires a tremendous amount of energy. All over the globe, miners have built massive computing rigs that work 24 hours a day to solve these problems and consume electricity. According to studies, Bitcoin mining consumes more power worldwide per year than many countries including Kazakhstan and the Philippines.

The enormous energy usage of Proof of Work—which, again, is built into its design—has caused widespread criticism from environmental groups, especially as countries try to reduce their emissions in the face of climate change. Some engineers claim that Proof of Work has security and scaling issues. So while Ethereum’s first developers started to build the network on Proof of Work in 2014, they were already toying with the idea of eventually switching over to a new, untested system called Proof of Stake.

In Proof of Stake, energy-guzzling miners are replaced by watchdogs known as “validators,” who deposit a significant amount of money (32 ETH, which is currently worth about $50,000) into the Ethereum network in order to be able to approve or deny transactions. As miners do, validators also earn cash rewards. Under this system, a hacker or bad-faith actor would need to put an obscene amount of money into the system in order to game it—and in doing so, risk losing that money if they are discovered and kicked out.

Core Ethereum developers worked tirelessly on this transition for many years. But they’ve encountered numerous challenges that have forced delay after delay, and turned the merge’s status into something of a running joke. Developers have explained that updating what is essentially the network’s operating system is incredibly difficult, especially given that it will be up and running the entire time: it will be akin to swapping out a car’s gas engine for an electric one while it’s barreling full-speed down a freeway.

Possible positive side effects from the merger

The developers hope this risky decision will prove to be worthwhile for many reasons. Environmental. Because miners will no longer have a financial incentive to run computers around the clock, the network’s energy usage will drop by more than 99%, according to researchers at the Ethereum Foundation. Mike Brune is the director of the Climate Change campaign Change the Code/Not the Climate. He stated to TIME that the merging was an important step in the right direction and that Bitcoin would follow the same course. “With fires raging around the world and historic floods destroying lives and livelihoods, state and federal leaders and corporate executives are racing to decarbonize as quickly as possible,” he wrote. “Ethereum has shown it’s possible to switch to an energy-efficient protocol with far less climate, air and water pollution.”

The improvement in energy efficiency may be good news for businesses. Due to the enormous carbon footprint, many traditional financial institutions and companies have been reluctant about investing fully in Ethereum. Vitalik Buterin (the founder of Ethereum), acknowledged this in February and encouraged skeptical parties to delay using the blockchain to reduce the environmental impact.

Learn More The Man Behind Ethereum Is Worried About Crypto’s Future

The merger should go smoothly, and corporate adoption will accelerate. This is especially true for institutions that have ESG mandates. Joe Lubin, a co-founder of Ethereum and the founder of the blockchain company Consensys, tells TIME that he’s talked with several “major financial institutions” who have been waiting until the merge to become “significantly involved” in Ethereum.

Because of its congestion and high fees, Ethereum has been avoided by many potential users. The network wasn’t ready for the sharp uptick in users it received in 2021, forcing some people to pay hundreds of dollars in transaction fees.

The merge won’t eliminate those fees, but Ethereum developers say that its completion will lay the groundwork for them to roll out new technologies to scale the network. The most crucial tool is called sharding, which splits the network’s data into smaller parcels, making the network faster and cheaper to use. Buterin said in February that sharding could eventually lower fees to around a nickel—and bring back many crypto users who had spurned Ethereum for other cheaper blockchains, like Solana and Avalanche.

“It’ll take time to get there, but it basically takes us into an infinite-transaction-per-second throughput architecture,” Lubin says. “It’s about to go internet-scale.”

Ethereum developers think that Proof of Stake, as an alternative to traditional Proof of Stake, will make it more secure and less vulnerable to attack. A report by Consensys says that in order for an attacker to take over 51% of the network—which would allow them to re-write parts of the blockchain as they wish—it would require more than $11 billion.

However, there are still many dangers

However, the merger comes with serious risks. Ethereum was the main network that enabled the explosion of cryptocurrency activity over the past two years. This included NFTs and Decentralized Financial Institutions (DeFi) as well as decentralized autonomous organisations (DAOs). If something were to go wrong in the transition, the well-being of all of those applications and organizations—which collectively handle more than $50 billion in user funds—would be in peril.

Lubin, for what it’s worth, predicts the merge will be seamless and glitch-free for users. “It will be like Apple upgrading your iPhone operating system overnight, and you don’t even know what happened when you get on your machine in the morning,” he says.

The merge could also cause a split in Ethereum’s user base. Since Ethereum’s decentralized nature means that no one can force users to change to the new system, they are not required to. If enough people or platforms choose to stay with the older Proof of Work Ethereum, confusion and chaos may ensue about where tokens’ true value lies. A Proof of Work minersAlready, they have signaled their intention to resist the merger and started to jump back to an earlier version of Ethereum Classic.

These miners may be looking to make a profit and have invested heavily in mining equipment that is likely to become obsolete once Ethereum switches. Nearly all of the other Ethereum users indicated they would switch to Proof of Stake, which makes a civil war unlikely.

“I think at least a temporary fork is likely: there’s an opportunity to make a quick Ether, and there are a lot of opportunists out there,” Lubin says. “But I can’t imagine wanting to build anything, or put anything of significant value, on a chain that has so many things that are fundamentally broken and abandoned.”

Some people worry that Ethereum will be more vulnerable to U.S. government censorship as a result of the merger. The Treasury Department banned Americans from accessing Tornado Cash last month. This service helps crypto owners to protect their anonymity. Anyone who contacts a Tornado cash-related address could be subject to U.S. sanctions. In order to conform to the government’s requirements, Coinbase or any large Proof of Stake validator could choose to restrict transactions that are related to Tornado Cash. Such an action would run counter to crypto’s decentralization ideals.

Brian Armstrong, Coinbase’s CEO, stated however that he preferred to use the service. his company shut down its staking operationsInstead, it will enable censorship. And Collins Belton, a prominent crypto lawyer and managing partner of legal firm Brookwood, tells TIME that he doubts the merge will have much impact on the U.S. government’s regulation strategies. “I don’t think the argument is likely to stick, to say that Proof of Stake is so fundamentally different that the U.S. government will shift its approach and will now start approaching validators,” he says. “I think it overestimates the government’s ability to really parse through these technical arguments.”

Learn more: An American New Year The Crackdown on Crypto-Users Has Crypto Users Been Worried about Their Privacy

Next steps

The Ethereum developers have been testing various versions of the merge for the past couple years in an effort to find bugs and flaws in the code. On Tuesday, the merge’s final test run, known as the Bellatrix upgrade, was activated successfully, clearing the path for the real thing. Although the merge should take place on September 15, due to complex technical issues, it could be delayed once more. Experts will then closely watch the market to assess if any of the old Ethereum versions are gaining popularity or falling to zero. New chapters for Ethereum and crypto are expected to begin next week.

Here are more must-read stories from TIME

Get in touchAt


Related Articles

Back to top button