The Merge has got to be the topic of the day in the cryptocurrency space since Ethereum took a step further to upgrade its consensus mechanism. This article explains the phenomenon and what it means for Ethereum and the crypto industry at large.
After Bitcoin, Ethereum is the second-most valuable digital currency in the world by market value, and it recently finished a long-overdue transition to the proof-of-stake network in a process known as the merge.
The “Merge” transformation, which will reduce energy costs and pave the way for more widespread usage of crypto technology in industries like finance, is anticipated.
In other words, miners are rewarded for their “stake” in the network rather than for the computing power awarded in the proof-of-work method.
What is Ethereum?
Ethereum is a technology that’s home to digital money, global payments, and applications. It is an open-source, decentralized blockchain that supports smart contracts.
The platform’s native cryptocurrency is Ether. Programmer Vitalik Buterin came up with the idea for Ethereum in 2013, and Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin were all co-founders.
Anyone can publish permanent and immutable decentralized applications on Ethereum, allowing users to interact with them. Anyone can use Ethereum to develop any secure digital technology.
There is a token built into it specifically for usage on the blockchain network, but users may also use it to pay for tasks done on the blockchain.
The network recently switched from the proof-of-work consensus protocol to the proof-of-stake consensus mechanism.
What is proof of work (PoW)?
In a permissionless, decentralized network where miners compete to attach blocks and generate new currency, proof of work is an agreement that each miner has a success probability that is inversely correlated with the amount of computational effort put out, People must use sophisticated computational power to solve challenging mathematical puzzles in order to validate a transaction on the blockchain.
The transaction is recorded on the blockchain when the puzzles are solved, and the miner who completed the problems first is paid in cryptocurrency. This is also how new cryptocurrencies are introduced, however, the process typically consumes a lot of energy.
What is Proof of Stake (PoS)?
A consensus mechanism for processing transactions and adding new blocks to a blockchain in cryptocurrencies is called proof-of-stake.
It was developed as a replacement for Proof-of-work (POW), the first consensus technique used to authenticate a blockchain and include new blocks. Blocks are no longer confirmed using coin owners’ equipment thanks to proof-of-stake.
In exchange for the opportunity to validate blocks, the owners submit their coins as collateral. Owners of staked coins are known as “validators.” A coin owner must “stake” a particular number of coins in order to become a validator.
For instance, before a user may become a validator on Ethereum, 32 ETH must be staked. When a predetermined number of validators confirm that a block is accurate, it is finalized and closed. Blocks are validated by many validators.
The block is then “mined,” or selected at random, by validators. Instead of employing a competition-based process like proof-of-work, this system randomly selects who gets to “mine.” The mechanism uses less energy than the POW does.
What is The Merge?
Since the creation of digital assets requires a significant amount of electricity and produces substantial CO2 emissions, environmental groups have long attacked them.
In this regard, on September 15, 2022, Ethereum underwent an upgrade process known as “the Merge” to go from proof-of-work (PoW) to proof-of-stake (PoS) as its consensus method.
The Ethereum blockchain previously operated on a proof-of-work mechanism, similar to that of Bitcoin, in which nodes, or computers connected to a huge network, competed with one another to solve challenging mathematical problems.
Those that are successful can then mine the following block of a transaction to produce new coins. The shift, in the opinion of cryptocurrency enthusiasts, will reduce Ethereum’s energy usage and increase user interest. Users of Ethereum don’t need to do anything to activate the upgrade.
During the Merge, the Beacon Chain, a proof-of-stake blockchain network protected by validators staking ether, replaced Ethereum’s proof-of-work mining system. Due to “proof of work,” the process that produces cryptocurrencies uses a lot of energy.
By updating its software, Ethereum is switching to “proof of stake,” which uses less energy. Although The Merge won’t affect network transaction prices or speed, it will establish the groundwork for upcoming software updates that platform proponents hope would increase.
What does The merge mean for Ethereum?
The Merge poses some advantages for the Ethereum network and Ether, some of which are outlined below
- Less Electricity usage
- Reduced e-waste
- Lower inflation and increase staking
- Decrease in Ethereum token supply
Less Electricity usage
Ethereum anticipates a 99.95% reduction in electricity use after switching to proof-of-stake.
Almost 38 kilotons of electronic garbage (or “e-waste”) are produced annually as a result of cryptocurrency mining, which also consumes and swiftly degrades significant quantities of computer hardware.
Typically, hazardous materials like mercury, lead, or arsenic is present in e-waste, which can result in neurological issues or cancer.
According to Digiconomist Alex DeVries, Ethereum’s proof-of-stake algorithm could drastically minimize the amount of e-waste it produces.
Lower inflation and increase staking
Institutional investors should find The Merge more tempting since it should reduce inflation and boost staking yields. The Merge will alter Ether’s characteristics to make it more similar to yield-bearing securities.
After the Merge, the staking rewards tracker predicts that Ethereum will yield a return of roughly 5.2%. This increases revenue for businesses that enable users to pool their Ethereum holdings for staking, including institutional and private validators as well as cryptocurrency exchanges such as Coinbase and Kraken.
Decrease in Ethereum token supply
The merge could increase the coin’s appeal to investors, especially when combined with an anticipated net reduction in the amount of Ether tokens, which may occur a few months after the update.
Only roughly 11% of the available Ether is now used for Ethereum staking. Around 80% of the Ether may eventually be staked, which means that it will be locked up for a while. The situation might affect the long-term pricing and liquidity of ether.
What The merge means for other cryptos
Asides from Ethereum, the merge looks to affect some areas in the cryptocurrency industry at large, some of which are?
- Mainstream adoption of crypto
- Switch from proof-of-work systems to other blockchains
- More institutional adoption
Mainstream adoption of crypto
Since users will now have financial incentives to stake their ETH and receive a yield on it, the merge may help bring crypto closer to the public in addition to the more energy-efficient proof-of-stake procedure.
Switch from proof-of-work systems to other blockchains
The temptation to move to a more energy-efficient procedure may increase if the new Ethereum system performs well. Other proof-of-work systems, most notably Bitcoin’s, may consider switching.
More institutional adoption
Large organizations and funds dedicated to combating climate change have long refrained from investing in cryptocurrencies due to environmental concerns around such blockchains.
Ethereum hopes that by making the platform more environmentally friendly, institutional investors will take a second look at its currency, Ether, and more developers who shunned the network because of its high energy use will switch. This might lead to the adoption of cryptocurrencies by institutions and organizations.