Cryptocurrencies: Ethereum “merger”, a revolution that wants to make the blockchain less energy intensive

Long announced, repeatedly postponed, it should finally take place this Thursday. The transition from the Ethereum blockchain to Proof-of-Stake, dubbed “The Fusion” (or The Merge” in English) is a real earthquake in the world of cryptocurrency enthusiasts. This could revolutionize the sector forever by reducing its significant energy consumption, a very often criticized cryptocurrencies with Bitcoin at the forefront, which is increasingly being questioned in terms of Ethereum’s valuation.

Proof of Work or Proof of Stake?

This little revolution concerns the way transactions are verified on the Ethereum blockchain. Blockchain technology allows you to send money bypassing a trusted third party. When a classic bank transfer is made, it is the bank that takes on this intermediary role, verifying, for example, that the person making the transfer has enough funds to pay the recipient and that the withdrawn amount actually reaches their bank. Account.

In the blockchain, the security of a transaction is provided by users organized in a network. Traditionally, this happens through the Proof of Work mechanism. The computers that update the blockchain, called “miners,” are constantly competing with each other to validate the current block of transactions, in what looks like a giant computing competition. To win, you must be the first to solve a difficult mathematical problem (called a “hash function”). The miner who achieves this before others gets the right to validate a new block of transactions, which is then invariably added to the chain of previous blocks (hence the term “blockchain”), and the miner gets paid in digital currency for his work. participation.

This device, used in the Bitcoin blockchain as well as in Ethereum, requires significant computing power, and therefore the miners are real digital farms with many computer servers, it is rare that people work alone at home with their computer. Although reliable, it has the disadvantage of being very energy intensive: by some estimates, the energy consumed each year by the Bitcoin blockchain is equivalent to that of a country like Belgium.

Proof of Stake is completely different: computers don’t burn energy trying to solve one problem before others. Instead, blockchain participants are asked to deposit their digital tokens (Ether in this case). Thus, they become eligible to participate in the lottery: each time a transaction needs to be confirmed, one of the participants is selected to verify the transaction. The more tokens he has placed in escrow, the higher his chances of being selected. In the case of Ethereum, validators must stake at least 32 Ether to help validate blocks. After confirming the transaction, he receives more digital tokens in return. Conversely, if a participant misbehaves, such as by confirming a fraudulent transaction, they lose the Ether they have escrowed.

As for the term “Fusion”, it comes from the fact that the Ethereum blockchain has been testing the Proof-of-Stake mechanism on a small scale for several years now. “We are talking about a merger here because the parallel Ethereum network has already been running in Proof-of-Stake since December 2020 to test the reliability of the device, so today we are talking about merging the two networks,” Emilien explains. Bernard-Alzias, Associate at Simmons & Simmons, Financial Services Regulatory Specialist.

Expected benefits from the merger

If Fusion is so eagerly awaited, it is because it promises to make the Ethereum blockchain less energy-intensive, which is one of the main obstacles to its deployment on a larger scale today. “The impact is primarily environmental, as the validation of a transaction will no longer be based on the energy consumed to solve a complex mathematical problem (“mining”), but on the amount of ether that the validator(s) owns (i.e. “stake”) “, – develops the lawyer. Proof of Stake requires 99.9% less power than Proof of Work. Organizations committed to protecting the environment, such as Greenpeace, have criticized proof-of-work for this reason and have promoted proof-of-stake instead.

But the benefits don’t end there. Removing proof-of-work would also reduce the need for advanced semiconductors used by miners and hence the price of those chips. Good news as the global economy is experiencing a deficit in this area after Covid.

The merger could also, in the long run, reduce the transaction costs that exist on the Ethereum blockchain: it can only certify a limited number of transactions at a time when a large number of people try to use it. , transaction fees can skyrocket, sometimes reaching $200 per transaction. While Fusion won’t fix this issue overnight, the developer community sees this as a first step towards future updates aimed at lowering the fee.

Finally, proof-of-stake will also increase the security of the blockchain: “if anyone considers the proof-of-work method to be more secure (because it is very energy-intensive and it will be necessary to control more than 50% of the computational ability to carry out an attack known as “51%”), with proof-of-stake you should to control 66% of the ethers immobilized in the protocol, and this is visible, ”says Emilien Bernard-Alzias.

Ethereum or the promise to decentralize everything

The Ethereum blockchain was created by Vitalik Buterin, a programmer who started working on the concept in 2013 before officially launching the platform in 2015. tokens, but also for other types of transactions.

In particular, Ethereum allows the creation of smart contracts, computer programs embedded in a blockchain that run after very specific and predefined conditions are met. Once the parties involved in the creation of the contract have agreed on these conditions, none of them has the opportunity to suspend its execution. An innovation that opens up dizzying prospects, as it allows you to set up complex and secure virtual transactions without the intervention of a trusted third party in the service of decentralized applications (or Dapps). With major implications in insurance, real estate contracts, artistic property, or even value chain transparency and product traceability.

Ethereum’s long-planned transition to proof-of-stake has been repeatedly delayed to the point of being the source of many jokes among cryptocurrency enthusiasts. But the game was worth the candle, according to Emilien Bernard-Alzias.

“The Ethereum blockchain, created in 2015, was conceived as proof of work, but the transition to proof of stake has been in development for a very long time, starting in 2017. However, given the very vast scale of the ecosystem that relies on the Ethereum blockchain (from various tokens to decentralized applications, decentralized finance or DeFi), the impact of this migration will be unprecedented for the blockchain industry. So it was only fitting that the stakeholders took the time to work through this process to hopefully create an effective ownership verification technology and ensure a smooth migration. »

New Hope

If successful, the merger will finally prove that Ethereum can improve to fulfill all the promises of the blockchain. A glimmer of hope in a market that has been through hard times since the start of the year, with cascading bankruptcies and digital currencies dropping in price one after the other.

The total capitalization of the cryptocurrency market is currently around $1 trillion, which is $2 trillion less than in the same period last year. In a sign of the enthusiasm sparked by the announcement, Ether has surged strongly in recent weeks, reaching a total valuation of around $200 billion.

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