Cryptos: 5 things to know about the “Merger”, Ethereum’s energy revolution

Published on September 15, 2022, 9:00 amUpdated September 15, 2022 12:32 pm.

This Thursday, September 15th is a historic date in the young history of cryptography. Ethereum, the second blockchain in the world after Bitcoin, has changed how it works. Around 9:00 GMT on Thursday, the Confluence was successfully activated and no network slowdown was observed. An operation that was like replacing an airplane engine in flight for the backbone of the crypto ecosystem.

According to State of the Dapps, there are currently over 2,900 decentralized applications. The vast majority of NFT (non-fungible tokens) or decentralized finance (DeFi) applications are built on the Ethereum blockchain. The development, which currently brings the total value of Ethereum in circulation, the cryptocurrency developed by Ethereum, to over $190 billion (compared to over $380 billion for bitcoin), according to Coingeco, is a development. In the hours following the Confluence, the price of Ether did not suffer much, remaining stable at $1,590.

“Merge” will change the method of transaction verification

The operation, called “Merge” (“Merge” in French), consists of changing the method that the blockchain uses to verify its transactions. So far, Ethereum has used proof of work, just like the Bitcoin blockchain. On September 15, Ethereum moves to proof of stake.

The proof-by-work method consists of a competition between thousands of validators, called “miners”, who must solve cryptographic equations before anyone else. When they succeed, they contribute to the correct functioning of the blockchain by verifying transactions and are paid for this in cryptocurrencies.

The proof-of-stake method is to recruit a lot of volunteer validators who have Ethereum, Ethereum’s own currency, and assign them the work of verification. To participate in the verification process, validators need to deposit 32 Ether in escrow (one Ether is currently worth around $1,600).

Two years of testing with “Beacon Chain”

Even before the launch of Ethereum in 2015, the founders were already planning the transition to Proof-of-Stake. The process began in December 2020 with the launch of “Beacon Chain”, a parallel blockchain running on this mechanism, on which Ethereum developers were able to successfully test without touching the main blockchain. Nearly 420,000 validators are already active on this parallel blockchain. On September 15, the two blockchains are due to merge, hence the name “Merger”.

“Merge” to reduce Ethereum power consumption by 99%

However, the old consensus method, considered to be very efficient, is regularly criticized due to the astronomical amount of energy needed to run it. Miners create gigantic infrastructures and run very powerful computers day and night to perform calculations. Ethereum was estimated to require between 94 and 112 TWh of electricity per year before the “merger”, which is equivalent to the electricity consumption of a country like the Netherlands.

The proof-of-stake method is much less energy intensive. The Ethereum Foundation estimates that moving to proof-of-stake can even reduce blockchain power consumption by 99.95%. Thus, the “merger” should attract companies wishing to use protocols that are compatible with the ESG criteria into the Ethereum ecosystem and thereby catch up with competing blockchains such as Solana or Tezos in this regard.

risky operation

Several risks affect the operation. First of all, technical risk. Despite many preparatory tests, there is no guarantee that there will be no technical problems. Another risk is related to increased centralization of the network. Since the amount of Ether required to participate in the proof of stake is 32, or €50,000 at the current market price, many holders will be excluded from the process. An exception that can expand as the price of Ether rises. Then there is the risk of staking giants appearing, as is the case with mining at the present time, with only about 5 organizations concentrating 65% of Ethereum mining power.

Major exchanges such as Binance or Coinbase are also planning to temporarily freeze Ethereum trading. Binance said in a statement that the platform wants to “reduce trading risks associated with price volatility and ensure the safety of user funds during the hard fork.” A “hard fork” is the creation of a dissenting blockchain by part of the original blockchain community due to a disagreement over how it should work.

Changing the verification method will indeed hit a certain number of players in this sector by making their mining activities obsolete. Some of them are positioning themselves for a “hard fork” that could lead to the creation of a new blockchain and cryptocurrency that competes with Ethereum and Ethereum. While a “hard fork” is possible, the long-term success of the breakaway Ethereum blockchain remains unlikely, observers say.

‘Merger’ Doesn’t Solve All Ethereum’s Problems

Although the operation was long-awaited, it does not solve all the problems of Ethereum. “Merging” will not help him, for example, increase the number of transactions he can process at the same time. Currently, Ethereum can only support 20-30 transactions per second. Competing blockchains like Solana or Tezos are notable for offering several thousand transactions per second. The “merger” will also not reduce transaction fees on Ethereum, another Achilles’ heel of the platform, which is considered high compared to competing blockchains.

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