Last week, cryptocurrency giant Ethereum took the long-awaited step of switching its technology infrastructure to greener software. A new infrastructure called The Merge has reduced Ethereum’s power consumption by 99%.
While this is a welcome change in the cryptocurrency market, it comes with risks.
What has changed in Ethereum?
Before we talk about the merger, let’s take a look at what has changed on the Ethereum mainnet.
The main network (short for “main network”) is a blockchain technology responsible for transferring cryptocurrencies from a sender to a recipient. Since its inception, Ethereum has used Proof of Work mechanisms to validate transactions and mine new coins.
However, to mine new coins, proof-of-work transactions required computers to compete against each other to solve complex mathematical problems. Bitcoin also uses proof of work systems to verify transactions.
This process consumes terawatts of energy and releases megatons of carbon dioxide into the environment. It is estimated that bitcoin mining requires as much energy as it would take to power a small country, around 130 terawatt hours, according to the Digitconomist Bitcoin Energy Consumption Index.
Proof of Stake mechanisms ensure the security of block transactions by requiring cryptocurrency holders to use Ether to confirm new transactions. Thus, the era of cryptocurrency miners has ended for Ethereum and cryptocurrency validators are emerging.
Validators add newly validated transactions to a common block, and a group of validators will vote and validate the transaction. Once this happens, the block closes and the validators get more coins in return.
The main difference between mining and verification is that cryptocurrency holders are rewarded for their stake in the proof of stake network, while they are rewarded for their computing power in the proof of work network.
What is a merger?
The merger refers to the merging of the original Ethereum mainnet with a separate, more energy efficient and environmentally friendly blockchain to create a single chain. The Ethereum blockchain powers most of the crypto market, including NFTs.
Ethereum founder Vitalik Buterin envisioned Ethereum’s consensus layer becoming a proof-of-stake system back in 2014, a year after Ethereum’s inception. The new infrastructure is helping to significantly reduce Ethereum’s power consumption amid growing concern and criticism from national authorities and environmentalists.
This merger strategy is good news for potential crypto investors who have been hesitant due to the impact of crypto on the environment. This is also good news for current investors as this merger does not affect current assets.
Shortly before the merger, the price of Ethereum rose as investors and cryptocurrency enthusiasts became convinced that the new infrastructure would allow Ethereum to overtake Bitcoin. The hype surrounding the merger has given investors hope that the price of all cryptocurrencies will rise and revive the struggling market.
But that did not happen. Ethereum collapsed like the rest of the cryptocurrency market.
What does the merger mean for the cryptocurrency market?
The merger was an impressive technological achievement and a victory for the green people. However, major changes to the Ethereum infrastructure are changing the meaning of crypto investing.
Contrary to blockchain dogma, Proof-of-Stake networks and cryptocurrency investors may have to deal with a third party: the US government. After the merger, the US Securities and Exchange Commission introduced a new element of the plan to implement the Proof-of-Stake infrastructure.
Blockchain is decentralization, which means that the government should be involved as little as possible, if at all. But SEC Chairman Gary Gensler concluded that proof-of-stake transactions meant that tokens could be considered securities rather than currencies.
Last week, Gary Gensler testified before the Senate Committee on Banking, Housing, and Urban Affairs and told reporters, “From a coin point of view… this is another clue that, according to the Howey test, investors expect returns based on the efforts of others. , according to the Wall Street Journal.
Gary Gensler suggested that any cryptocurrency, not just Ethereum, that uses a proof-of-stake infrastructure could be considered a security and pass the Howey test. The Howey Test is a U.S. Supreme Court ruling that determines if a transaction is an “investment contract” and then requires government regulation, which cryptocurrency investors avoid like the plague.
This statement means that the placement of coins in the Proof-of-Stake system must include investor protections, which are not suitable for blockchain transactions. As a result, Ethereum fell by 11% and Bitcoin by 8%.
Overall, the cryptocurrency market has fallen well below its all-time high of $2.9 trillion in 2021 to just under $1 trillion in the first half of 2022. Cryptocurrency market experts say this drop is the result of changing economic conditions in the United States, rising inflation, and now concerns about the legality of cryptocurrency trading.
Crypto trading cannot be the one-way ticket to the millionaire status it has been on its way to, at least not yet.