What the Latest Ethereum Upgrade Means For ETH
Ethereum (ETH) has distinguished itself from other cryptocurrencies by being the first to implement decentralized applications (DApps). Within the Ethereum blockchain, the second-biggest blockchain network, ETH users can develop smart contracts, purchase NFTs, and make digital payments globally. They can also interact with thousands of DApps and trade ETH to USD from their homes.
While all these ETH use cases have caused its market cap to skyrocket, some concerns were raised. Some of these issues are power consumption and the increased gas fees caused by the increased network traffic.
If you’ve been following Ethereum, then you’ve probably heard about Ethereum 2.0 / ETH Merge as an upgrade on Ethereum 1.0. The next questions are, how does it differ from the initial Ethereum, and what does it portend?
Questions such as “will there be a different ETH coin?” and “will there be two distinct Ethereum blockchains now?” are causing much speculation. This is not strange, even for blockchain-savvy individuals. This article answers most questions regarding the Merge and helps you understand how it affects you.
Comparing Ethereum and Ethereum 2.0
Before the Merge (or Ethereum 2.0), Ethereum used PoW (Proof-of-Work) protocol to confirm transactions. However, with the onboarding of the Merge, ETH now utilizes the PoS (Proof-of-Stake) protocol. This change hopes to reduce the blockchain’s energy demands by 99.9%, a huge differential. It will also launch a brand-new era for Ethereum and, consequently, the entire crypto industry.
It isn’t easy to quantify how much enthusiasm and expectations this shift has elicited in the crypto industry. Many crypto users/supporters are optimistic that it will help to restore crypto’s reputation among skeptics. They also believe it will boost the efficiency of Ethereum’s massive ecosystem.
What Does Ethereum Merge Mean?
The Merge is an upgrade of Ethereum 1.0 that utilizes a proof-of-stake consensus algorithm to validate transactions through staking. It facilitates Ethereum’s main network to merge with layer 2, which operates with the new consensus framework. This is a plan that had been in the works for six years.
The mining process used to verify every Ethereum transaction before registering on the general blockchain network consumes enormous electricity. Ethereum’s staking framework (PoS) substitutes the proof-of-work concept, in which crypto miners use powerful computers and algorithms to solve hashes. Hashes in this context mean (complex numerical functions).
The Effect of Ethereum Merge on Miners and Power Consumption
Proof-of-work systems typically use up a tremendous amount of electricity. Bitcoin mining, for example, usually consumes over 127 terawatt-hours of DC power per year (TWh). That is more than Norway’s total energy usage.
With proof-of-work, Ethereum consumed roughly the same energy as Finland used yearly, resulting in a carbon footprint comparable to Switzerland’s. However, Ethereum should decrease its carbon emission by a staggering 99.9% with the Merge, tackling one of cryptocurrency’s major flaws.
As previously said, Ethereum had verified new transactions on the blockchain technology using a PoW protocol. This required “miners” to solve hashes hurriedly using enormous computing power. These miners are then rewarded in crypto.
However, this operation procedure is only possible when the miners are connected to an energy supply. This has posed scalability setbacks for Ethereum through network/transaction congestion increasing transfer fees, and decelerated processing rates. All these issues are making the network too costly for smaller transactions and making scaling challenging for larger ones.
Proof of Stake (PoS), as a solution, necessitates “validators” to stake (a cache of ether tokens, for example). This will allow them to be chosen to verify crypto transactions and get rewards. The more stakes a validator makes, the better their chances of winning the reward. However, all others staked will earn interests, making staking similar to purchasing bonds or stocks without computing operations.
The Upgrade Effect on Decentralization
Decentralization is the concept that decision-making and regulation should be distributed, contrary to financial institutions’ typically centralized consolidated authority. While this concept has always been integral to Ethereum’s objectives, using a proof-of-work (PoW) protocol makes it difficult to attain. Although the framework was designed to encourage decentralization, individuals or corporations with access to huge computer power have monopolized mining and profited from it.
Switching to a proof-of-stake framework will enable Ethereum players in the cryptocurrency market to distribute transactions across a broader and more diverse set of validators. This will be achieved by lowering the usually needed overhead for participation and lowering fees through efficiency improvements.
However, some concerns still exist; the minimum amount required for staking to become a validator is 32 ether (ETH), a high price for most users and individuals investing in cryptocurrency. One way to beat this is by individuals combining funds in a staking pool to meet the requirements.
It is 100% certain if the Merge will deliver its supposed transformation potential. Some scaling possibilities that supporters anticipate will not be revealed until after the Purge, Verge, Surge, and Splurge. These are Merge upgrades guaranteed by Vitalik Buterin (Ethereum CEO) that might not be forthcoming until 2023.
Effect of Ethereum Merge on Price, Security, Regulation, and other Cryptocurrencies
Cryptocurrency, like stocks, can be highly volatile, meaning prices are subject to quick changes. Therefore, Ethereum’s price will fluctuate after the Merge due to speculation. Other proof-of-stake cryptocurrencies like Solana and Polkadot could be influenced as well.
Some legal experts have implied that using a proof-of-stake protocol increases the risk of Ethereum being classified as unlicensed security. Since validators operate together to validate transactions anticipating a reward, it may be viewed as a “common enterprise.” However, this might place Ethereum in a regulatory gray area. Other experts speculate that this is inadequate for the SEC to initiate a lawsuit.
Although Buterin claims that the Merge makes Ethereum’s network more secure, some experts believe the opposite is true. This is due to the concept of replay attacks. Replay attacks occur when scammers record a contract on Ethereum’s old chain and then rehash it without authorization on the new blockchain.
Effect of the Merge on Traditional Businesses
Conventional businesses that have discontinued their crypto adoption due to its energy-guzzling initiatives might be reconsidering because of the Merge. This is not just because of Ethereum price but also standard proof-of-stake crypto projects. This will surely boost the crypto industry’s reputation and user base.
Proof-of-work protocols might be adopted on other blockchains. However, some avid supporters of Ethereum 1.0 intend to stick with the PoW blockchain. Also, startups built around crypto mining that have dropped Ethereum’s process might consider transitioning.
Miners are devising a network hard-fork strategy to separate the code and preserve an independent chain. This is not new – in 2016, some users tried this process to retain an original prototype of Ethereum. However, this move will not likely significantly impact the blockchain unless major platforms recognize it. For example, OpenSea, the biggest online marketplace for NFTs, has stated that it will adopt Ethereum’s PoS protocol only.
Conclusion
It is a huge accomplishment that Ethereum, a major cryptocurrency, has been upgraded to establish the foundations for a better ecosystem. This efficient and secure upgrade alone may cause a major transformation for the Web3 sector.
The new enthusiasm buoyed in public perception amongst other options for scalability could further attract VC investments. Ethereum’s much-anticipated transition to proof-of-stake protocols has surely infused a boost of fresh optimism and technical potential into the crypto industry.
