Ethereum has undergone its “merger”. What does it mean for crypto?
Ethereum, the blockchain network behind the world’s second-largest cryptocurrency ether, has just completed a major software upgrade that could revolutionize the cryptocurrency universe, some experts say.
Dubbed “the Merge” by crypto enthusiasts, the upgrade promises to lower Ethereum’s energy consumption and attract more users. Climate activists have long criticized digital assets because producing them uses huge amounts of electricity and generates huge CO2 emissions. The University of Cambridge and Digiconomist estimate that the two largest crypto assets, Bitcoin and Ethereum, together use around twice as much electricity in one year as the whole of Sweden.
Crypto production’s high energy consumption is due to “proof of work”, which is the way in which transactions are verified and more digital assets are produced. By upgrading the software, Ethereum is changing the process to “proof of stake”, which will lower energy consumption, attract more users and speed up transactions, experts say.
“The merger could be one of the most important events in history” for digital assets, said Jacky Goh, CEO and founder of Rewards Bunny, a platform that rewards shoppers with cashback in either cryptocurrency or US dollars. “It will make Ethereum more usable and scalable, and there will be better adoption.”
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What is Proof of Work (PoW)?
To confirm a transaction on the blockchain, people must solve complex mathematical puzzles using powerful computing power. Once the puzzles are solved, the transaction is added to the blockchain ledger and the person, or miner, who solved the puzzles first is rewarded with cryptocurrency. This is also how new cryptocurrencies are issued.
What is Proof of Stake (PoS)?
This method replaces miners with “validators” who pledge their cryptocurrency as collateral to create new blocks. Instead of individuals competing to be the first to solve the same mathematical puzzles to create new blocks, a person is chosen at random by an algorithm to validate, or confirm, a transaction.
Because your chances of being selected as a validator depend on how much you pledge, or “stakes”, many people pool their digital coins to increase their chances of being selected. The rewards are usually shared according to how much each person has contributed.
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What are the benefits of PoS?
It doesn’t require massive computing power since not everyone is trying to solve the same math puzzle at once, making it more energy efficient than PoW.
Also because it does not require as much computing power, the entry barriers are lower. People no longer need expensive, special hardware that can calculate complex equations at the speed of light.
“The merger will be a major development for the Ethereum network,” said Alan Goldberg, analyst at BestBrokers. “Electricity consumption is expected to drop by as much as 99.95%, which is huge, especially in the context of the current energy crisis.”
And that drop in energy consumption could be the key to making “Ethereum more palatable to policymakers and regulators,” Teunis Brosens, ING chief economist for digital finance and regulation, wrote in a report. “This in turn removes a stumbling block for traditional financial institutions and other companies to offer Ethereum-based services.”
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What are the negatives of PoS?
Politicians, regulators and financial institutions embracing Ethereum should be a signal that PoS is a big negative, some say.
The World Economic Forum (WEF) “has an article on its website praising the merger as a ‘sea change towards sustainability among cryptocurrencies,'” said Cory Klippsten, CEO of SwanBitcoin.com.
If an entity like the WEF decided to stake a large amount of cryptocurrency, it could do so without any barriers and exert its influence over Ethereum, Klippsten said.
Ethereum has never been truly decentralized, like Bitcoin, he claims. “Ethereum was started by a group of people like a company, and it raises money like a company, and it’s run like a company,” he said.
Medora Lee is a USA TODAY money, markets and personal finance reporter. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
