Ethereum Merge Explained: Why It Matters to Everyone

The Ethereum merger is significant, and not just for people who own crypto. In the works in one form or another since 2014, the long-delayed merger will see the second largest blockchain reduce its carbon emissions by a huge amount. If the merger is successful, ethereum’s power needs will drop by over 99%.

It is of great consequence. Cryptocurrency critics argue that coins like bitcoin and ether are useless and use huge amounts of electricity. The first point is polarizing and subjective, but the second is unequivocally true. At a time when more people than ever see mitigating climate change as society’s No. 1 priority, the carbon emissions of bitcoin and ethereum are too glaring to ignore.

In the merger, ethereum will adopt a system known as proof of stake, which has been planned since before the creation of the blockchain in 2014. Due to its technical complexity, and the ever-increasing amount of money at stake, it has been delayed several times. The merger is part of what was previously called “ether 2.0,” a series of upgrades that are reshaping the blockchain’s foundation. Mid-September is the deadline.

“We’ve been working on proof of stake for about seven years now,” Ethereum co-creator Vitalik Buterin said at the Eth Shanghai conference in March, “but finally all this work is coming together.”

Here’s everything you need to know to understand the big day.

Why is crypto bad for the environment?

To understand the merger, you must first understand the role of cryptocurrency miners.

Say you wanted to mine cryptocurrency. You would set up a powerful computer — a mining rig — to run software that tries to solve complex cryptographic puzzles. Your rig competes with hundreds of thousands of miners around the world trying to solve the same puzzle. If your computer decrypts the cryptography first, you win the right to “validate” a block — that is, add new data to the blockchain. Doing so earns you a reward: Bitcoin miners get 6.25 bitcoin ($129,000) for each block they verify, while ethereum miners get 2 ether ($2,400) plus gas, which are the fees users pay for each transaction (which can be huge).

It takes a powerful computer to stand a chance in this race, and people usually set up warehouses full of rigs for this purpose. This system is called “proof of work” and is how both the bitcoin and ethereum blockchains run. The point is that it allows the blockchain to be decentralized and secure at the same time.

“It’s what’s called the civil resistance mechanism,” said Jon Charbonneau, an analyst at Delphi Digital. Each blockchain must run on a scarce resource, Charbonneau explained, one that bad actors cannot monopolize. For proof-of-work blockchains, that resource is power – in the form of the electricity required to run a mining operation.

To take over ethereum right now, a bad actor would need to control 51% of the network’s power. The network consists of hundreds of thousands of computers around the world, meaning that the bad guys must control 51% of the power in this huge mining pool. Doing so would cost billions of dollars.

The system is secure. Although fraud and hacking are common in crypto, neither the bitcoin nor ethereum blockchains themselves have been compromised in the past. However, the downside is obvious. As cryptographic puzzles become more complicated and more miners compete to solve them, energy consumption increases.

How much energy does crypto use?

Lots and lots. Bitcoin is estimated to consume around 150 terawatt hours a year, which is more electricity than 45 million people in Argentina use. Ethereum is closer to Switzerland’s 9 million inhabitants, eating up around 62 million terawatt hours.

Much of this energy comes from renewable sources. About 57% of the energy used to mine bitcoin comes from renewable sources, according to the Bitcoin Mining Council. (The BMC relies on self-reporting among its members.) This is not motivated by climate awareness, but self-interest: Renewable energy is cheap, so mining operations are often set up near wind, solar or hydro farms.

Nevertheless, the carbon footprint is extensive. Ethereum is estimated to emit carbon dioxide on the same scale as Denmark.

How will the merger help?

The merger will see ethereum completely abandon proof of work, the energy-intensive system it currently uses, in favor of proof of stake.

In cryptoland, “staking” refers to depositing cryptocurrency to earn interest. For example, the creators of the terraUSD stablecoin offered customers 19% interest on stakes TerraUSD: You can deposit $10,000 and withdraw $11,900 after a year (until it imploded).

When proof of stake comes into effect, miners no longer need to solve cryptographic puzzles to verify new blocks. Instead, they will put ether tokens into a pool. Think of each of these tokens as a lottery ticket: if your token number is called, you win the right to verify the next block and earn the rewards that come with it.

It’s still an expensive business. Potential block verifiers – who will be known as “validators” rather than miners – must stake a minimum of 32 ether ($48,500) to be eligible. This system sees punters put up raw capital, rather than power, to validate blocks. While a bad actor would need 51% of a network’s power to overrun a proof-of-work system, they would need 51% of the total effort to overrun the proof-of-stake system.

Since cryptographic puzzles will no longer be part of the system, electricity expenses will drop an estimated 99.65%, according to the Ethereum Foundation.

Why is it called “the merger”?

The way ethereum will transition from proof of work to proof of stake will be achieved through a merger of two blockchains.

The Ethereum blockchain that people use is known as the “mainnet”, as distinct from various “testnet” blockchains that are only used by developers. In December 2020, Ethereum developers created a new network called the beacon chain. The Beacon chain is essentially the new Ethereum.

The Beacon chain is a proof-of-stake chain that has operated in isolation since its creation 18 months ago. Validators have added blocks to the chain, but these blocks have not contained data or transactions. Essentially, it has been put through various stress tests ahead of the big day.

The merger will see the data held on Ethereum’s mainnet transferred to the beacon chain, which will then become the main blockchain on ethereum’s network. In the run-up to the merger, ethereum developers have been stress-testing the new blockchain by running data and transactions through it on various ethereum testnets.

“If you talk to the ethereum developers, and I have, they would tell you that if proof-of-work mining was banned overnight, they could do the merge right now and it would be fine,” Charbonneau said. Much of the smear developers are currently focused on applying applications and clients built on top of ethereum, he added, not the proof-of-stake implementation itself. “If they did the merge today, it would be buggy for a few months … but the protocol itself, there are no worries [among the developers].”

Are there any risks?

Absolutely. Critics of ethereum – typically bitcoin enthusiasts – compare the merger to changing the engine of an airplane in the middle of a passenger flight. At stake is not just the plane, but $183 billion worth of ether in circulation.

On a technical level, there may be many unforeseen errors with the new blockchain. Solana, another proof-of-stake blockchain, has had several outages this year. Solana and ethereum differ in that Solana’s fees are small, which means that it is easier for bots to overwhelm the blockchain, but technical difficulties are not excluded.

Critics also wonder whether proof of stake will be as secure as proof of work. Charbonneau reckons it might be safer because of a feature called “slashing” — essentially, validators can have their staked ether burned, and network access revoked, if they’re found to have acted maliciously.

“Say someone 51% attacks bitcoin today, you can’t really do anything,” Charbonneau said. “They have all the miners, and they can just keep attacking you. … With proof of stake, it’s very easy. If you attack the network, it’s provable and we just cut you, and then your money is gone.”

“You get a bullet and that’s it. Then you can’t do it again.”

Will it cause the price of ether to go up?

Ether is down around 60% since the beginning of the year, and many are hoping that the merger will revive the price. This has been a hotly debated topic in crypto circles for the past few months, but the answer is that no one knows for sure what the merger will do to the price of ether.

There are two primary reasons why people are predicting that the price of Ether will skyrocket after the merger. First, the idea is that ethereum fractionation of the carbon footprint will make it easier for large companies to both invest in ether and create ethereum applications.

“The reality is, if you take away the eco-friendly part, a lot of people aren’t going to use it [ethereum] and don’t want to invest in it just based on ESG reasons,” Charbonneau said, referring to environmental, social and corporate governance standards for ethical investments. “There are a lot of tech companies that have openly said, ‘we’re not going to do that. everything until after the merger.'”

The second argument people make is a bit more technical. Mining Ethereum is expensive; as electricity prices have gone up and crypto prices have gone down, even successful mining operations have started to see red. To offset costs, miners usually sell most of the cryptocurrency they earn from mining. It creates selling pressure for millions of dollars every day when miners unload the ether. Once ethereum is proof-of-stake, miners (or “validators” as they’re called) don’t have to sell all the ether they earn, since validating blocks is so much cheaper than mining them via proof-of-work cryptography.

On the other hand, however, many claim that the merger has already been priced in. It has been in the works for seven years, and many large investors, the argument goes, have put money into ethereum with the expectation that the merger would be successful. .

When will the merger take place?

The merger is expected to take place in September. In a recent conference call among ethereum developers, Tim Beiko of the Ethereum Foundation set September 19 as a tentative date.

“This merger timeline isn’t final, but it’s extremely exciting to see it come together,” tweeted another developer. “Please consider this a planning timeline.”

The announcement saw the price of ether go up considerably, to $1,600. That’s far from the high of $4,800, but encouraging news for ethereum enthusiasts in the midst of a cold crypto winter.