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Ethereum Merge Explained: Why It Matters For Everyone

The Ethereum merger matters, and not just for people who own crypto. In the works in one form or another since 2014, the long-delayed merger will result in the second-largest blockchain reducing its carbon emissions by an enormous amount. If the merger is successful, Ethereum’s power requirements will drop by over 99%.

This is of enormous consequence. Cryptocurrency critics argue that coins like bitcoin and ether are useless and consume massive amounts of electricity. The first point is polarizing and subjective, however the second is clearly true. At a time when more people than ever are considering climate protection as society’s top priority, Bitcoin and Ethereum’s carbon emissions are too noticeable to ignore.

At the merger, Ethereum will introduce a system known as Proof of Stake, which was planned even before the creation of the blockchain in 2014. Due to its technical complexity and the ever-increasing amount of money at risk, it has been delayed multiple times. The Merge is part of what has been called “Ether 2.0” in the past, a series of upgrades reshaping the fundamentals of the blockchain. The target date is mid-September.

“We’ve been working on Proof of Stake for about seven years now,” said 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 merge, you must first understand the role of cryptocurrency miners.

Suppose you wanted to mine cryptocurrency. You would set up a powerful computer – a mining rig – to run software that attempts to solve complex cryptographic puzzles. Your rig competes with hundreds of thousands of miners around the world trying to solve the same puzzle. When your computer first decrypts the cryptography, you gain the right to “validate” a block — that is, add new data to the blockchain. In return, you get 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 charge for each transaction pay (which can be enormous).

It takes a powerful computer to stand a chance in this race, and people usually build warehouses full of rigs for that purpose. This system is called “Proof of Work” and this is how both Bitcoin and Ethereum blockchains work. The point is that blockchain can be decentralized and secure at the same time.

“This is the so-called civilian resistance mechanism,” says Jon Charbonneau, an analyst at Delphi Digital. Any blockchain must run on a scarce resource, Charbonneau explained, which bad actors cannot monopolize. For proof-of-work blockchains, that resource is power — in the form of power required to run a mining operation.

To overtake Ethereum now, a bad player would need to control 51% of the network’s power. The network consists of hundreds of thousands of computers around the world, which means bad guys would have to control 51% of the energy in this massive mining pool. That would cost billions of dollars.

The system is secure. Although fraud and hacks are rampant in crypto, neither the Bitcoin nor the 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 Consume?

Increasingly. It is estimated that bitcoin consumes about 150 terawatt hours annually, which is more electricity than 45 million people use in Argentina. Ethereum is closer to the 9 million inhabitants of Switzerlandwhich consumes about 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. (BMC relies on self-disclosure by its members.) Behind this is not climate awareness, but self-interest: Renewable energies are cheap, which is why mining operations are often built near wind, solar or hydroelectric power plants.

Nevertheless, the carbon footprint is extensive. It is estimated that Ethereum emits carbon dioxide at a similar rate as Denmark.

How will the merge 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 crypto land, staking refers to depositing cryptocurrency to earn interest. For example, the creators of the stablecoin terraUSD offered customers 19% interest on staked TerraUSD: they could deposit $10,000 and withdraw $11,900 after a year (until it imploded).

When Proof of Stake goes into effect, miners will no longer need to solve cryptographic puzzles to verify new blocks. Instead, they deposit ether tokens in a pool. Imagine each of these tokens is a lottery ticket: when your token number is called, you win the right to verify the next block and earn associated rewards.

It’s still an expensive business. Potential block verifiers — referred to as “validators” instead of miners — must stake at least 32 ether ($48,500) to be eligible. This system sees punters using raw capital instead of power to validate blocks. While a bad player needs 51% of a network’s power to overrun a proof-of-work system, it would need 51% of all ether staked to overrun the proof-of-stake system.

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

Why is it called “the fusion”?

The way Ethereum is moving from Proof of Work to Proof of Stake is accomplished by bringing two blockchains together.

The Ethereum blockchain used by humans is known as the “mainnet,” as distinguished from various “testnet” blockchains used only by developers. In December 2020, Ethereum developers created a new network called Beacon Chain. The Beacon Chain is essentially the new Ethereum.

The Beacon Chain is a proof-of-stake chain that has been chugging along in isolation since its inception 18 months ago. Validators added blocks to the chain, but those blocks contained no data or transactions. Essentially, it underwent various stress tests prior to the big day.

When merged, the data stored on the Ethereum mainnet is transferred to the Beacon chain, which then becomes the main blockchain on the Ethereum network. In the run-up to the merger, Ethereum developers stress-tested the new blockchain by running data and transactions on various Ethereum testnets.

“If you talk to the Ethereum developers, and I did, they would tell you that if proof-of-work mining were banned overnight, they could do the merge immediately and it would be fine,” said Charbonneau. Much of the ironing out that developers are currently focusing on relates to applications and clients built on Ethereum, he added, not proof-of-stake execution itself. “If they did the merge today would be it bugged for a few months… but the log itself, there are no worries [among the developers].”

Are there risks?

Absolutely. Ethereum critics – typically Bitcoin enthusiasts – likened the merger to changing an airplane’s engine in the middle of a passenger flight. At stake is not only the plane, but also the $183 billion worth of ether in circulation.

On a technical level, there could be many unforeseen bugs with the new blockchain. Solana, another proof-of-stake blockchain, has suffered multiple outages this year. Solana and Ethereum differ in that Solana’s fees are tiny, meaning it’s easier for bots to overpower the blockchain, but technical difficulties aren’t out of the question.

Critics also wonder if Proof of Stake will be as secure as Proof of Work. Charbonneau posits that it could be more secure due to a feature called “slashing” — essentially, validators can burn their staked ether and revoke their network access if they’re found to have acted maliciously.

“Suppose someone attacks Bitcoin 51% today, there’s not really anything you can do,” Charbonneau said. “They all have miners and might just keep attacking you. … It’s really easy with Proof of Stake. If you attack the network, it’s detectable and we just cut you off 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 about 60% since the beginning of the year, and many are hoping the merger will revive its 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 for the price of ether.

There are two main reasons why people are predicting that Ether’s price will skyrocket after the merger. First, the idea is that fractionating Ethereum’s carbon footprint will make it easier for large companies to both invest in Ether and develop Ethereum applications.

“The reality is, if you take away the eco-friendly part, there are a lot of people who aren’t going to use it [ethereum] and not just want to invest in it for ESG reasons,” said Charbonneau, noting environmental, social and corporate governance standards for ethical investing. “There are a lot of technology companies that have openly said, ‘We’re not going to do all this until after the merger.'”

The second argument people make is a bit more technical. Mining Ethereum is costly; As electricity prices have risen and crypto prices have fallen, even successful mining operations have started seeing red. To offset the costs, miners typically sell most of the cryptocurrency they earn from mining. This creates millions of dollars in selling pressure every day as miners dump their ether. Once Ethereum is Proof of Stake Miners (or “Validators” as they are known) they don’t have to sell all the Ether they earn as validating blocks is so much cheaper than using Proof-of-Work dismantle cryptography.

On the other hand, however, many argue that the merger is already priced in. It has been in the works for seven years and many major investors, the argument goes, have invested money in Ethereum in anticipation 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 gave September 19 as a tentative date.

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

The announcement saw the price of Ether rise significantly, to $1,600. That’s a far cry from its $4,800 high, but encouraging news for Ethereum enthusiasts amid a cold crypto winter.

Ethereum Merge Explained: Why It Matters For Everyone Source link Ethereum Merge Explained: Why It Matters For Everyone

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