The world’s second-largest cryptocurrency has undergone a major transformation that will change its technology to reduce carbon emissions by more than 99.9 percent, according to its Ethereum platform.
The transition known as the “merger” has been completed, Ethereum founder Vitalik Buterin confirmed on Thursday.
“And we’re done!… Happy merging everyone. This is a big moment for the Ethereum ecosystem,” he tweeted.
It means its blockchain technology has been upgraded from the energy-intensive model used by its rival Bitcoin.
While anticipation surrounding the move has seen the price of Ethereum’s token, Ether (ETH), double over the past two months, not everyone is looking forward to the change.
Euronews Next looks at what is changing and how the transformation may affect the crypto market.
What is Ethereum “Merge” and Proof of Stake?
The first part of the Merge upgrade began on September 6 with the Bellatrix upgrade, which marked a so-called “hard fork” that will convert Ethereum from proof-of-work (PoW) to proof-of-stake (PoS). base.
The transition will transition Ethereum from a power-intensive PoW model to a PoS model. Both mechanisms are used to confirm transactions and add new blocks to the chain, but they work differently.
The PoW system works like a competitive numerical guessing game, and the first person to solve a puzzle wins a fixed amount of cryptocurrency.
It requires a global network of computers to run concurrently for a transaction, and therefore a lot of energy.
In a PoS system, you don’t need power-hungry hardware because you get coins that are deposited as collateral in the staking process and then randomization is done through software.
How powerful your machine is doesn’t increase your chance of winning and being able to create another block for the blockchain. The only thing that increases your chance of winning is getting more coins.
How did the markets react?
There has been no massive change in the price of Ethereum since the Merge was completed on Thursday.
“It’s been a long time coming and it’s been smooth sailing so far. Price action has been muted in the short term and I think that will continue because of the huge amount of option interest that has been opened recently,” Richard said. Usher, head of OTC trading at London-based crypto company BCB Group.
“I feel that today is a hugely significant step forward in the usability of cryptocurrencies going forward. While it may not have a direct impact on BTC (Bitcoin) etc., it will support the future of all cryptoassets moving forward,” he said in comments to Euronews Next.
The volatile crypto market has been under pressure in recent months during a period dubbed cryptowinter, when the value of cryptocurrencies such as Bitcoin took a hit.
Usher said he believes that as broader risk markets begin to recover, he strongly believes today’s merger “will give beleaguered investors confidence that broader crypto assets have a place in their portfolios.”
Can Ethereum Merger Make Crypto Greener?
The move to PoS is “a step in the right direction towards sustainability,” Alex de Vries, an economist who runs the website Digiconomist, told Euronews Next.
He estimates the energy consumption of Ethereum mining to be around 72 terawatt hours per year, equivalent to the carbon footprint of Switzerland.
De Vries says he is working to see how much energy the switch will save. Right now, he estimates it’s at least 99 percent.
“That means something like the electricity consumption of a country like Portugal (a quarter of all data centers in the world combined) will disappear overnight,” he said.
However, he added that PoS will not completely solve the energy problem of cryptocurrencies.
“Blockchain by design will simply never be a super-efficient technology,” he said.
Merger or split?
The choice of the name Merge is due to Ethereum adopting the Beacon Chain PoS system, but it is a bit misleading as there will likely be a larger split, creating a PoS chain and a PoW chain.
This fork is not the first in the history of cryptocurrencies. Bitcoin also saw a split after the upgrades, creating Bitcoin Gold and Bitcoin Cash.
According to Tokenomics expert Eloisa Marchesoni, Merge won’t have that big of an impact for investors and the cryptocurrency startup scene.
“The worst impact will be on the miners,” she told Euronews Next, explaining that the value of the old version will probably decrease and the equipment used for mining will not work for the new PoS model.
For Ethereum, if the PoS version takes off and the price is high, then the PoW version may have a low price, forcing most miners to shut down.
Marchesoni, who mines Ether herself, said the expensive equipment isn’t a total waste because you can find alternative coins on PoS that are compatible. Although it may take a month, it does not cause major problems.
The main point miners are upset about, she says, is the centralization aspect and the feeling that Ethereum is “acting like Wall Street and banks.”
As big as Bitcoin?
Although it may be cleaner for the environment than Bitcoin, a modernized Ethereum is unlikely to take the top spot in the crypto market.
“Bitcoin will always be like electronic digital gold. And Ethereum is like fiat money, they’re just two completely different things,” Marchesoni said.
“And no one is holding their larger capital in Ethereum, people will be holding their larger capital in Bitcoin. None of the OGs, as we call them, none of the originals in crypto are really speculating in Bitcoin that much”.
Marchesoni expects Ethereum to see a slight increase in price, but perhaps only for a few days or weeks.
In the long term, he believes that Ethereum lays the groundwork for PoS, which unlike PoW cannot be used for metaverse or NFT, but that other cryptocurrencies will develop the blockchain for new protocols and new governance models.
De Vries also doesn’t believe Merge will cause the latest crypto bull run. Although “it’s a step in the right direction” for cleaner cryptocurrency mining, he said it doesn’t solve PoS issues, especially scalability.
However, Merge could possibly prompt policymakers to ban PoW in the coming years as they seek to regulate cryptocurrencies, citing concerns about its environmental impact.
“If Ethereum can go from proof of work to proof of stake, why wouldn’t they just say, ‘Bitcoin, you either do the same or we don’t allow bitcoin anymore,'” de Vries said.
“I think it’s a very real risk if (the merger) is really successful. I would fully expect it to come back on the table again, maybe not right away, but certainly soon.”
How will this affect Web3?
According to Conor Svensson, CEO and founder of Web3 Labs, the merger won’t change much Web3 soon.
“The merger event has been on the minds of the Ethereum community for several years and there is confidence in its inevitability as various teams build on Ethereum technology,” he told Euronews Next.
Svensson said that the challenge for Ethereum now is that it needs to continue its updates, such as security or speed, to still stay ahead of its competitors. However, he believes that Ethereum’s place in Web3 is the building block of most Web3 technologies, such as NFTs.
“These decentralized autonomous organizations, they’re all emerging first on Ethereum, and that’s what brought all these projects into it,” he said, adding, “Where is the main innovation happening in Web3? It’s still happening mainly on Ethereum.”
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