- Ethereum has successfully "merged" from Proof-of-Work to Proof-of-Stake.
- The landmark update will bring major changes to the Ethereum network, including a 99.95% reduction in energy consumption and a 90% cut in ETH issuance.
- Many believe that the Merge could act as a bullish catalyst for ETH on a long-term timeframe, but there are reasons to be skeptical in the immediate future.
The world’s second-biggest blockchain transitioned to Proof-of-Stake at a Total Terminal Difficulty of 58750000000000000000000.
The massive overhaul of Ethereum known as the Merge has
finally happened, moving the digital machinery at the core of the second-largest
cryptocurrency to a vastly more energy-efficient system after years of
development and delay.
It was no small feat swapping out one way of running a
blockchain, known as proof-of-work, for another, called proof-of-stake. “The
metaphor that I use is this idea of switching out an engine from a running
car,” said Justin Drake, a researcher at the non-profit Ethereum Foundation who
spoke to CoinDesk before the Merge happened. “I like to think of it as kind of
like the switch from gasoline to electric.”
The payoff is potentially gigantic. Ethereum should now
consume 99.9% or so less energy. From an energy costs perspective, it's like
Finland suddenly shut off its power grid, according to one estimate.
Ethereum’s developers say the upgrade will make the network
– which houses a $60 billion ecosystem of cryptocurrency exchanges, lending
companies, non-fungible token (NFT) marketplaces and other apps – more secure
and scalable, too.
The idea was there from the start that Ethereum would
eventually make the switch to proof-of-stake. But the transition was a
complicated technical effort – an endeavor so risky that many doubted it would
happen at all.
"There’s a part of me which hasn’t completely realized
that this is actually happening,” Drake said. “I’m somewhat in denial, you
know, because I’ve trained myself to just expect it to happen in the future.”
When the Merge officially kicked in at 2:43 AM EST, over
41,000 people were tuned in on YouTube to an "Ethereum Mainnet Merge
Viewing Party." They watched with bated breath as key metrics trickled in
suggesting that Ethereum's core systems had remained intact. After around 15
long minutes, the Merge officially finalized, meaning it could be declared a
success.
The update, which ends the network’s reliance on the
energy-intensive process of cryptocurrency mining, has been closely watched by
crypto investors, enthusiasts and skeptics for the impact it is expected to
have on the wider blockchain industry.
Mark Cuban, investor and billionaire owner of the Dallas
Mavericks basketball team, told CoinDesk he would be “watching [the Merge] with
interest like everyone else,” pointing out that it might make ETH, the
network's native token, deflationary.
In the minutes immediately following the Merge, ETH – whose
current market value near $200 billion makes it the second-largest
cryptocurrency after bitcoin (BTC) – was trading at $1,632, down about 0.4% in
the previous 24 hours.
The update’s complexity was compounded by the fact that it
may have been one of the largest open-source software endeavors in history,
requiring coordination across dozens of teams and scores of individual researchers,
developers and volunteers.
Tim Beiko, an Ethereum Foundation developer who played a key
role in coordinating the update, said to CoinDesk, “I think the Merge can
genuinely get those people who were interested in Ethereum, but skeptical of
the environmental impacts, to come and experiment with it.”
Goodbye, miners
In 2008, Bitcoin introduced the world to the idea of a
decentralized ledger – a single, immutable record of transactions that
computers around the world could view, alter and trust without the need for
intermediaries.
Ethereum, introduced in 2015, expanded upon the core
concepts of Bitcoin with smart contracts – or computer programs that
effectively use the blockchain as a global supercomputer, recording data onto
its network. That innovation was the essential ingredient behind decentralized
finance (DeFi) and NFTs – the main catalysts of the most recent crypto boom.
The Merge retires Ethereum’s proof-of-work system, where
crypto miners competed to write transactions to its ledger – and earn rewards
for doing so – by solving cryptographic puzzles.
Most crypto mining today happens in “farms,” though they may
be more aptly described as factories. Picture massive warehouses lined with
rows of computers stacked on top of one another like shelves of books at a
university library – each computer hot to the touch as it strains to pump out
cryptocurrency.
This system, which was pioneered by Bitcoin, is what caused
Ethereum to guzzle so much energy and is responsible for fueling the blockchain
sector’s reputation as an environmental menace.
“My daughter and I spoke about NFTs a few months ago,”
recalled Ben Edgington, a product leader at the Ethereum research and
development firm ConsenSys. “At the dinner table I rather foolishly mentioned
some NFT projects, and she was yelling at me, ‘How can you boil the oceans with
this nonsense? This is terrible. I can't believe that you do this for a
living.’”
Edgington, who began his career researching climate science
before eventually landing in crypto, understood where his daughter was coming
from. “Rightly or wrongly, she'd absorbed a very toxic environmental
narrative,” he said. “I mean, it's kind of hard to defend ‘stickers for
grownups’ that emit, by some estimates, a megaton of [carbon dioxide] a week.”
Hello, stakers
Ethereum’s new system, proof-of-stake, does away with mining
entirely.
Miners are replaced by validators – people who “stake” at
least 32 ETH by sending them to an address on the Ethereum network where they
cannot be bought or sold.
These staked ETH tokens act like lottery tickets: The more
ETH a validator stakes, the more likely one of its tickets will be drawn,
granting it the ability to write a “block” of transactions to Ethereum's
digital ledger.
Ethereum introduced a proof-of-stake network in 2020 called
the Beacon Chain, but until the Merge it was just a staging area for validators
to get set up for the switch. Ethereum’s transition to proof-of-stake involved
merging the Beacon Chain with Ethereum’s main network.
According to Beiko, the energy consumption of proof-of-stake
is “not even a rounding error in terms of environmental impact.”
“Proof-of-stake is like running an app on your MacBook,” he
said. “It's like running Slack. It's like running Google Chrome or running
Netflix. Obviously, your MacBook plugs into the wall and uses electricity to
run. But no one thinks about the environmental impact of running Slack, right?”
Edgington pointed to the environmental impact of the Merge
upgrade as the benefit he is personally the most excited about. “I feel very
proud, you know, that I'll be able to look back and say I've had a role to play
in removing a megaton of carbon from the atmosphere every week. That's
something that meaningfully affects my family and others,” he said.
New incentives
Rather than a single piece of open-source software, the
Ethereum network is better understood as a nation-state – a kind of living
organism that comes together when a bunch of computers talk to one another in
the same language, all following an identical set of rules.
Ethereum’s new system introduces a new set of incentives for
the people operating these computers to follow the rules as written, thereby
securing the ledger from any unwanted tampering.
“Proof-of-work is a mechanism by which you take physical
resources and you convert them into security for the network. If you want your
network to be more secure, you need more of those physical resources,” Beiko
explained. “On proof-of-stake, what we do is we use financial resources to
convert to security.”
Although Ethereum had thousands of individual miners
operating and securing its proof-of-work network, computers from just three
mining pools dominated a majority of the network’s hashrate, a measure of the
collective computing power of all miners.
If a few of Ethereum’s big mining firms colluded to amass a
majority of the network’s hashrate, they would have been able to execute a
so-called 51% attack, making it difficult or impossible for anyone else to
update the ledger.
In proof-of-stake, the amount of ETH one stakes – not the
amount of energy one expends – dictates control over the network.
Proof-of-stake boosters say this makes attacks more expensive and
self-defeating: attackers can have their staked ETH slashed, or reduced, as
punishment for trying to harm the network.
Not everyone buys into the proof-of-stake hype. There are no
signs that Bitcoin, for instance, will ever abandon proof-of-work – which
proponents insist remains the more battle-tested and secure system.
And although control of the Ethereum network will no longer
be concentrated in the hands of a few publicly traded mining syndicates,
critics insist that old power players will just be replaced by new ones. Lido,
a kind of community-run validator collective, controls over 30% of the stake on
Ethereum’s proof-of-stake chain. Coinbase, Kraken and Binance – three of the
largest crypto exchanges – own another 30% of the network’s stake.
Skepticism around proof-of-stake fueled Chandler Guo, a
prominent crypto miner, to announce in the lead-up to the Merge that he would
launch a fork of Ethereum’s old proof-of-work chain – a clone of Ethereum’s
blockchain that hums along using the old miner-based mechanism.
Ethereum’s core developers have generally derided
proof-of-work forks as sideshows and scams, but Guo’s “ETHPOW” effort and
others like it have gained modest traction in certain corners of the crypto
community.
Trading the Merge
In crypto markets, the Merge had become an object of
speculation since at least mid-July, with traders initially viewing the event
as a catalyst for a steep rally in the price of ETH. The market for ETH options
started pricing in post-Merge gains, a welcome respite following the crash in
digital-asset markets earlier in the year.
The prospect of a fork of the Ethereum blockchain by irate
crypto miners spurred a wave of new activity, this time as traders tried to
lock in value from the theoretical airdrop of a new “ETHPOW” token.
In general, it is impossible to predict with certainty how
the markets will react to a successful Merge. The upgrade has been on
Ethereum’s roadmap since its inception, so there’s the possibility that it has
already, by-and-large, been priced in by the market.
“I think if you asked me maybe about three weeks ago, I
would say that not only is it priced in, it’s overly priced in,” said Kevin
Zhou of Galois Capital. “Now the market is roughly 70/30 in favor of this being
a positive event for ETH.”
What’s next?
"This is the first step in Ethereum's big journey
towards being a very mature system, but there are still steps left to go,"
said Vitalik Buterin, Ethereum's co-creator, as he reflected on the Merge
during Thursday's viewing party. He went on to mention Ethereum's relatively
high fees and slow speeds, which were not addressed by the update, but remain
as much a barrier to growing the network's user base as environmental concerns
ever was.
Buterin, Ethereum's most visible figurehead, previously
outlined a set of next steps for the network that includes “sharding” – a
method that should help address the network’s sluggish transaction times and
high fees by spreading transactions across “shards,” like adding lanes to a
highway.
That upgrade was initially slated to accompany the
transition to proof-of-stake, but it was deprioritized given the success that
third-party solutions – called rollups – have had in solving some of the same
issues.
Rollups foreshadow the likely future for Ethereum
development, where community solutions – rather than updates to Ethereum’s core
code – play the primary role in expanding the chain’s capabilities.
For Buterin, the Merge is just the beginning. "To me,
the Merge just symbolizes the difference between early stage Ethereum, and the
Ethereum we've always wanted ... to become," he said on Thursday's live
stream. "So let's go build out all of the other parts of this ecosystem
and turn Ethereum into what we want it to be."
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