The cryptocurrency community is excited about what could prove to be a game-changing event in the burgeoning world of digital currency: a major upgrade — dubbed “The Merge” — of the Ethereum blockchain. Crypto enthusiasts say the merger, which went live on Thursday, will greatly reduce the company’s environmental impactand more broadly to enhance its usefulness as a way to conduct financial transactions, among other things.
But what exactly is merger and how could it change the future of crypto?
What is the merge?
Ethereum, created by Canadian computer programmer Vitalik Buterin in 2015 is a blockchain (or digital ledger) used when cryptocurrency investors buy ether. It is one of the most used blockchains in the world, surpassed only by the Bitcoin network. According to the Ethereum Foundation, a group of developers who now oversee the blockchain, there are more than 71 million crypto wallets on the Ethereum blockchain today.
Think of the merge as the next generation or version 2.0 of. After almost two years of thinking and testing a new way of conducting transactions, Ethereum developers say it is finally ready for prime time. Simply put, the merge aims to reduce the number of people and computers required to add another block of data to the Ethereum network.
The change is called a merge because there were previously several ways to create a new block of data. Developers have now combined (or merged) these methods into a single process.
When should it happen and why now?
The merger was officially launched on Thursday and so far has had no discernible impact on the value of popular cryptocurrencies. Both bitcoin and ether were down more than 1% hours after the upgrade started.
The merger is happening now because Ethereum is mature enough to handle financial payments, store non-fungible tokens, trade crypto and host smart contracts, said blockchain expert Merav Ozair. But streamlining the process of adding data to the blockchain could make these and other transactions much faster, according to developers.
Ethereum in its current form can perform 15 transactions per second, said Ozair, founder of startup Blockchain Intelligence. But if the merger is successful, the blockchain could eventually process up to 100,000 transactions per second — “far beyond what Visa and Mastercard can do,” she said.
How would the merger reduce CO2 emissions?
On a blockchain network, transactions are not verified by a bank, credit card company, or other third party. Rather, it relies on a network of computers competing to solve complex problems in exchange for tokens. It takes thousands of computers to verify transactions on the Ethereum blockchain, a process known as proof of work.
All those powerful server computers chugging along together require massive amounts of power. The Ethereum blockchain consumes around 112 terawatt hours of electricity per year — roughly the same amount of energy used to power the Netherlands. This energy use releases about 53 tons of harmful carbon emissions into the environment annually, the same amount Singapore produces in a year.
The Merge replaces the Proof of Work system with an alternative method called Proof of Stake. In this system, cryptocurrency holders, known as “validators,” spend a portion of their coins in exchange for the right to be randomly selected to verify transactions and record them in a new block. Because Proof of Stake has fewer people using their computers to verify transactions, fewer terawatt hours are burned.
Using proof-of-stake, the merge is expected to reduce the power consumption of the Ethereum blockchain by 99.9%, the developers said.
Will the merger make using cryptocurrency safer?
Possibly. As of December 2020, Ethereum developers are essentially running two different versions of the blockchain at the same time. The beacon version was used so they could test the proof-of-stake system, while the mainnet version continued with proof-of-work as usual. But when both versions were run, hackers had twice as many entry points to potentially attack Ethereum.
Now that the merge is complete, mainnet has been deleted and all financial transactions are now only transmitted on Beacon. Deleting a version of the chain, combined with a small pool of validators, will reduce the chances of a hacker damaging the blockchain, the developers said.
It’s important to note that these changes haven’t made accounts more secure yet, as they haven’t been tested enough. Ethereum developers have posted a warning on the foundation’s website explaining how hackers could try to scam users for the digital currency.
Are there any risks or disadvantages?
The shift to a proof-of-stake system is likely to create the haves and have-nots among validators and everyone else using Ethereum, said Bryan Daugherty, global director of public policy for the BSV Blockchain Association.
That’s because in order to become a validator for Ethereum, someone must invest at least 32 ethers – roughly $52,000 – and agree to stash those tokens in a separate account. Under those rules, anyone who doesn’t have that much cryptocurrency can’t serve to validate Ethereum transactions, Daugherty said.
“The way I see it, the plan now is to eliminate mining altogether and allocate those coins to those with the largest positions,” he said.
Agreeing to stash ether in exchange could also haunt validators, especially if the price of ether falls dramatically and someone wants to sell, Daugherty said.
“They force people to lock up their coins,” he said. “That seems like a big red flag to me.”