Ethereum’s biggest upgrade to date has just come into effect, in what industry experts are calling a turning point for the entire crypto sector. So far, all indications are that the so-called merge — which aims to reduce the cryptocurrency’s energy consumption by more than 99% — was a success.
The very first Proof-of-Stake transaction block was completed with almost 100 percent customer participation. This was by far the best case scenario.
The overhaul of the Ethereum network is fundamentally changing the way blockchain secures its network and verifies transactions. Most of these changes happen under the hood, and the mark of a successful upgrade is that the end-user won’t feel any difference in the hours and days to come.
Cryptocurrencies like Ethereum and Bitcoin are often criticized for the mining process used to generate new coins. Before the merger, both blockchains had their own vast network of miners around the world running highly specialized computers that processed mathematical equations to validate transactions. Proof-of-work consumes a lot of energy and is one of the biggest criticisms of the industry.
But with the upgrade, Ethereum has migrated to a system known as Proof-of-Stake, which swaps miners for validators. Instead of running large computer banks, validators use their existing ether cache to verify transactions and mint new tokens. This requires far less electricity than mining, and experts say it will make the protocol both safer and more sustainable.
The price of ether skyrocketed after the merger. It is trading around $1,640, up more than 3% in the last hour.
Nine teams and more than 100 developers have been working on the merger for years. In the coming hours, this decentralized network of programmers spread across the planet will monitor the rollout and, if necessary, debug as quickly as possible.
Danny Ryan, a Denver core developer who has been working on the merger for five years, tells CNBC that they will watch for anomalies through both automated and manual monitoring systems. If there are any issues, the appropriate team will fix bugs and release a patch for users, but Ryan says that given all the successful trials over the past few months, they’re pretty confident going into the merge.
“There could be some kind of small fire that will be put out very quickly,” Ryan said. “But the network as a whole – because of the redundancy across all this disparate software – will very likely be stable and healthy.”
Part of the reason the Fusion is such a big deal has to do with looks.
Last week, the White House released a report warning that proof-of-work mining operations could stand in the way of efforts to curb climate change. Reducing energy consumption by approximately 99.95% will not only create greater sustainability for the network, but will also significantly lower the barrier to entry for institutional investors who have struggled with the prospect of contributing to the climate crisis.
Bank of America said in a Sept. 9 note that the importance The post-merger reduction in energy consumption “may allow some institutional investors to buy the token that were previously banned from buying tokens that run on blockchains and leverage Proof of Work (PoW) consensus mechanisms.”
Analysts have said that institutional money making its way into the digital assets space at scale is critical to its future as an asset class.
The upgrade also changes the tokenomics around Ethereum’s native coin, Ether.
“Ether itself is becoming a productive asset,” Ryan said. “It’s not something to speculate on, but it’s something that can generate returns.”
In this post-merge era, Ether is taking on some of the hallmarks of a traditional financial asset, such as: B. A certificate of deposit that pays interest to holders.
“It’s probably the lowest risk return within the Ethereum ecosystem,” explained Ryan, adding that the return in other corners of decentralized finance, or DeFi, involves taking smart contract risk and other types of counterparty risk.
The upgrade will also result in a significantly reduced supply of Ether tokens in circulation, which could pave the way for Ether to become a deflationary currency in the coming weeks and months. Some investors say that this could also help boost the price of the token.
This reduced offer is the result of the new verification model, which replaces miners with “validators”. The rewards for validators are much smaller than those that went to proof-of-work miners, meaning fewer ethers will be mined as a result of this upgrade. Validators are also required to lock their tokens for an extended period of time, taking Ether out of circulation.
Additionally, as part of an upgrade that went into effect in August 2021, the network is already “burning” or destroying some digital currency that would otherwise be put back into circulation.
Developers say the improved network security is another key feature of the upgrade.
“There are changes in the chain’s security guarantees,” said Sigma Prime’s Sean Anderson.
Take a 51% attack, where someone or a consortium of people controls 51% or more of a cryptocurrency and then uses that control as a weapon to make changes to the blockchain.
Anderson says it’s much easier to recover from a 51% attack on a proof-of-stake network because there are built-in mechanisms to financially punish malicious actors by reducing their stake.
“Because that economic asset is in the protocol, you get a much better recovery mode, so you end up with a better security profile,” Ryan told CNBC.
The next few hours, days are crucial
The next few hours and days will be the key to assessing the state of the Ethereum network after the upgrade. Behind the scenes, developers will monitor metrics like validator participation rate to see how things are going. But programmers tell CNBC that in an ideal world, users wouldn’t even notice the upgrade.
“If everything goes perfectly, an end user wouldn’t notice a difference,” Anderson said. “If someone trying to trade Ethereum doesn’t realize it, then it was smooth.”
The upgrade doesn’t immediately make Ethereum faster, cheaper, or more scalable. But these features come with future upgrades, now possible post-merge.
Scalability in particular is something Ryan says will be badly needed for the future network.
Right now, layer-two technologies like sharding and roll-ups are working to address just that.
“More scalability, more ways to process user transactions are being brought online in parallel through Layer 2 constructions called roll-ups, but scaling is not being enhanced at the core protocol itself,” Ryan continued. That comes in later upgrades instead.
Katie Talati, head of research at asset management firm Arca, says her team is keeping a close eye on everything in the Layer 2 space, particularly the projects trying to offer scalability.
“The biggest problem right now is that it’s very fragmented,” Talati said. “You end up with these people who are on Ethereum now, but they’re isolated from each other because the L2s don’t necessarily talk to each other very easily. And so it’s just not a seamless experience,” she said.