The second largest cryptocurrency in the world is undergoing a significant transformation that will change its technology to reduce carbon emissions by more than 99%, according to its Ethereum platform.
The transition known as “The Merge” is coming to Ethereum, which will upgrade its blockchain technology from the energy-intensive model used by its rival Bitcoin.
While anticipation on the move has seen the price of Ethereum’s token Ether (ETH) double over the past couple of months, not everyone is looking forward to the change.
Euronews Next examines what is changing and how the transformation could affect the cryptocurrency market.
What is Ethereum union and when does it happen?
The first part of the Merge update began on September 6 with the Bellatrix update, which will mark a so-called “hard fork” that will convert Ethereum from a proof-of-work (PoW) to a proof-of-stake (PoS). ) base.
The second part of the update will take place between 13 and 15 September, the Ethereum Foundation said.
On September 10, Ethereum’s development team, Nethermind, said it had completed the shadow fork test prerequisite, which stress-tests synchronization assumptions to ensure network security. The former was performed in April and this was the last.
The shift will take Ethereum from the energy-intensive PoW model to the 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 number riddle game and the first person who solves the puzzle receives a fixed amount of cryptocurrency.
It requires a global network of computers to run concurrently when a transaction occurs and therefore a lot of power.
In the PoS system, there is no need for the hardware that consumes energy during the acquisition of coins, which are placed as collateral in the staking process and therefore there is a random selection via the software.
The power of your machine does not increase your chances of winning and being able to create the next block for the blockchain. The only thing that increases your chances of winning is simply getting more coins.
Could Ethereum Merging Make Cryptocurrencies Greener?
The move to PoS is “a step in the right direction on sustainability,” Alex de Vries, an economist who runs the Digiconomist website, told Euronews Next.
It estimates that the energy consumption of Ethereum mining is around 72 terawatt hours per year, which is equivalent to Switzerland’s carbon footprint.
De Vries says he’s working to figure out how much the switch will save energy. At the moment, he estimates it’s at least 99%.
“This translates into something like the electricity consumption of a country like Portugal (a quarter of all data centers in the world combined) disappearing overnight,” he said.
But he added that PoS won’t completely solve the cryptocurrency energy problem.
“Blockchain by design will never be a super efficient technology,” he said.
A union or a split?
The choice of the name Merge is due to the fact that Ethereum is adopting the Beacon Chain PoS system but it is a bit deceptive as there is likely to be more than one division, creating the PoS chain and a PoW chain.
This fork is not the first time it has occurred in the history of cryptocurrencies. Bitcoin also saw splits after the updates and created Bitcoin Gold and Bitcoin Cash.
For investors and the cryptocurrency start-up scene, Merge won’t have much of an impact, according to Eloisa Marchesoni, a tokenomics expert.
“The worst impact will be on the miners,” he told Euronews Next, explaining that the value of the old version is likely to decrease and that 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, the PoW version may be priced low, which will force most miners to close.
Marchesoni, who mines Ether herself, said the expensive equipment is not a total waste as you can find alternative coins to mine on PoS that are compatible. While it may take a month to do, it doesn’t cause huge problems.
The main point miners are upset about, he said, is the centralization aspect and the feeling that Ethereum “behaves like Wall Street and the banks.”
How big is Bitcoin?
While it may be cleaner for the environment than Bitcoin, upgraded Ethereum is unlikely to reach the top spot in the cryptocurrency market.
“Bitcoin will always be like electronic digital gold. And Ethereum is like fiat money, they are just two completely different things,” said Marchesoni.
“And no one holds its largest capital in Ethereum, people will hold large capital in Bitcoin. None of the OGs, as we call them, none of the cryptocurrency originals actually speculate that much on Bitcoin.”
Marchesoni expects Ethereum to see a slight increase in the price, but perhaps only for a few days or weeks.
In the long run, he believes that Ethereum is laying the foundation for PoS, which unlike PoW cannot be used for the metaverse or NFT, but that other cryptocurrencies will develop the blockchain for new protocols and new governance models.
De Vries also does not believe that Merge will cause the latest cryptocurrency rally. Although he “is a step in the right direction” for cleaner cryptocurrency mining, he said he doesn’t solve PoS problems, primarily scalability.
However, Merge could possibly push policy makers to ban PoW in the coming years as they try to regulate cryptocurrencies and have reported concerns about its environmental impact.
“If Ethereum can go from proof of work to proof of participation, why shouldn’t they just say, ‘Bitcoin, you will either do the same thing or we won’t allow Bitcoin anymore,’” de Vries said.
“I think it’s a very real risk if (Merge) is really successful. I fully expect this to be back on the table again, maybe not right away, but definitely soon.”