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The crypto industry will be closely watching Ethereum’s “Merge,” a highly anticipated upgrade that is expected to happen in September. If successful, the upgrade is anticipated to lower the blockchain’s carbon footprint, reduce ether supply and potentially have a profound impact on the whole crypto ecosystem.
Here are five things you should know:
What is Ethereum Merge?
The Merge is a plan to transition the Ethereum
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blockchain from proof-of-work to proof-of-stake, with a goal to slash the blockchain’s energy consumption and lay the ground for it to be more productive in the future.
A few questions first. The reason for the Merge? To make the transition happen, Ethereum’s Mainnet, or its primary execution layer, will be merged with Beacon chain, a proof-of-stake consensus layer.
What are proof-of-work and proof-of-stake? Both are consensus mechanisms that aim to secure blockchain and to prevent bad actors from cheating. Under the proof-of-work mechanism, miners verify new transactions on the blockchain by solving complicated mathematical puzzles. This usually requires extensive energy consumption, which has made the crypto industry vulnerable to criticism. The Yale Environmental Review in 2019 equated acquiring Bitcoin to “mining diamonds.” Both Bitcoin
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and Ethereum currently adopts the proof-of-work mode.
Under proof-of-stake, blockchain transactions are validated by coin owners, who stake, or lock up their cryptocurrencies with the blockchain. As it doesn’t require much use of electricity, the mechanism has been pitched as a more environmentally-friendly alternative to proof-of-work, and currently is used by many of Ethereum’s competitors, such as Binance Chain, Solana
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Cardano
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Polkadot
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and Avalanche
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Why is the Merge important for Ethereum?
The upgrade is anticipated to make Ethereum much greener, reducing the blockchain’s energy consumption by an estimated 99.95%, according to the Ethereum Foundation. Currently, a single Ethereum transaction requires power equivalent to what an average U.S. household consumes over 6.5 days, according to Digiconomist. Ethereum’s total energy consumption stands at about 78.6 TWh per year, comparable to the power consumption of Chile, and the blockchain’s carbon emission is comparable to that of Hong Kong.
Meanwhile, the Merge also is anticipated to reduce new issuance of ether by 90%, according to the Ethereum foundation. Vitalik Buterin, co-founder of Ethereum, in July said that once the merge is completed, the issuance of ether will be controlled by an equation that depends on the amount of ether stake, instead of being set at five million per year.
What’s more, the Merge may pave the way for Ethereum to become more scalable, setting the foundation for the blockchain to become faster and cheaper in the future.
What does the “Merge” mean for the rest of crypto?
Ethereum is expected to be the first blockchain ever to transition to proof-of-stake from proof-of-work. Thus, the whole crypto industry is watching to see if it will overcome significant technical challenges to implement the Merge successfully.
Meanwhile, Ethereum is the largest blockchain for decentralized finance, or DeFi, with more than $35 billion value locked on it, according to data from Defi Llama. Whether the Merge is implemented smoothly could impact the whole Ethereum ecosystem.
Some also expect the price of ether to rise into the “Merge,” though the crypto has plunged 57% year-to-date, according to CoinDesk data. Analysts at research firm FSInsight expect ether’s market cap to surpass that bitcoin in the next 12 months, as ether’s new supply is reduced and as selling pressure from miners is eliminated, according to a recent note. Ether’s market cap stands at $202 billion, while that of bitcoin is about $411 billion, according to data from CoinMarketCap.
Read: Will ether’s price fall after the ‘Merge’ in September?
When will it happen?
In July, Tim Beiko, who organizes core developer calls for Ethereum, projected the Merge to be launched in the week of September 19. However, the timeline is subject to change, Beiko noted.
Ethereum’s Buterin tweeted on Aug. 12 that the Merge will likely to happen on around Sept. 15, though the exact date depends on hashrate, or the total networking power contributed to the network.
On Aug. 10, Ethereum went through its final dress rehearsal, with its test environment network called “Goerli” completing a Merge successfully.
How are traders preparing?
Traders have been busy positioning themselves ahead of the merge, especially after Ethereum miner Chandler Guo in late July proposed to “hard fork” the Ethereum blockchain, or splitting the chain into a duplicate version based on the proof-of-work consensus mechanism. Some miners vowed support for Guo’s proposal, since the Merge would make mining obsolete. It isn’t clear how much popularity the new chain might gain.
However, if the hard fork materializes, all ether holders are expected to receive an equal amount of new tokens on the forked chain, in line with what usually happens during forks. As a result, some traders have been borrowing ether to capture any profits.
In general, institutional interests have been rising ahead of the Merge, with the number of addresses holding over 100 ether, 1000 ether and more than 10,000 ether rising sharply, according to Blockchain data.
Hear from Mike Novogratz at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The Galaxy Digital CEO has ideas about navigating the crypto winter.
