The Ethereum Merger Is Complete, Ushering in a New Era for the World’s Second-Biggest Blockchain
The historic upgrade gets rid of the miners who used to run the blockchain. This will have huge benefits for the environment.
After years of planning and delays, the Merge, a major update to Ethereum, has finally happened. This means that the digital machinery at the heart of the second-largest cryptocurrency by market value is now running on a system that uses a lot less energy.
It was no easy task to switch from one method of running a blockchain, known as proof-of-work, to another, known as proof-of-stake. “The metaphor I use is this idea of swapping out an engine from a running car,” said Justin Drake, a researcher at the non-profit Ethereum Foundation in one of the interviews.
The potential payoff is enormous. Ethereum should now use 99.9% less energy. According to one estimate, Finland has abruptly shut down its power grid.
Ethereum’s developers say that the upgrade will make the network more secure and scalable. The network is home to a $60 billion ecosystem of cryptocurrency exchanges, lending companies, non-fungible token (NFT) marketplaces, and other apps.
When the merge went live at 6:43 a.m. UTC, more than 41,000 people were watching an “Ethereum Mainnet Merge Viewing Party” on YouTube. They waited with bated breath as key metrics indicated that Ethereum’s core systems had not been compromised. After about 15 minutes, the merge was officially completed, indicating that it could be considered a success. The price of ETH, which has a market cap of nearly $200 billion and is the second-largest cryptocurrency after bitcoin (BTC), remained largely unchanged following the merge.
The update, which eliminates the network’s reliance on the energy-intensive process of cryptocurrency mining, has been closely watched by cryptocurrency investors, enthusiasts, and sceptics for the impact it is expected to have on the larger blockchain industry.
Mark Cuban, the billionaire owner of the Dallas Mavericks basketball team, said that he would be “watching [the Merge] with interest like everyone else,” warning that it could deflationist ETH, the network’s native token.
The idea was always that Ethereum would eventually transition to proof-of-stake. However, the transition required a complex technical effort—an endeavour so risky that many questioned whether it would take place at all.
“There’s a part of me that hasn’t fully realised what’s going on,” Drake admitted. I’m a little delusory, you know, because I’ve trained myself to just expect it to happen in the future.”
The complexity of the update was exacerbated by the fact that it was possibly one of the largest open-source software endeavours in history, requiring coordination across dozens of teams and scores of individual researchers, developers, and volunteers.
“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,” Tim Beiko, an Ethereum Foundation developer who played a key role in coordinating the update, has said.
In 2008, Bitcoin introduced the concept of a decentralised ledger-a single, immutable record of transactions that computers all over the world could view, alter, and trust without the need for intermediaries.
Ethereum, which was introduced in 2015, expanded on the core concepts of Bitcoin by introducing smart contracts—or computer programmes that use the blockchain as a global supercomputer, recording data onto its network. This creativity was what made decentralized finance (DeFi) and non-fungible tokens (NFTs), which are the main reasons for the recent crypto boom, possible.
The Merge phased out Ethereum’s proof-of-work system, in which crypto miners competed to write transactions to the ledger and earn rewards for doing so by solving cryptographic puzzles.
The majority of crypto mining today takes place in “farms,” which may be more accurately described as factories. Imagine massive warehouses lined with rows of computers stacked on top of one another like book shelves in a university library, each computer hot to the touch as it strains to produce cryptocurrency.
This system, which was started by Bitcoin, is the reason why Ethereum uses so much energy and why the blockchain industry is seen as a threat to the environment.
“My daughter and I discussed NFTs a few months ago,” Ben Edgington, a product leader at Ethereum research and development firm ConsenSys, recalled. At dinner, I foolishly mentioned some NFT projects, and she yelled at me, ‘How can you boil the oceans with this nonsense?’ This is a disaster. I can’t believe you make a living doing this.'”
Edgington, who began his career in climate science before moving on to crypto, understood his daughter’s point of view. “Right or wrong,” he said, “she’d absorbed a very toxic environmental narrative.” “I mean, it’s hard to defend’ stickers for adults,’ which, according to some estimates, emit a megaton of [carbon dioxide] per week.”
Hello there, stakeholders.
Proof-of-stake, Ethereum’s new system, eliminates mining entirely.
Validators take the place of miners by sending at least 32 ETH to an address on the Ethereum network where they cannot be bought or sold.
These staked ETH tokens work like lottery tickets. The more ETH a validator bets, the more likely it is that one of its tickets will be drawn, giving it access to Ethereum’s digital ledger and the ability to write a “block” of transactions.
The Beacon Chain, a proof-of-stake network launched by Ethereum in 2020, served as a staging area for validators preparing for the switch until the Merge. The Beacon Chain was merged with Ethereum’s main network as part of the transition to proof-of-stake.
The energy consumption of proof-of-stake is “not even a rounding error in terms of environmental impact,” according to Beiko.
“It’s like running an app on your MacBook,” he explained. “It’s similar to running Slack. It’s similar to using Google Chrome or Netflix. Obviously, your MacBook plugs into a wall and runs on electricity. But, surely, no one considers the environmental impact of running Slack?”
The environmental impact of the Merge upgrade, according to Edgington, is the benefit he is most excited about. “I feel very proud, you know, to be able to look back and say I helped remove a megaton of carbon from the atmosphere every week.” “That has a significant impact on my family and others,” he said.
Rather than a single piece of open-source software, the Ethereum network is better understood as a nation-state—a type of living organism formed when a group of computers communicate in the same language while adhering to the same set of rules.
The new Ethereum system gives the people who run these computers new reasons to follow the rules exactly as written. This keeps the ledger from being changed.
“Proof-of-work is a mechanism that takes physical resources and converts them into network security.” “You need more of those physical resources if you want your network to be more secure,” Beiko explained. “With proof-of-stake, we use financial resources to convert to security.”
Even though Ethereum’s proof-of-work network was run and protected by thousands of individual miners, most of the network’s hashrate, which is a measure of how much computing power all miners put together, came from just three mining pools.
If a few of Ethereum’s major mining firms banded together and amassed a majority of the network’s hashrate, they could have carried out a so-called 51% attack, making it difficult or impossible for anyone else to update the ledger.
The amount of ETH staked, rather than the amount of energy expended, determines network control in proof-of-stake. Supporters of Proof-of-Stake say that this makes attacks more expensive and useless because attackers’ staked ETH can be cut or reduced as a punishment for trying to hurt the network.
Not everyone believes in the proof-of-stake craze. There is no sign that Bitcoin, for example, will ever stop using proof-of-work, which its supporters say is the more secure and battle-tested system.
And, while control of the Ethereum network will no longer be concentrated in a few publicly traded mining syndicates, critics argue that old power players will simply be replaced by new ones. More than 30% of Ethereum’s proof-of-stake chain is controlled by Lido, a community-run validator collective. Each of Coinbase, Kraken, and Binance, three of the largest cryptocurrency exchanges, owns 30% of the network.
Skepticism about proof-of-stake prompted Chandler Guo, a prominent crypto miner, to announce in the run-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 operates on the old miner-based mechanism.
Ethereum’s core developers have generally dismissed proof-of-work forks as gimmicks and scams, but Guo’s “ETHPOW” effort and others like it have gained some traction in the crypto community.
Buying and Selling the Merge
The Merge has been the subject of speculation in crypto markets since at least mid-July, with traders initially viewing the event as a catalyst for a steep rise in the price of ETH. After the crash in digital asset markets earlier this year, the ETH options market started to price in gains after Merge, which was a welcome relief.
The idea that angry cryptocurrency miners might split the Ethereum blockchain sparked a new wave of trading. This time, traders tried to lock in the value of a new “ETHPOW” token that might be given away for free.
In general, it is impossible to predict how the markets will react to a successful merger with certainty. Because the upgrade has been on Ethereum’s roadmap since its inception, it’s possible that the market has already priced it in.
“I think if you asked me maybe three weeks ago, I would say that not only is it priced in, but it’s overpriced,” Galois Capital’s Kevin Zhou said. “The market is currently split roughly 70/30 in favour of this being a positive event for ETH.”
What comes next?
“This is the first step in Ethereum’s long journey towards becoming a very mature system, but there are still steps to go,” said Vitalik Buterin, Ethereum’s co-creator, during Thursday’s viewing party. He went on to say that the update didn’t do anything about Ethereum’s high fees and slow speeds, which are just as much of a barrier to the network’s growth as environmental concerns were.
Buterin, Ethereum’s most visible figurehead, previously outlined a set of next steps for the network that includes “sharding”—a method that, like adding lanes to a highway, should help address the network’s sluggish transaction times and high fees by spreading transactions across “shards.”
This upgrade was supposed to happen at the same time as the switch to proof-of-stake, but it wasn’t as important because rollups, which are third-party solutions, were able to solve some of the same problems.
Rollups show how Ethereum development is likely to go in the future, where community solutions will be more important than updates to Ethereum’s core code for making the chain’s capabilities grow.
Buterin sees the merge as just the beginning. To him, the Merge simply represents the difference between early-stage Ethereum and the Ethereum we’ve always wanted to become, he said during Thursday’s live stream. “So let’s go build out the rest of this ecosystem and make Ethereum what we want it to be.”