The Merge has occurred: Ethereum has shifted to proof of stake.
Nobody knows what the cryptocurrency platform’s major upgrade will mean for the industry.
After a six-year buildup, “The Merge,” a major upgrade to the Ethereum cryptocurrency platform, was finally completed today. As of 2:43 a.m. ET this morning, Ethereum is now using proof of stake, a method of approving new transactions that promises to reduce the blockchain’s energy requirements by 99.9% while ushering in a new era for the second-largest cryptocurrency.
It’s difficult to overstate how much industry excitement has surrounded this shift. Many people are hoping that it will help to restore crypto’s reputation among skeptics while also improving the efficiency of Ethereum’s massive ecosystem of businesses and developers. Google even made a countdown clock with white and black bears, a reference to a meme about the event.
Ethereum, like Bitcoin, has been approving new transactions on the blockchain using a consensus mechanism known as proof of work, in which “miners” race to solve hard math problems using massive amounts of computing power and are rewarded in crypto for their efforts. That method uses a lot of energy. It has also made scaling Ethereum hard. When the network is busy, fees go up and processing speeds go down. This makes the network too expensive for smaller transactions and hard to scale for larger ones.
Proof of stake on the other hand, necessitates “validators” putting up a stake—in this case, a cache of ether tokens—in order to be chosen to approve transactions and earn a small reward. The more a validator stakes, the better his or her chances of winning the prize. But all ether that is staked will earn interest. This makes staking similar to buying stocks or bonds without the need to do a lot of work.
Decentralization, or the idea that decision-making and control should be distributed rather than centralized in one authority, has always been central to Ethereum’s vision. However, with proof of work, that ideal has been difficult to achieve. Even though the mechanism was made to encourage decentralization, people or groups with a lot of computer power have been able to control proof-of-work mining and profit from it.
Switching to proof of stake could help Ethereum distribute transactions across a larger and more diverse set of validators and users by lowering the required overhead for participation and lowering fees through efficiency improvements. However, power dynamics remain a concern. The minimum amount you can stake to become a validator is 32 ether (ETH), which was worth about $51,000 as of Wednesday afternoon, but individuals can pool their resources to meet the requirement.
We won’t know right away whether the Merge—the point at which Ethereum’s main network merges with the layer that uses the new consensus mechanism—delivers on its transformative promise. Some of the scaling efficiencies that supporters are looking forward to will not arrive until after the Surge, Verge, Purge, and Splurge—other upgrades promised by Ethereum CEO Vitalik Buterin that could last until 2023. Buterin stated in July that Ethereum would be only 55% “done” after the merge.
A lot could happen in the meantime. After the initial instability of speculation, the price of ether, Ethereum’s cryptocurrency, may move up or down, and other proof-of-stake coins such as Solana and Polkadot may be affected as well. The change could also put Ethereum in more of a regulatory gray area. Some legal scholars have suggested that using proof of stake increases the risk of the cryptocurrency being classified as an unregistered security because validators work together to approve transactions with the expectation of reward, which may be viewed as a “common enterprise”. However, other experts doubt that the argument is strong enough for the SEC to pursue. Buterin claims that the merge makes Ethereum’s network more secure, but some experts believe the opposite is true, warning users to be wary of “replay attacks,” in which scammers record a transaction on Ethereum’s old chain and then repeat it without permission on the new one.
Because transactions on the network should look more like other financial transactions after the merge, traditional businesses that may have shied away from crypto’s unique and energy-guzzling processes may reconsider Ethereum—and proof-of-stake cryptocurrencies in general. If they do, the crypto industry’s reputation and user base may improve.
On the other hand, startups built around miners that have been excluded from Ethereum’s process will almost certainly need to pivot or refocus on Bitcoin and other proof-of-work networks. Some ardent Ethereum 1 supporters intend to stick with proof-of-work Ethereum. One prominent miner has stated that he will “hard fork” the network, separating the code to preserve a separate chain (as some did in 2016 to preserve a previous incarnation of Ethereum). This change is unlikely to have a big effect on the ecosystem unless it is recognized by the major platforms. OpenSea, the largest market for NFTs, has said that it will only support proof-of-stake Ethereum.
Whatever happens next, Ethereum’s much-anticipated shift to proof of stake has injected new energy and technical possibility into an industry battered by constant reports of fraud and legal investigations, plummeting token prices, and public exhaustion with celebrity endorsements and hype cycles. It is a huge accomplishment that one of the major crypto players spent time and money laying the groundwork for a less destructive and more efficient ecosystem. This could be a big deal for the Web3 industry, which is still getting steady funding from venture capitalists and could get a boost from how the public sees it.