Ethereum Merge: A Changing Crypto Climate
Beginning with the basics, what is Ethereum and why is “The Merge” big news in the crypto world?
Ethereum is one of the biggest crypto assets in the world circulating both non-fungible tokens (“NFTs”) and crypto coins. Ethereum is based on a Proof of Work (“PoW”) blockchain model however, The Merge intends to move away from this to a Proof of Stakes (“PoS”) mechanism.
Unpacking PoW, miners compete with one another in order to mine blocs containing transactions, once these are mined, the miner will have earned coins. In order to do this specialised computers and hardware are used to solve complex mathematical problems. The first miner to then solve the problem bloc will be rewarded with coins (in Ethereum’s case ETH). In comparison, PoS uses validators who must propose new blocks and verify transactions by staking their own coins as collateral, meaning that anyone who fails to validate or validates malicious transactions may have their collateral stake taken away.
The Merge hopes to achieve the following goals:
- Improving scalability,
- Enhancing security and decentralisation, and
- Reducing energy consumption.
The Merge was set to occur on the 15th September however, we are yet to understand how successful The Merge has been in achieving the above goals.
From a climate perspective, it is likely that The Merge will have a direct impact on the environment as specialised technology is no longer required to mine crypto coins rather, more standardised computers can validate a transaction. While the current CO2 output on Ethereum is thought to be of a similar size to that of Finland, The Merge will aim to transition this to carbon neutrality as according to the Ethereum Foundation The Merge should slash energy consumption by around 99.95%. This is because the specialised technology had been using a vast amount of energy however, in taking this out of the equation, the energy consumption will decline.
Looking at the aim of security and decentralisation, both should increase as a result of moving from a PoW framework to the PoS mechanism. This is due to the fact miners will no longer have to invest in the complex technology to mine the currency, in turn enhancing the security by reducing the risk of monopolisation. If more people are able to validate transactions without having to use state of the art technology, this strengthens the security of the blockchain as more people are able to get involved, also strengthening the decentralised state of the Ethereum network.
The specialist technology, that was once in high demand, for the purposes of mining crypto currency is now somewhat redundant when it comes to mining Ethereum. As a result, there has been a backlash, with many miners turning to other coins still operating on the PoW framework so that they can continue to use the specialised technology. Another potential issue by moving to a PoS framework is that miners now take on more risk, as they are staking their own coin on validating a transaction, which may result in a loss.
It will be interesting to see how the new Ethereum framework works in practice and if any teething problems occur.