Ethereum Finally Begins The Merge – But What Will It Mean?

To Merge or not to Merge - that is no longer the question.
16 September 2022

When two become one – the Merge has begun.

Ethereum has finally begun “The Merge,” a move that’s it’s been planning since 2014. The Merge is expected to fundamentally change the nature of the cryptocurrency and how it’s mined, while dramatically reducing the ecological impact of Ethereum mining.

One of the main problems with cryptocurrency, and cryptomining in particular, is that is uses as much energy as a small to medium country every year.

No – literally. It’s been cautiously estimated that the Ethereum ecosystem alone uses roughly the same energy as Finland per year. Sometimes, as in the middle of this year, the Ethereum Foundation estimates, that rises to as much energy as the Netherlands.

That means there has been intense resistance to cryptomining – the process of logging, updating and checking transactions on the blockchains that underpin cryptocurrencies like Ethereum – because the energy it requires in terms of high-grade computer time places a counter-productive burden on power grids. That’s become a geopolitical factor, especially at a time when energy is at a premium, and green alternatives to fossil fuels are striving for greater adoption to avert the climate change cataclysm to which we are driving the planet.

Proof of Work Vs Proof of Stake

Cryptomining, more officially known as “Proof of Work,” has until now been used by most of the popular blockchains, including Ethereum, Dogecoin, Litecoin, and the biggest cryptocurrency in the world, Bitcoin.

The Merge sees Ethereum (number 2 in the bitcoin stakes) move to a different mining model, known as “Proof of Stake.” It vastly reduces the number of computers needed to verify transactions, and downgrades the types of computer that can validate transactions. Each of a much smaller number of “validators” put their own collection of Ethereum cryptocurrency at stake against their making a mistake in their validations in the new model.

That way, you not only highly motivate your cryptocurrency’s “validators” to accuracy – turning it from a simple energy-burn remote process into an engaged human process – you also vastly reduce the amount of energy required to maintain the cryptocurrency at its current levels and let it evolve as before. The energy impact of the Ethereum Merge, as mentioned, has been likened to the entire nation of Finland turning off its national power grid.

The Green Future of Cryptocurrency?

The move has naturally seen environmentalists cheer, and could arguably pave the way for cryptocurrency to come in from the cold of planet-killing opprobrium, but it may not be quite that simple. All the other big players in the cryptocurrency sector will – as far as is known – remain on the energy-burning “Proof of Work” system. What happens next will be interesting to watch – either Ethereum will gain significant support and move closer to overtaking Bitcoin because of its eco-responsible shift of paradigm, or it may just possibly wither compared to the other energy-guzzling cryptomining currencies.

That might happen both because of the reduced number of validators needed in the Proof of Stake system, the fact that validators have to stake their existing Ethereum stocks in order to guarantee their standard of work, and the fact that the result of the shift will be fewer ‘coins’ being awarded for validation work. That being the case, by elevating the amount of human investment and crypto-investment required and lowering the reward for the work done, Ethereum may well find it has created the perfect engine for disincentivization to use its currency.

A Colossal Undertaking

It’s fairly certain that the other cryptocurrencies won’t be following suit any time soon (unless of course, the opposite happens and Ethereum soars in popularity and take-up), because the process of shifting from Proof of Work to Proof of Stake has been monumentally difficult – which is why it’s taken eight years from first being announced to becoming a reality. The Ethereum Foundation’s Justin Drake has likened the shift to taking out a car’s engine while it’s still running, and it’s also been likened to rebuilding the foundations of a skyscraper while it’s still standing. That’s apposite, as Ethereum underpins a $60 billion financial ecosystem, so getting the shift wrong could have had appalling economic consequences.

Other cyrptocurrencies will undoubtedly wait to see whether the benefits of the Merge provide a reason to undertake such a risky manoeuver themselves.

There are potentially enormous benefits for Ethereum, though. The Merge – which describes the merge of Ethereum with a carbon copy known as the Beacon Chain, which has been running on Proof of Stake since 2020 – should make the blockchain significantly more stable and scalable, assuming the currency doesn’t experience a mass exodus of cryptominers.

Some large-scale cryptomining companies though, like Dubai-based Prima Technologies, are already spending tens of thousands of dollars to replace the machines they used to mine Ethereum with even more expensive machines – used to mine Bitcoin.

The green way forward for cryptocurrency, or a spectacular way to do good in the world and go out of business? The Merge may have happened, but the jury’s out on Ethereum’s future prospects.