The Ethereum merge was arguably the biggest news in the Ethereum network in 2022, first for its nature and its impact on the Ethereum blockchain and crypto generally.
What does merge mean? The Ethereum merge was a blockchain upgrade in which the Ethereum blockchain transitioned from the proof-of-work (PoW) to the proof-of-stake (PoS) algorithm. The merge impacts energy usage, network speed, investment, decentralization, legal classifications, economic factors, and more.
What is proof of stake, and how is it different from proof of work?
What does merge mean, and what is the proof-of-stake algorithm? It is necessary to understand proof-of-work first.
Blockchains have public ledgers of cryptocurrencies stored on them and track transactions, which happen continuously. To preserve decentralization and blockchain integrity, all transactions are verified and updated to a blockchain by different updaters (nodes). For their work, the updaters receive some payment in the native cryptocurrency of the blockchain they update.
In the former system, the proof-of-work algorithm chooses the updater for each transaction through competition, in which updaters must solve a complex puzzle that requires huge computing power, and only updaters with high-performance computers can solve it and possibly win the competition to mine the cryptocurrency. Those updates who complete the puzzle are called miners. But because of the energy requirements and limitations of proof-of-work mining, the Ethereum network decided on an ETH merge to move to a more efficient method., beginning on September 15, 2022.
The proof-of-stake algorithm chooses the blockchain updater based not on complex quizzes but on chance. How does it work?
All Ethereum holders can deposit or “stake” their coins on the proof-of-stake platform. The Bitcoin Ethereum merger sets a minimum of 32 ETH for stakers. Stakers lock their assets from other transactions unless they decide to unlock them. The network then chooses an updater for each block of transactions from the pool of stakers.
The reasons for proving proof of stake
May contribute to deflation
Deflation is a potential advantage of the merge Ethereum that the network enjoy. The transition to proof-of-stake mining significantly lowers the cost-per-coin based on lower energy consumption. Advocates believe this could lower the cost of adding new coins to the crypt industry, promoting deflation.
Ethereum Staking and the BTC ETH merge proof-of-stake mining is also expected to improve the Ethereum burning rate for removing coins from the supply, potentially increasing demand as supply falls, thereby driving prices higher. However, scarcity only sometimes increases value.
Significant reduction in energy consumption
Ethereum and Bitcoin, the leading blockchains, were criticized for their energy consumption, mostly caused by the energy-intensive proof-of-work algorithm. But today, the energy consumption of the Ethereum blockchain has significantly reduced, thanks to the proof-of-stake algorithm. This is one of the advantages of the Ethereum merge.
According to a report from the CCRI (Crypto Carbon Ratings Institute), The Bitcoin Ethereum merge reduced its energy usage and carbon footprint by approximately 99.99%. The Ethereum Energy Consumption Index (EECI) estimated the yearly energy consumption of Ethereum as high as 93.98 terawatts. After The Merge, that estimate fell to just 0.01 terawatts (as of September 18, 2022).
This significant achievement means that miners can save and repurpose energy.
Allows stakers to earn interest
Staking leverages the concept of traditional fiat bank savings to generate interest for stakers. The merge Ethereum allows stakers to earn more ETH by mining on the Ethereum blockchain. But crypto staking is not without some risks, the most important being market volatility. The market value of ETH may fall to levels that reduce the overall portfolio of the holder. Ethereum the merge staking, also means holders cannot access their staked funds as they are locked for a set period. This limits access to cryptocurrency funds for other investments and can expose holders to market volatility.
Reasons against proving a proof of stake
Stakes can cause liquidity problems
Liquidity is an important factor in price stability and trading, and the number of tokens available on the market impacts liquidity. The Bitcoin and Ethereum merge will only release staked tokens when there’s an upgrade, an important factor that ETH stakers need to consider. If stakers have no access to their staked funds, the market liquidity may dip, causing uncontrolled volatility in a negative direction. There’s always a chance that the coin may be worth less when the lock-up period ends. When is the Ethereum merge upgrade date? There’s no set date for the next ETH upgrade.
Could make Ethereum less decentralized
When is Ethereum merge PoS impact ending? The proof-of-stake mining algorithm may make crypto less decentralized by making it easier for institutional investors to have the upper hand when mining ETH.
For example, the ETH staking program requires a minimum of 32 ETH (over $50,000 as of 17 January 2023), which most stakers do not have. Only a few institutional investors may have that amount or more. This may also open the blockchain up for 51% attacks, where an individual or small group holds most of the staking supply and thus theoretically control the blockchain. This could lead to the manipulation of the blockchain.
May be more susceptible to new attacks
As the official Ethereum Foundation website notes, the proof-of-stake algorithm is "more complex to implement than proof of work," and "younger and less battle-tested compared to proof-of-work."
While the ETHerium merge is complete, all stakers and investors should be aware of challenges such as cyberattacks and hacking attempts. Although the Ethereum network has strong cyber and development teams, the possibility of security and network challenges is ever-present. Investors must therefore maintain best practices at all times to prevent or minimize the impact of challenges.
The Merge and energy consumption
The ETH 2.0 Merge ended the energy-intensive proof-of-work mining for Ethereum. It started the eco-friendly, green, and sustainable Ethereum network ecosystem, which runs on the proof-of-stake mining algorithm. The Merge was highly anticipated and met with largely positive opinions as economic and environmental experts praised it.
In a conversation with Euronews Next, Alex de Vries, an economist, called The Merge a “step in the right direction on sustainability” and compared the energy consumption of Ethereum mining and the carbon footprint of Switzerland; they match.
The Ethereum Bitcoin merge may not solve the energy problem of the crypto industry. Still, it significantly reduces energy consumption and makes it less expensive for mining farm hosting firms to mine Ethereum and other cryptos.
What to keep in mind if you invest in Ethereum after the merger
Ensure that you understand the merge, implications, and impact before you save Ethereum or invest in the coin. Since no one knows when is ETH merge upgrade will be, you should calculate your risks and plan your investment and withdrawals before you stake your cryptocurrencies. This will help you reduce your risks.