Ethereum upgraded to a new blockchain infrastructure. What does it mean for the crypto market?

Last week, the crypto giant Ethereum achieved a long-awaited milestone and moved its technological infrastructure to a more environmentally sustainable software. The move to the new infrastructure, called the merge, reduced Ethereum’s energy consumption by 99%. Despite this being a much-anticipated change in the crypto market, it has its risks.

What changed Ethereum?

Before we talk about the merger, let’s go over what changed in the Ethereum mainnet.

A mainnet is the blockchain technology responsible for transferring cryptocurrency from sender to receiver. Since Ethereum’s inception, it has used proof-of-work mechanisms to validate transactions and mine new coins.

But to mine new coins, proof-of-work transactions needed computers to compete with each other to solve complicated math problems. Bitcoin also uses proof-of-work systems to validate new coins.

This process consumes terawatts of energy and releases megatons of carbon dioxide into the environment. It is estimated that Bitcoin mining requires the same amount of energy to power a small country, about 130 terawatt hours, according to Digitconomist’s Bitcoin Energy Consumption Index.

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Proof-of-stake mechanisms secure block transactions by requiring crypto holders to use their Ether coins as collateral to validate new coins. So, for Ethereum, the days of crypto miners and the upcoming crypto validators are over.

Validators add newly validated transactions to a shared block, and a group of validators will vote and agree that the transaction is legitimate. When that happens, the block is closed and validators will receive more coins in exchange.

The main difference between mining and validation is that crypto holders are rewarded for their stake in a proof-of-stake network, compared to being rewarded for computing power in a proof-of-work network.

What is the merger?

The merger refers to the merging of Ethereum’s original mainnet with a separate, more energy-efficient, environmentally friendly blockchain to create one chain. Ethereum’s blockchain powers much of the crypto market, including NFTs.

Ethereum’s founder, Vitalik Buterin, had visions of changing Ethereum’s consensus layer to a proof-of-stake system as early as 2014, a year after he created Ethereum. The new infrastructure offers significant reductions in Ethereum’s energy consumption, amid growing concerns and criticism from US officials and environmentalists about cryptomining’s effect on the environment.

The merger is good news for potential crypto investors who had cold feet due to crypto’s effect on the environment. It is also good news for current investors, as the merger will have no effect on current assets.

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Just before the merger happened, Ethereum saw a surge in price as investors and crypto enthusiasts were confident that the new infrastructure would give Ethereum the upper hand to surpass Bitcoin. The hype surrounding the merger gave investors hope that all cryptocurrencies would increase in price and boost the struggling market.

But that didn’t happen. Ethereum took a dip and so did the rest of the crypto market.

What does the merger mean for the crypto market?

The Merge was an impressive feat of technology and a victory for people who care about the environment. However, small changes in wording and large changes in Ethereum’s infrastructure are changing the meaning of investing in crypto.

Contrary to blockchain dogma, proof-of-stake networks and crypto investors may have to share the pavement with a third wheel — the US government. After the merger, the US Securities and Exchange Commission introduced a new wrinkle in the plan to embrace proof-of-stake infrastructure.

Blockchain is about decentralization, which means that the government should be involved as little as possible, or not at all. But SEC Chairman Gary Gensler concluded that proof-of-stake transactions mean that tokens can be considered securities and not currencies.

Speaking before a Senate Banking, Housing and Urban Affairs Committee last week, Gensler told reporters: “From the coin’s perspective … it’s another indication that under the Howey test, the investing public expects profits based on the efforts of others ,” according to the Wall Street Journal.

Gensler suggested that any cryptocurrency, not just Ethereum, that uses a proof-of-stake infrastructure could qualify as a security and could pass the Howey test. The Howey test is a US Supreme Court ruling that determines whether a transaction is an “investment contract” and then requires government regulation, something crypto investors avoid like the plague.

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This claim means that staking coins in a proof-of-stake system should include investor protections that are not suitable for blockchain transactions. As a result, Ethereum fell by 11% and Bitcoin by 8%.

Overall, the crypto market fell well below the all-time high of $2.9 trillion in 2021 to just below $1 trillion in the first half of 2022. Crypto market experts claim the decline is a consequence of changes in US economic conditions, rising inflation, and now SEC concerns on the legality of crypto trading after the merger.

Crypto trading may not be the one-way ticket to millionaire status it was once made out to be – at least not yet.