How Will the Ethereum Merger Affect Bitcoin’s Image?

Ethereum founder Vitalik Buterin said Tuesday that the Ethereum merger is on target to happen “around” September 13th to September 15th. That’s when the world’s second largest cryptocurrency will throw away its energy-intensive proof-of-work consensus mechanism.

How will that shift affect Bitcoin, which still stands alone at the top of the crypto market and still uses proof of work?

Shifting sand

The merger is just the latest Ethereum blockchain upgrade aimed at creating a trusted decentralized ecosystem for the future of finance. In addition to alleviating energy problems, the move to proof-of-stake offers additional benefits.

As proof of stake, block transactions are verified by validators who have staked a number of their tokens. The more tokens a person has associated with the blockchain, the more likely they are to be randomly selected as a network validator.

This differs from proof of work, which relies on computers to solve mathematical algorithms to mine tokens. As more tokens are put into circulation, the difficulty of mining the tokens increases, thus increasing the amount of energy required to complete the necessary calculations.

This rate of energy consumption is a major criticism of proof of work, which will remain the basis of Bitcoin mining after Ethereum drops the process. Beyond the energy issue, and in addition to the recent crackdowns on crypto lenders, the crypto industry at large faces myriad macroeconomic concerns, ranging from political tensions to high inflation rates to hawkish national monetary policy. These macro factors are credited with igniting the latest bear market.

Price pressure

Bitcoin reached its all-time high of $69,000 in November 2021. Since then, rough economic conditions have eroded Bitcoin’s price along with the rest of the market. As Bitcoin’s price continues to falter, facing some resistance at $20,000, the near-term price outlook for the leading cryptocurrency remains unclear. It is unclear what kind of event or change will help Bitcoin back; FTX CEO Sam Bankman-Fried said in a recent episode of the Decrypthis gm podcast would it take an “overall economic recovery” or “people are getting to a place where they use crypto for everyday purposes.”

As the volatility of leading cryptocurrencies continues to worry mainstream investors, they may become more critical of Bitcoin’s fundamentals — and Ethereum’s network upgrades, intended to position the ecosystem as the currency of the future, could put even more pressure on Bitcoin’s usability.

In an interview with journalist Noah Smith last week about models of security, governance and consensus mechanisms, Vitalik Buterin expressed his concerns about Bitcoin’s proof-of-work issuance model. “A consensus system that unnecessarily costs huge amounts of electricity is not only bad for the environment, it also requires the issuance of hundreds of thousands of BTC or ETH every year,” he said.

Buterin’s concerns lie not only in the current energy consumption, but how the constant issuance of a proof-of-work token will affect future validation.

Bitcoin’s “issuance will be reduced to almost zero, and then it will cease to be a problem,” he said. “But then Bitcoin will start to deal with another problem: how to ensure that [the blockchain] stay safe.”

Kyle McDonald, an “artist who works with code” who has recently made waves with provocative declarations about Bitcoin’s impending death, says Decrypt that Ethereum will slowly win the reliability debate among investors and will benefit from more long-term adaptation.

“After the merger, only 23% of all volume will be proof of work, mostly like Bitcoin,” he said. “As regulators look for ways to control crypto, targeting proof of work will be the obvious first move.”

Indeed, Bitcoin’s reputation as an energy guzzler remains its Achilles heel.

Digital economista scientific and technological publication that tracks Bitcoin energy consumption, regularly uses financial models involving network hashrate, mining revenue and annual energy consumption. Its conclusion? “Bitcoin is not likely to become more sustainable anytime soon.”

The analysis was strengthened after China cracked down on crypto mining, significantly reducing the share of renewable energy powering the network. Researcher Alex de Vries noted that “Bitcoin got dirtier after the Chinese mining in 2021.”

Overhyped event?

But not everyone is convinced that Ethereum will reign supreme as a result.

Analysts such as eToro’s Glen Goodman have highlighted how Ethereum’s price has outperformed Bitcoin in recent weeks, driving much of the recent narrative. “The last thing has been, ‘Ethereum is much better than Bitcoin, because the merger is coming, and the merger will make everything wonderful in the crypto world and is much more environmentally friendly,'” Goodman said on eToros “Crypto this week“webinar.

But looking at the performance of Bitcoin and Ethereum together, he said, “really shows you in stark relief how misguided the merger narrative has been. I would argue… it was just a catch up game, that was probably the main factor. Ethereum had fallen so much harder than Bitcoin had since the end of last year, and after playing catch up, it is now trading more or less exactly where Bitcoin is.”

Goodman concluded that narrative around the merger”has helped Ethereum recover, but not nearly as much as the boosters want to claim.”

Dan Held, an influential Bitcoiner who now eschews the “maximalist” label in favor of “mostamalist,” told Decrypthis gm podcast he is looking at the merger closely and that “I think it will put pressure on Bitcoin’s energy consumption”, although he sees evidence of effort as not worth the sacrifices of network security.

And still other critics such as Dennis Porter, founder of the non-profit organization Satoshi Action Fund, say that the merger will indeed making Ethereum irrelevant. “Ethereum is parenting itself by removing Proof-of-Work,” Ported declared on Twitter. “ETH will tilt out of the global energy markets.”

Ultimately, the future of Bitcoin after the merger is uncertain. Regulation, energy considerations and competition are just some of the factors that come into play. At a time when the biggest competitor is about to claim a significant technical advantage, the inventors are wary of the potential financial risks.