Why “the Merge” could change the future of cryptocurrency

The cryptocurrency community is buzzing about what could turn out to be a landmark event in the burgeoning digital currency world: a major upgrade — dubbed “the Merge” — of the ethereum blockchain. Crypto enthusiasts say the merger will greatly reduce the environmental impact of cryptocurrency mining and more broadly improve its utility as a means of conducting financial transactions. including use.

But what exactly is the merger and how could it change the future of crypto?

What is the merger?

Ethereum, which was launched by Canadian computer programmer Vitalik Buterin in 2015, is a blockchain (or digital ledger) used when cryptocurrency investors buy ether. It is one of the world’s most widely used blockchains, second only to the bitcoin network. There are more than 71 million crypto wallets on the ethereum blockchain today, according to the Ethereum Foundation, a group of developers now monitoring the blockchain.

Think of Merge as the next generation, or 2.0 version, of ethereum. After nearly two years of thinking about and testing a new way to transact, ethereum developers say it’s finally ready for prime time. Simply put, the merger aims to reduce the number of people and computers needed to add another block of data to the ethereum network.

The change is called merging because there are currently several ways to create a new block of data. Developers plan to combine the existing methods into one process that they say is both safe and environmentally friendly.

When will it happen and why now?

The exact timing of the merger is unclear, but the developers said they are giving themselves a deadline of September 19 to finalize the matter. In August, they said they would start rolling out the merger on September 6 and complete everything between September 10 and September 20, Coindesk reported.

The merger is happening now because ethereum is mature enough to handle financial payments, store non-fungible tokens, trade crypto and host smart contracts, blockchain expert Merav Ozair said. But streamlining the process of adding data to the blockchain could make these and other transactions much faster, according to developers.

Ethereum can do 15 transactions per second in its current form, said Ozair, who founded the startup Blockchain Intelligence. But if the merger is successful, the blockchain could eventually handle up to 100,000 transactions per second — “way beyond what Visa and Mastercard can do,” she said.

How would the merger reduce carbon emissions?

In a blockchain network, transactions are not verified by a bank, credit card company or other third party. Rather, it relies on a network of computers competing to solve complex problems in exchange for tokens. It takes thousands of computers to verify transactions on the ethereum blockchain, a mechanism known as “proof of work.”

All the powerful server computers that are being dumped together require huge amounts of power. The Ethereum blockchain uses about 112 terawatt-hours of electricity a year — about the same amount of energy used to power the Netherlands. This level of energy consumption releases about 53 tons of harmful carbon emissions into the environment annually, the same amount Singapore produces in a year.

The merger replaces the proof-of-work system with an alternative approach called “proof of stake”. In that system, owners of cryptocurrency known as “validators” verify transactions and record them on a new block. Because proof of stake means fewer people use their computers to verify transactions, fewer terawatt hours are burned.

Using proof-of-stake, the merger is estimated to reduce the ethereum blockchain’s energy consumption by 99.9%, developers said.

Will the merger be safer to use cryptocurrency?

Quite possible. Since December 2020, ethereum developers have essentially been running two different versions of the blockchain simultaneously. The Beacon version was used so they could test the proof-of-stake system, while the Mainnet version continued with business as usual using proof of work. But having both versions running gave hackers twice as many entry points to potentially attack ethereum.

After the merger, the Mainnet version will disappear and financial transactions will only live on Beacon. Deleting one version of the chain, combined with having a small pool of validators, will reduce the chances of a hacker damaging the blockchain, the developers said.

It’s important to note that these changes haven’t yet been proven to make accounts more secure because they haven’t been tested at a large enough scale. Ethereum developers have posted a warning on the foundation’s website, explaining how hackers may try to trick users of the digital currency.

Are there any risks or disadvantages?

Moving to a proof-of-stake system is likely to create “haves” and “have-nots” among the validators and everyone else using ethereum, said Bryan Daugherty, the global director of public policy for the BSV Blockchain Association.

That’s because, to become a validator on ethereum, someone must invest at least 32 ether – roughly $52,000 – and agree to keep those tokens stashed away in a separate account. Under those rules, not everyone who doesn’t have that much cryptocurrency can serve to validate ethereum transactions, Daugherty said.

“The way I see it, the plan now is to eliminate mining altogether and allocate these coins to those with the largest positions,” he said.

Agreeing to hide ether in exchange could come back to haunt the validators as well, especially if the price of ether drops dramatically and someone wants to sell, Daugherty said.

“You’re forcing people to lock your coins,” he said. “That seems very red-flagged to me.”