With Ethereum Merger Enabled, Blockchain Becomes More Sustainable – Ledger Insights

This morning, the Ethereum blockchain completed the “Merge,” which moved the blockchain from the Proof of Work security mechanism that burns a ton of energy to the more efficient Proof of Stake. Instead of using electricity to solve many mathematical problems to write transactions to the network, with Proof of Stake, users risk ETH cryptocurrency to ensure that only legitimate transactions are validated. Bad actors are “cut” or lose crypto.

With $23 billion in DeFi value on Ethereum, securing this kind of live upgrade is no mean feat. To address the risk, some DeFi protocols, such as Aave, voluntarily reduced activity. Over the past 24 hours, the DeFi value locked on Ethereum has fallen by 27% compared to small single-digit percentage declines for other chains, according to Defi Llama.

Apart from sustainability, Proof of Stake creates a new business model for Ethereum token holders because they now have the opportunity to earn a crypto return, currently around 4.5% on tokens. It’s something other newer blockchains leveraging Proof of Stake have already offered. Institutions are getting started with the likes of SIX Digital Exchange (SDX) which offer betting services.

According to Token Terminal, Ethereum has earned $1.4 billion in protocol revenue in the past six months and $7.6 billion in the past year.

The combination of being more sustainable than before and providing a revenue stream should make Ethereum more competitive with the many emerging Layer 1 blockchains.

However, the latest upgrade doesn’t solve all of Ethereum’s growing pains. The network’s scalability challenges persist, and transaction costs will therefore remain high. Instead, to solve scaling problems, it relies on layer 2 solutions and sidechains, such as batch transactions.

A more imminent additional upgrade will allow those who staked their ETH tokens to withdraw them. The current lock-in entails some risk.

With many token holders using centralized institutions like cryptocurrency exchanges for stakes, there are concerns that it will be easier for governments to impose controls, such as with the US Treasury Department’s ban on Tornado Cash.

At Ledger Insights, we are more focused on business use cases for blockchain rather than crypto as an investment. But given that Ethereum is a cryptocurrency, there is an angle to making money. Some of the transaction gas fees will go to the Proof of Stake validators. But most of the ETH transaction revenue will be burned. In other words, the net amount of ETH cryptocurrency in circulation will decrease, making ETH deflationary. Therefore – disregarding all other price inputs – this should increase ETH’s price.

Forking blockchains

Some of the miners running Proof of Work computers plan to continue the old Proof of Work version of the blockchain, thus creating two Ethereum blockchains, a fork. This means that those who own ETH tokens will now also own ETHW.

Yesterday we explored what that means for NFTs. In very few cases, someone now owns the same NFT in both the Proof of Stake and Proof of Work chains, but that depends on the NFT license. In most cases, they will only have rights to NFTs on the Proof of Stake chain.

From an institutional perspective, a number of companies have issued ETFs or ETPs based on Ethereum tokens. In some cases, this will mean that the ETP owner will receive an additional ETP representing ETHW.

It also remains to be seen whether the breakaway ETHW network will have sufficient participation to remain secure. While ETC Group said it plans to give its Ethereum ETP holders an additional ETHW ETP, Coinshares said it intends to but wants to wait and see what happens with ETHW.

Now that the transition is out of the way, developers and business people can get back to focusing on using the blockchain.