Several months into a likely crypto winter, token prices have fallen like leaves of a tree, hitting the ground where they can stay for months, if not years. But even as industrialist Bitcoin struggled to recover from losses that halved its value, Ethereum has risen like a phoenix from the snowy ashes – its value has surged nearly 70% in recent weeks.
The resurgence most likely stems from a promising story in the crypto world: that of “the Merge”, an upcoming technological upgrade of the Ethereum blockchain. More than two years in the making, the Merge is already being heralded by crypto experts as a defining moment for Web3, a moment that could evolve into blockchain technology that could one day power the world.
On August 10, Ethereum developers performed their third and final test of the upgrade before it goes live on September 15. The run-through, which took place at a practice network called Goerli, successfully prepared the engineering team for the big finish, as well as investors for a big rally.
“It would not be an understatement to say that the Ethereum merger is the most anticipated event in crypto history,” said Tom Dunleavy, senior analyst at crypto research firm Messari. wrote this week. And according to James Butterfill, head of research at crypto management firm CoinShares, more than $159 Million Has Flown To Ethereum in the past two months.
It sparked hype for some that a long-awaited “flipping” — the hypothetical moment when Ethereum overtakes Bitcoin as the top crypto token, first predicted in 2017 — could finally be on the horizon.
The promise of the merger
The Merge is important, in part because Ethereum is the blockchain variant that makes up the vast majority of Web3 technology today. The world’s second largest cryptocurrency is built on it (ETH), as well as most NFTs and such blockchain games as the huge Axie Infinity and Alien Worlds. It also pioneered the architecture for smart contracts, or coded programs that run automatically when certain conditions are met, to do everything from auctioning a rare collectible to canceling a lease.
But if we were ever to live in some sort of techno-future, where virtual money joins hands in the blink of an eye and algorithms distribute free-floating digital assets among billions of people, then there must exist a blockchain with the capacity to log. trillions of transactions per day. At the moment, the Ethereum blockchain can only handle about 6 kilobytes of data per second (in the 7 years since its inception it has more than amassed) 9 terabytes of archive data). Now imagine transaction volumes growing exponentially as crypto moves from edge to standard, and its applications expand beyond finance into the arts, music, and gaming realms. Can blockchains accommodate such a surge without freezing servers, increasing consumer fees, or skyrocketing energy costs?
That is the looming question, and the Fusion is the first step towards finding an answer. Crucially, it won’t immediately impact Ethereum’s scalability — the blockchain’s transaction capacity, including the number of transactions and the so-called gas prices associated with it, will remain the same — but the hope is that the new infrastructure will support a future system that can multiply.
It will be the first of five major upgrades on Ethereum’s roadmap for years to come: the others, meanwhile, have been dubbed the “surge”, “verge”, “purge” and “splurge”. At its final destination – and after a rewiring known as “shards– the blockchain will be able to log 100,000 transactions per second, says chain founder Vitalik Buterin said at a conference in July. Nowadays the capacity is only 15 per second, according to Coinbase.
All in all, it is literally a beacon of light in the darkness of the crypto winter. The first prototype of Ethereum 2.0, created in December 2020, is called the “Beacon Chain” – and it has running parallel to our version of Ethereum for almost two years, with each transaction recorded at a time as developers tinkered with the mechanics. When it’s done, the two chains will “merge” together, converging like trains on a railway line (Goerli is, in fact, named after a train station in Berlin). The old system will disappear and a new system will emerge, bringing with it the possibility of a better Web3.
Towards a greener world
One of the loudest criticisms of the growing Web3 economy has been its environmental footprint, mainly due to a consensus mechanism known as proof-of-work (PoW). Consensus mechanisms allow blockchains to determine how much money is in a person’s digital wallet, so must be designed to defend against entities that hijack the blockchain for nefarious purposes. PoW does this by demanding huge energy charges from those encrypting the blockchain transactions – more than any single company could reasonably monitor. The whole process, known as ‘mining’, could eat up carbon equal to the country of the Netherlands in a year.
But there is a much less carbon-guzzling consensus mechanism. It’s called proof-of-stake (PoS) and instead functions by demanding a sum of cryptocurrency as collateral, in a process known as “staking.” A number of newer blockchains now use PoS for its durability, but so far the two major cryptocurrency tokens, Bitcoin and Ethereum, which together hold nearly 60% of the global crypto market capitalization, have both used PoW.
That will change when the Merge transitions the Ethereum blockchain from PoW to PoS, making it the biggest test yet of that consensus mechanism in the wild. According to developers, the move could: reduce energy consumption by 99.95%returning the network’s greenhouse gas emissions back to Earth.
As Dunleavy tells londonbusinessblog.com, the merger will also disrupt the tokenomics of a $200 billion cryptocurrency, which is arguably the biggest draw for investors. Part of that, he says, is due to a shift in supply and demand. In the current system, so-called validators, which encode blockchain transactions, are awarded 2 newly minted Ethereum tokens, meaning that every time a new block is added to the chain (every 15 seconds), 2 ETH is put into circulation. But when the merger takes place, the price is lowered to 0.2 ETH, drastically reducing inflationary pressures on Ethereum. Some believe that these dynamics could even trigger a flipping within the next 12 months.
Another factor, he explains, is the elimination of forced sellers from the market: “Every day, when miners receive their tokens, they have to sell some to pay for their electricity and mining equipment. . . but strikers don’t have to sell their tokens. That takes a lot of selling pressure off Ethereum.”
The kingdom of Ethereum is coming
As with most ventures of such gargantuan proportions, the Merger had been continuously delayed, degenerating the so-called crypto that awaits the next phase of the Web3 revolution, as the timeline for the Merger stretched from mid-2021 to late 2022. When, in July, it finally announced its target date, the price of Ethereum rose 20% in one day.
But it is not without controversy. There are concerns that proof-of-stake is less secure than proof-of-work: In theory, an entity with a cryptocurrency war chest could have enough stake in Ethereum to single-handedly manipulate the blockchain by encrypting erroneous transactions.
Then there are the miners. Ethereum mining – which requires supercomputers to solve complex mathematical puzzles, solely for the purpose of generating an immense energy charge – has become a lucrative business, as the fastest miners are rewarded with pieces of ETH. The crowds have spawned an industry estimated to be worth $19 billion, according to a recent report from Messari. Miners made more than $620 million in July alone, and they can harvest up to $20 to $30 million a day, according to Dunleavy. Many of them have made fortunes in cash by investing in supercomputing equipment, akin to working capital. But the move to PoS could be a death knell, leaving mining largely obsolete as a remnant of PoW.
That looming concern has led some to call for a “hard fork” of the Ethereum blockchain, in which the new Ethereum would launch as planned, but the old Ethereum would still live on, with one chain becoming two instead. . Both are said to have tokens traded on crypto exchanges – a proposal, from prominent Chinese crypto miner Chandler Guo, she lists under ETHS and ETHW respectively. Although it’s quite a niche campaign, it won at least one big name advocate in Chinese crypto mogul and Tron founder Justin Sun.
It won’t be the first time Ethereum has forked. In 2016 – during one of the most fraught saga in blockchain history – the network split after hackers exploited a flaw in the smart contract code for one of the very first decentralized autonomous organizations, or DAOs, built on the Ethereum blockchain. . After attackers drained $60 million and threatened to take the blockchain hostage, developers made the controversial decision to split the chain, create a new Ethereum with funds allocated back to its pre-hack status, and return the loot to its rightful owners. . The hacked chain now exists as Ethereum Classic, but many have stayed true to the original – its token, ETC, is still in the top 20.
But with all phases of the Merge green lit, Ethereum is rushing to its destination in September. Time will tell if it is green enough to take the market out of the crypto winter.