The Ethereum Merge Explained
Readers who are aware of recent developments within the Crypto economy would likely have heard some hype around the ‘Ethereum ‘Merge’. For those who are not so familiar with cryptocurrencies, companies in the sector (often referred to as Web 3) use blockchain technology to store transparent and immutable (unchangeable) transactions on a ledger (digital record). This allows every transaction to be traceable and easy to verify, reducing losses of funds due to mismanagement or theft. Ethereum itself is the second largest crypto currency by user base after bitcoin and was founded by Vitalik Buterin when he was just 17 and is now worth $1.5 billion. Until recently, cryptocurrencies depended on a process called ‘proof of work’ in order to verify transactions and protect their systems from hackers. This system consumes a large amount of computing power and therefore uses significant amounts of energy. In an attempt to fix this issue, Ethereum is attempting a new shift to ‘proof of stake’ and ‘the Merge’ marks the completion of ecosystem integration onto the new system. In this article I will provide more background into the history of cryptocurrencies and their benefits, ethereums proposed proof of stake model and the potential wider implications of this on the global work economy.
A Brief History of Cryptocurrencies
A cryptocurrency by definition is a digital currency designed to work as a medium of exchange through a computer network which does not rely on a central authority. This essentially means digital currencies provide a system which allows users to buy and sell goods in exchange for a value system not dependent on a government or bank. The idea of the blockchain was introduced by Satoshi Nakomoto, the anonymous founding father of Bitcoin, the first crypto currency. In 2008 he released the infamous “Peer-to-Peer Cash System” proposal (commonly referred to as a whitepaper) in which he invents the idea of blockchain technology. A blockchain simply defines a record of transactions kept on a network of computers constantly working together to verify and process a network of transactions. The blockchain depends on the computer systems to solve complex calculations which encrypt (protect) the funds being transacted. Each year the blockchain issues a certain number of coins which miners (the computers conducting calculations to verify transactions) can compete to gain. The coins can then be exchanged amongst users in exchange for goods or national currency, depending on the value of the coin.
This ecosystem builds the basis of the value of Bitcoin, and the ‘final halving’ for Bitcoin is scheduled for 2140. Today Bitcoin has a total value of $20,000 per coin, and a total market capitalization of $400 billion. Ethereum, is the second largest crypto currency which follows the structure of Bitcoin but focuses on using blockchains to create ‘Smart Contracts’ which automatically manages funds based on the terms of given business agreement. This has proven popular for businesses who use the Ethereum chain in order to create Non-Fungible Tokens (NFT’s) for example, which is used to store artworks and ensure the original artists are compensated for every transfer of ownership of their work. The Ethereum chain verifies the work as original as the timestamp will verify the origination date and initial author of the work, solving issues of fraud in this industry.
The Ethereum Merge and The Meaning of Proof of Stake
The system which depends on computers to mine digital currencies by verifying transactions is called “proof of work”. Often the most powerful computers earn the most, meaning businesses invest large sums in mining farms which consume large amounts of energy. The system was created to provide equal opportunities for miners but has resulted in Chinese / Russian mine farms dominating. Success in beating competitors is often dependent on the processing power of one’s computer, so using expensive gaming processing units (GPU), bigger mining groups have begun to dominate.
The Proof of Stake Protocol requires ownership of at least 36 ethereum tokens ($57,600 worth). Any person with that amount within their ‘wallet’ (account), is able to apply to be a part of what is called the validation chain, this being used as collateral ensuring the user will receive points in exchange. This system which manages the validators and transactions is called the Beacon chain and has been launched since 2020, and is popularly referred to as Ethereum 2.0 . In comparison, it relies on well established Ethereum users to verify transactions and therefore puts more trust into the community.
What Happens Now
Last night around midnight Eastern Time the ‘merge’ was officially complete and ethereum has officially become a Proof of Stake system using the Beacon chain.Before the split there was an average of 13,000 ETH ($100,000 est), that is being mined everyday. The change ensures the miners will no longer be dependent on energy consuming GPU’s in order to process transactions, reducing total energy consumption by a total 99.5%.
While this is a big win for the world there are however additional risks for Ethereum coin holders who must now consider new risks such as a potential Denial of Service (DOS) attack. In this case, the validator uses his coins to deny transactions, causing a user to lose their slot to the denier. There have also been significant amounts of fraudulent coins which have used different variations of ETH 2.0 to trick people. This however, is the most progressive move in the Crypto industry, and the whole world is watching. This could possibly signify the future of the formalisation of the industry.