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Just over a week ago, the second biggest cryptocurrency, Ethereum, underwent one of the most difficult switches in the history of the whole sector. Ethereum has moved from Proof-of-Work consensus mechanism to Proof-of-Stake consensus mechanism.
The Merge, as this move is known, was a long-awaited event that probably compares to Bitcoin halving with its importance. What this means, what it brings and what negatives this step has? That’s the main topic of today’s article.
Ethereum has been the second biggest cryptocurrency for some time. After Bitcoin, it is the most famous and probably most recognised cryptocurrency. It is also a smart contract platform that helped birth the very recent cryptocurrency booms of non-fungible tokens (NFT) or decentralised finance (DeFi).
However, with a huge demand for all the transactions, the whole Ethereum network became congested, which translated to enormous transaction fees. This made the network almost unusable for day-to-day transactions. And that is one of the main problems that the current switch from PoW to PoS wants to solve.
As of 15 th of September, Ethereum has changed its consensus mechanism from Proof-of-Work to Proof-of-Stake. This means that miners are no longer needed to validate transactions, neither their mining services, devices or hashing power. On the contrary, validators, known as the stakers, will be in charge of approving transactions to the network, for which they will earn a staking reward.
Before they are eligible for any reward, however, they need to stake Ethereum coins in one of the staking protocols, or with the Beacon chain, which is the official Ethereum address where the stakers need to send their coins. The lowest level to get to the staking pool is 32ETH, which currently is about $45,000.
Currently, there are over 13.7 million ETH being staked. As of now, these cannot be unstaked, which means that once they are moved to the Beacoin Chain , they will be staying there for the foreseeable future.
However, not everyone has that kind of money or ETH to stake, yet the staking rewards might still be attractive for them. This problem led to creation of companies and staking protocols such as Lido, where stakers can send any amount of ETH and receive staking rewards. This is obviously related to the proportion of ETH that the stakers send to the staking protocol.
One of the biggest talking points of this switch was the narrative connected to energy consumption. Proof-of-Work requires energy to be spent on mining, a process, during which the transactions are validated. However, for the Proof-of-Stake protocol , no hardware or energy expenditure is not needed.
On the contrary, the only thing that the stakers do is lock up their stake and earn a passive income on it, hence do not need any energy. Many estimate that the overall use in the energy consumption can currently be over 99% less than in the case of PoW . For instance, Justin Drake, researcher at Ethereum Foundation said that it can be estimated that this move has the power to lower the global energy consumption of electricity by 0.2%.
Drake was then followed by others, such as Ben Edgington. Ben Edgington, product leader at ConsenSys, the Ethereum research and development firm, supported Drake’s statements as he believes this step is in the right direction mostly due to the environmental shift.
“I feel very proud, you know, that I’ll be able to look back and say I’ve had a role to play in removing a megaton of carbon from the atmosphere every week. That’s something that meaningfully affects my family and others. “
The debate around energy consumption of the consensus protocols meant that a lot of people started to be interested in The Merge. The hype around this was obviously very visible right at the moment when it was taking place. A livestream of The Merge that was on Youtube under the name of “ Ethereum Mainnet Merge Viewing Party ” had more than 41,000 viewers right around the time it was happening. This only portrays the importance of the Merge.
However, not everyone was on board with The Merge. Chandler Guo, a prominent cryptocurrency miner has thus decided to launch a fork of the old Proof-of-Work consensus mechanism of Ethereum. His effort is known under the ticker ETHPOW.
It is not very probable, though, that it will catch on. Most of the miners seem to be moving on and away from Ethereum. This was easily spotted by the price reaction of some of the more popular cryptocurrencies that the miners use for profits.
For instance, Ethereum Classic (ETC) and RavenCoin (RVN) have both seen a huge price surge as well as hash power surge right around the time when the Ethereum Merge was happening. In the case of ETC, the hashrate has increased by more than 500%, with the price skyrocketing from $14 to $44. RVN on the other hand rose from $0.02 dollars to $0.07 dollars.
So far, we have established probably the two biggest reasons why Ethereum has moved from PoW to PoS. However, there are also some negatives connected to this step, which is why, to balance this debate out, we will also look at two of the most discussed problems with this step.
First one is centralisation. While Ethereum is still a cryptocurrency, which means that it should have the goal of becoming or being decentralised, many opponents of The Merge believe that this step has actually made Ethereum more centralised. This can be viewed on many levels.
The cost of being a staker is one. Not a lot of people can actually pay more than 40,000 dollars to become validators and stakers of ETH. This means that mostly the richer will have the ability to stake this cryptocurrency and earn passive income on it. That means that they would be earning more ETH, creating a vicious cycle of people with more Ethereum earning more Ethereum etc.
If someone wants to still become staker and does not have enough ETH to do so, there are staking pools that can solve this problem. Lido is probably the most famous one, but exchanges such as Binance, Kraken or Coinbase also offer this service.
However, this only exacerbates the problem with centralisation, as these four entities alone currently hold more than 60% of all the staked Ethereum. Lido holds about 30%, Coinbase almost 14%. Kraken 8.5% and Binance approximately 6.5%. This is a huge concern for the advocates of decentralised systems and networks.
Lastly, there are also rumours of most of these exchanges or other staking pools being hosted solely on Amazon Web Services. This again highlights the centralisation problem as more than 50% of the network is dependent on one single point of failure.
The move to switch from PoW to PoS also came with another unexpected news. And that is the attention of regulators, mainly in the U.S. According to several sources, the change to PoS consensus mechanism protocol might mean that Ethereum would be viewed as a security in the eyes of SEC (Securities and Exchanges Commission).
This could potentially enforce many entities such as exchanges or staking pools, to collect information about investors and transactions connected to Ethereum and many of its tokens. Overall, this could increase the regulatory pressures as well as decrease the potential privacy and anonymity features of some of the cryptocurrencies.
The Merge has been connected to Ethereum for several years. In fact, the founders of the project stated several times that moving from PoW to PoS was one of their initial goals in 2015, when ETH was founded. They also estimated that there have been several teams working on this switch for more than three years.
The Merge has been such a major part of Ethereum for so long that the current expectations of what comes next might have been overshadowed. That is why Vitalik Buterin, probably the biggest person connected to Ethereum, has highlighted some of the steps that will be coming next to Ethereum.
Buterin stated that the next stage will mostly be connected to implementing shards and sharding technology, which should help with the speed of transactions as well as their cost. The scalability will be thus one of the main focus points for the future. Overall, creation and implementation of Layer-2 solutions will be in the center of the next stage of ETH development known as The Surge.
With The Merge being successfully behind us, the next stage, The Surge, should become one of the main talking points for the Ethereum community. After that, the plans are to focus on next stages known as The Verge, The Purge and The Spurge. All in all, after implementation of all of these stages the Ethereum network should be able to process 100,000 transactions per second according to Vitalik.
The Merge was without any doubt one of the most important and ambitious projects in the cryptocurrency world. Nothing like this has been done on such a scale before, which is one of the main reasons why this highly anticipated event had a huge media coverage.
While it was finally implemented, the work of Ethereum developers is far from being done. Next phases and stages of the progress of the second biggest cryptocurrency have been clearly stated. Yet, many are now mostly looking at the effects of The Merge and what it means for ETH right at this moment as it does not only have its benefits, but also pitfalls.
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