The Ethereum Merge is significant, and not just for people who own cryptocurrencies. The long-delayed Merge has been in the works in one form or another since 2014, allowing the second largest blockchain to enormously reduce its carbon emissions. If the merger is successful, ethereum’s electricity requirements will drop by more than 99%.
This has a huge consequence. Critics of cryptocurrencies argue that coins like Bitcoin and Ether are useless and consume huge amounts of electricity. The first point is polarizing and subjective, but. At a time when more people than ever consider mitigating climate change to be society’s #1 priority, the carbon footprint of Bitcoin and Ethereum is too glaring to ignore.
In the merger, ethereum will adopt a system known as proof of stake, which was planned even before the creation of the blockchain in 2014. Due to its technical complexity and the increasing amount of money at stake, it has been postponed several times. The merger is part of what has been called “ether 2.0” in the past, a series of upgrades that are reshaping the foundations of blockchain. The goal deadline is mid-September.
“We’ve been working on proof of stake for about seven years,” Ethereum co-creator Vitalik Buterin said at the Eth Shanghai conference in March, “but eventually all the work comes together.”
Here’s everything you need to know to make the big day meaningful.
Why are cryptocurrencies harmful to the environment?
To understand Merge, you must first understand the role of cryptocurrency miners.
Let’s say you wanted to mine cryptocurrency. You would set up a powerful computer—a mining rig—to run software that attempts to solve complex cryptographic puzzles. Your rig competes with hundreds of thousands of miners around the world trying to solve the same puzzle. If your computer first decrypts the cryptography, you gain the right to “validate” the block – that is, add new data to the blockchain. Doing so will get you a reward: Bitcoin miners get 6.25 Bitcoin ($129,000) for each verified block, while Ethereum miners get 2 Ether ($2,400) plus gas, which are the fees users pay for each transaction (which can be huge).
You need a powerful computer to stand a chance in this race, and people usually set up warehouses full of kits for this purpose. This system is called “proof of work” and is how both the Bitcoin and Ethereum blockchains work. The point is that it allows the blockchain to be decentralized and secure at the same time.
“This is called a civil resistance mechanism,” said Jon Charbonneau, an analyst at Delphi Digital. Each blockchain must run on a scarce resource, Charbonneau explained, that bad actors cannot monopolize. For proof-of-work blockchains, this source of energy is in the form of electricity needed to run a mining operation.
For a bad actor to overtake ethereum right now, they would have to control 51% of the network’s power. The network consists of hundreds of thousands of computers worldwide, which means bad guys would have to control 51% of the power in this vast mining pool. That would cost billions of dollars.
The system is secure. Although fraud and hacking are common in cryptocurrencies, neither the Bitcoin nor the Ethereum blockchains themselves have been compromised in the past. However, the disadvantage is obvious. As cryptographic puzzles become more complicated and more and more miners compete to solve them, energy consumption rises.
How much energy do cryptocurrencies use?
Lots and lots. Bitcoin is estimated to use about 150 terawatt hours per year, which is more electricity than 45 million people in Argentina use. Ethereum is closer to 9 million Swiss citizens, consuming about 62 million terawatt hours.
Much of this energy comes from renewable sources. About 57% of the energy used to mine Bitcoin comes from renewable sources, according to the Bitcoin Mining Council. (BMC relies on self-reporting among its members.) It’s motivated not by climate conscientiousness but by self-interest: Renewable energy is cheap, so mining operations are often set up near wind, solar or hydro farms.
Still, the carbon footprint is extensive. Ethereum is estimated to emit carbon dioxide on a similar scale to Denmark.
How will Merge help?
The merger will see Ethereum completely ditch proof of work, the energy-intensive system it currently uses, in favor of proof-of-stake.
In crypto land, a “stake” refers to depositing cryptocurrency to earn interest. For example, the creators of the terraUSD stablecoin offered customers 19% interest on staked TerraUSD: You can deposit $10,000 and withdraw $11,900 after a year ().
Once Proof of Stake goes into effect, miners will no longer have to solve cryptographic puzzles to verify new blocks. Instead, they put ether tokens into the pool. Think of each of these tokens as a lottery ticket: If your token number is called, you win the right to validate the next block and receive the rewards associated with it.
It’s still an expensive business. Potential block validators — who will be known as “validators” instead of miners — must stake a minimum of 32 ether ($48,500) to be eligible. This system sees punters putting up raw capital, rather than power, to validate blocks. While a bad actor needs 51% of the network power to beat the proof-of-stake system, he would need 51% of the total staked ether to beat the proof-of-stake system.
Since cryptographic puzzles will no longer be part of the system, electricity expenses will drop by an estimated 99.65%, according to the Ethereum Foundation.
Why is it called a “merger”?
The way ethereum will go from proof of work to proof of stake will be achieved by merging the two blockchains.
the ethereum blockchain that people use is known as the “mainnet”, as opposed to the various “testnet” blockchains that are only used by developers. In December 2020, Ethereum developers created a new network called the beacon chain. Beacon chain is essentially the new ethereum.
The Beacon chain is a proof-of-stake chain that has been running in isolation since its inception 18 months ago. Validators added blocks to the chain, but those blocks did not contain any data or transactions. Basically it was subjected to various stress tests before the big day.
With Merge, data stored on the Ethereum mainnet is transferred to the beacon chain, which then becomes the main blockchain on the ethereum network. In the run-up to the merger, ethereum developers stress-tested the new blockchain by running data and transactions through it on various ethereum testnets.
“If you talk to ethereum developers, and I did, they would tell you that if proof-of-work mining is disabled overnight, they could do a Merge right now and it would be fine,” Charbonneau said. He added that most developers are currently focused on applications and clients built on ethereum, not on proof-of-stake implementation itself. “If they did the merge today, it would be buggy for a few months… but the protocol itself, nothing to worry about. [among the developers].”
Are there any risks?
Absolutely. Critics of ethereum—typically bitcoin enthusiasts—liken the merger to changing an airplane engine in the middle of a passenger flight. At stake is not just an airplane, but $183 billion worth of ether in circulation.
On a technical level, there could be many unforeseen errors with the new blockchain. Solana, another verified blockchain, has suffered several outages this year. Solana and ethereum differ in that the fees for Solana are tiny, which means that it is easier for bots to flood the blockchain, but technical difficulties are not out of the question.
Critics also question whether proof of stake will be as secure as proof of work. Charbonneau believes this could be made more secure by a feature called “hacking” – basically, validators can have their staked ether burned and their access to the network revoked if they are found to have acted maliciously.
“Let’s say somebody attacks 51% of Bitcoin today, there’s really nothing you can do,” Charbonneau said. “They have all the miners and they could keep attacking you. … With proof of stake, it’s really simple. If you attack the network, it’s provable and we just hack you and your money is gone.”
“You get one bullet and that’s it. Then you can’t do it anymore.”
Will this cause the price of Ether to rise?
Ether has fallen 60% since the start of the year, and many are hoping the Merge will revive its price. This has been a hotly debated topic in crypto circles for the past few months, but the answer is that no one knows for sure what the price of Ether will be caused by the Merge.
There are two main reasons why people are predicting that the price of Ether will skyrocket after the merger. The first is the idea that ethereum will split its carbon footprint and make it easier for large companies to both invest in ethereum and build ethereum applications.
“The reality is, if you take away the environmentally friendly part, there are a lot of people who won’t use it. [ethereum] and I don’t want to invest in it just based on ESG reasons,” Charbonneau said, referring to environmental, social and corporate standards for ethical investing. “There are a lot of tech companies that have openly said, ‘We’re not going to do anything until after the merger.’
The second argument people make is a bit more technical. Mining Ethereum is expensive; as electricity prices went up and cryptocurrency prices went down, even successful mining operations began to see red. To offset costs, miners usually sell most of the cryptocurrency they earn from mining. This creates millions of dollars worth of selling pressure every day as miners unload their Ether. Once ethereum is proof of stake miners (or “validators” as they will be called) will not have to sell all the earned ether because validating blocks is much cheaper than mining them through proof of work cryptography.
On the other hand, however, many argue that the merger is already counted. It has been in the works for seven years and many large investors, the argument goes, have put money into ethereum expecting the merger to be successful. .
When will the merger take place?
The merger is expected to take place in September. In a recent conference call among ethereum developers, Tim Beiko of the Ethereum Foundation set September 19 as a tentative date.
“The merge timeline isn’t final, but it’s extremely exciting to see it come together,” another developer tweeted. “Please take this as a planning timeline.
The price of Ether was mentioned in the announcement. That’s a far cry from its $4,800, but encouraging news for ethereum enthusiasts in the midst of a cold crypto winter.