Ethereum’s biggest update has just gone into effect, in what industry experts are calling a game changer for the entire crypto industry. So far, all signs suggest that the so-called merger – which is designed to reduce the cryptocurrency’s power consumption by more than 99% – has been a success.
The first-ever block of Proof-of-Stake transactions was finalized with nearly 100% customer participation. It was, by far, the best scenario.
The redesign of the Ethereum network fundamentally changes the way the blockchain secures its network and verifies transactions. Most of these changes happen under the hood and the hallmark of a successful upgrade is that the end user does not feel any difference in the hours and days to come.
Cryptocurrencies such as ethereum and bitcoin are often criticized for the mining process to generate new coins. Prior to the merger, both blockchains had their own vast network of miners all over the planet running highly specialized computers that crushed mathematical equations in order to validate transactions. Proof of work uses a lot of energy, and it’s one of the biggest targets of criticism in the industry.
But with the upgrade, Ethereum migrated to a system called proof-of-stake, which replaces miners with validators. Instead of managing large computer banks, validators leverage their existing ether cache as a way to verify transactions and create new tokens. It requires far less energy than mining and experts say it will make the protocol both safer and more sustainable.
The price of ether surged following the merger. It is trading at around $1,640, up more than 3% in the past hour.
Nine teams and over 100 developers have worked on Fusion for years. In the coming hours, this decentralized network of programmers spread all over the planet will monitor the deployment and, if necessary, debug as quickly as possible.
Danny Ryan, a Denver-based lead developer who has been working on the merger for five years, told CNBC he will monitor any irregularities through automated and manual monitoring systems. If any issues arise, the relevant team will debug and release a fix for users, but Ryan says they’re pretty confident about the merge considering all the successful trials over the past few months.
“There could be some kind of small fire going out very quickly,” Ryan said. “But the network as a whole – because of the redundancy between all this different software – will most likely be stable and healthy.”
Part of the reason fusion is so important has to do with optics.
Last week, the White House released a report warning that proof-of-work mining operations could hamper efforts to mitigate climate change. A drastic reduction in power consumption of around 99.95% will not only establish greater sustainability for the grid, but will also go a long way in lowering the barrier to entry for institutional investors, who have struggled with the to contribute to the climate crisis.
Bank of America said in a Sept. 9 note that the important post-merger energy reduction “may allow some institutional investors to purchase the token that was previously prohibited from purchasing tokens running on blockchains by leveraging proof-of-work consensus mechanisms ( PoW)”.
Analysts have said that institutional money entering the large-scale digital asset space is critical to its future as an asset class.
The upgrade also changes the tokenomics around Ethereum’s native coin, Ether.
“Ether itself becomes a productive asset,” Ryan said. “It’s not something you could just speculate on, but it’s something that can generate returns.”
In this post-merger era, ether takes on some of the typical characteristics of a traditional financial asset, such as a certificate of deposit, which pays interest to holders.
“That’s probably the lowest risk return inside the Ethereum ecosystem,” explained Ryan, who added that the return in other corners of decentralized finance, or DeFi, involves taking smart contract risks and other types of counterparty risk.
The upgrade will also lead to a significant reduction in the supply of Ether tokens in circulation, which could pave the way for Ether to become a deflationary currency in the weeks and months to come. Some investors say it could also help drive the price of the token higher.
This reduced offer is the result of the new verification model which replaces miners with “validators”. The rewards for validators are much smaller than those that went to proof-of-work miners, meaning less ether will be minted as a result of this upgrade. Validators are also required to lock their tokens for an extended period, removing Ether from circulation.
Additionally, under an upgrade that took effect in August 2021, the network is already “burning” or permanently destroying some of the digital currency that would otherwise be recycled into circulation.
The developers say improved network security is another key feature of the upgrade.
“There are changes to the chain’s security guarantees,” said Sean Anderson of Sigma Prime.
Take a 51% attack, in which someone or a consortium of people controls 51% or more of a cryptocurrency and then weaponizes that control to make changes to the blockchain.
Anderson says it’s much easier to recover from a 51% attack on a proof-of-stake network because there are built-in mechanisms to financially punish malicious actors by reducing their stake.
“Because this economic asset is inside the protocol, you get a much better mode of recovery, so you end up with a better kind of security profile,” Ryan told CNBC.
The next few hours, days are the key
The next few hours and days will be critical to gauge the health of the Ethereum network after the upgrade. Behind the scenes, the developers will be monitoring metrics like validator turnout to determine how things are going. But coders tell CNBC that in an ideal world, users would be completely unaware of the upgrade.
“If everything goes perfectly, the end user won’t notice any difference,” Anderson said. “If someone trying to transact on Ethereum doesn’t realize that, then it’s been fine.”
Upgrading does not immediately make ethereum faster, cheaper, or more scalable. But these features come with future upgrades that are now possible after the merger.
Scalability, in particular, is something that Ryan says is desperately needed for the network in the future.
Currently, layer two technologies such as sharding and roll-ups are trying to solve this problem.
“More scalability, more ability to process user transactions are brought online in parallel via layer two constructs called roll-ups, but scale is not improved at the base protocol level itself “, continued Ryan. This comes in later updates instead.
Katie Talati, head of research at asset management firm Arca, says her team keeps a close eye on everything in the layer two space, especially projects that try to offer scalability.
“The biggest problem right now is that it’s very fragmented,” Talati said. “You end up with these people who are now on Ethereum, but they’re isolated from each other, because the L2s don’t necessarily talk to each other very easily. And so it’s just not a seamless experience,” he said. she declared.