Ethereum makes history with the merger to Proof-of-Stake

The world’s second largest blockchain launched its long-awaited “Merge” update this morning, moving the network from a Proof-of-Work consensus algorithm to Proof-of-Stake. Ethereum developers celebrated the update alongside other prominent members of the community with a press conference. A live party over 40,000 people watched the event.

Ethereum moved to Proof-of-Stake when the network’s total difficulty threshold, a measure that determines the difficulty of mining Ethereum blocks, was reached. 587500000000000000000000000 early Thursday. The update, known as Paris, follows last week’s Bellatrix upgrade, in which Ethereum prepared its consensus layer for the main event. The change saw Ethereum’s main Proof-of-Work network “merge” with its Beacon Proof-of-Stake chain, this is the first time that Ethereum’s core network has been updated.The merge has been described as the equivalent of an airplane changing its engine in mid-flight.

With today’s change, Ethereum will now rely on the validators that stake the ETH to reach consensus and secure the network. Proof-of-Stake will bring several major changes to the Ethereum network. Perhaps the most important of these changes is an estimated 99.95% reduction in energy consumption. Since Ethereum will no longer rely on miners to run power-hungry hardware, it will become much more efficient. Justin Drake, a researcher at the Ethereum Foundation, said the change would reduce global electricity consumption by 0.2 percent during the Ethereum Foundation’s live broadcast. In addition, the network will stop paying ETH to miners, resulting in a reduction in emissions of about 90 percent. Previously, Ethereum was issuing about 13,000 ETH per day, but now it will only pay about 1,600 ETH to validators.

The merger is a momentous event not only for the Ethereum community, but for the crypto community as a whole. Never before has a Proof-of-Work network of the scale of Ethereum moved to Proof-of-Stake. Ethereum co-founder Vitalik Buterin has been talking about Proof-of-Stake since 2014 and the Merge took years to see the light of day, it suffered several delays until the Ethereum Foundation committed to a 2022 launch. “Proof-of-Stake has been a dream for the Ethereum ecosystem since pretty much the beginning“, Buterin said at the Ethereum Foundation’s presentation event.

However, while most Ethereum fans anticipated the event, the merger was also a point of contention among Ethereum miners because it essentially made them obsolete. That’s why a group of Proof-of-Work advocates came together over the summer to preserve a new version of the network under the name EthereumPOW. The Proof-of-Work channel is expected to go live with a drop for ETH holders in the next 24 hours.

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Concerns about censorship resistance

As the merger approaches, many crypto-currency advocates within and outside the Ethereum ecosystem have expressed concerns about the network’s ability to evade censorship, in light of the U.S. Treasury Department’s sanctions against Tornado Cash. There are concerns that an Ethereum Proof-of-Stake would be easier to censor than a Proof-of-Work network, given that many of the major network validators, such as Coinbase, are based in the United States. In order to maintain Ethereum’s decentralization, these validators would have to process all transactions assigned to them, even if they do not comply with Treasury sanctions. Validators could theoretically choose to block certain transactions to follow Treasury sanctions, which would result in censorship on the base layer.

Coinbase CEO Brian Armstrong commented on the issue when debates over the network’s censorship resistance raged last month, saying the exchange would rather abandon staking than engage in censorship. Vitalik Buterin, meanwhile, confirmed in a tweet that he sees censorship as an attack on the network and advocates slashing, a process by which stakers lose their ETH as punishment for misbehaving or not validating transactions properly.

What is the future of Ethereum?

In the run-up to the merger, community attention focused on what the upgrade could mean for Ethereum’s native asset, ETH. The number two crypto-currency rallied more than 100 percent from its June low over the summer, fueled in large part by growing anticipation of today’s launch. Several Ethereum-related tokens in the ecosystem, such as Lido’s LDO and Ethereum Classic’s ETC, also advanced. ETH briefly surpassed $2,000 on the back of this rise, but has since pulled back.

ETH showed renewed strength last week when it hit a 2022 high against BTC, raising hopes among Ethereum enthusiasts of a possible “flippening” in which Ethereum would surpass the market capitalization of Bitcoin (ETH holders have been calling for the reversal for years now). However, it peaked at a ratio of 0.085 and has struggled to maintain its momentum since. ETH took a big hit on Tuesday when the U.S. Consumer Price Index came in higher than expected at 8.3%, and it still looked sluggish in the hours leading up to the meltdown.

The macroeconomic environment

Some people think that the merger could be asell the news“, probably because it generated a huge amount of hype and such scenarios are common in the crypto space. Moreover, the current macroeconomic landscape paints a bleak picture for risky assets like crypto-currencies, regardless of any promising updates or big launches. With inflation rampant around the world, the Federal Reserve is expected to announce another interest rate hike next week; some have predicted that it could double down on its hawkish stance with a 100 basis point rate hike, which would likely shake up global markets. Fed Chairman Jerome Powell has repeatedly indicated that the U.S. central bank is committed to curbing inflation; he reaffirmed in Jackson Hole last month that the Fed is targeting a rate of 2 percent, which is still a far cry from the current price spike.

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In addition to the macro picture, crypto has been on a tear for nearly a year, seeing its market capitalization drop from $3 trillion to around $1 trillion. Even if the Fed becomes dovish next week, retail interest in digital assets has taken a hit compared to this time last year, and the crypto has little to no catalyst remaining beyond the Merger. While the update has been the talk of the community for several weeks, enthusiasts may tire of discussing it by the end of the year.

A deflationary asset

Despite the clear case for a bearish ETH and the broader crypto space today, the merger is arguably the biggest rally catalyst Ethereum has ever seen. With the network reducing its issuance by 90%, ETH will likely become the crypto’s first major deflationary asset if demand to use the network remains constant (Ethereum burns ETH with every transaction as part of an update known as EIP-1559, increasing the asset’s scarcity as more people use the network). According to data from ultrasound.money, ETH supply will peak at 120.5 million and decline by about 1 million coins per year.

Crypto commentators have been discussing both sides of the argument in recent weeks as Merge’s hype has grown. BitMEX co-founder Arthur Hayes, for example, said Bankless that the merger could be a “sell the news“but that he considered the ETH operation as “an evidence“because of the reduction in emissions.

In addition to ETH itself, there is a larger question of whether Ethereum’s move to Proof-of-Stake will lead to an increase in public interest in the network. Crypto-currencies have at times come under scrutiny in the general public, often due to the impact of Proof-of-Work mining. In 2021 and more recently, Ethereum’s NFTs have been the subject of intense public criticism, but the environmental arguments made by critics are nearly redundant now that the network uses Proof-of-Stake. If the public gets used to the idea of an energy-efficient Ethereum, it will undoubtedly raise questions about Bitcoin and its reliance on proof-of-work.

ETH is currently trading at about $1,580, which puts Ethereum’s market cap at about $194 billion. It’s down 2 percent today.

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