Time to prove Ethereum’s worth
Aside from the neverending whipsaw market volatility, something big went down in crypto yesterday - Ethereum completed its long awaited Merge.
The labour of proof of work
The migration of the Ethereum network from ‘poof of work’ to ‘proof of stake’ was significant for many reasons, both to those inside and outside of the crypto-sphere.
Ethereum is the second-largest cryptocurrency by market cap ($210 billion-ish as of time of writing) sitting only behind the big beast of Bitcoin ($400bn-ish).
It is the most popular platform for that nebulous new paradigm, Web3, which was such a hot trend over the last 12 months, encompassing much of the NFT and De-Fi trends. Upon Ethereum’s bedrock these new cutting edge innovations are being built. To make it run, until this week, Ethereum used a proof of work (PoW) consensus protocol.
This method of validation allowed the decentralized Ethereum network to collectively authenticate transactions. These approved transactions were added to the Ethereum blockchain. In practice (i.e. in the mad world of crypto mining), miners competed to solve maths problems to earn the right to create new blocks, and their success was rewarded with new ETH. Due to this process being potentially hugely wealth generative, it was ultra competitive. Hence, solving involved a heck of a lot of computer power, with it being estimated that maintenance of the Ethereum network used the same amount of energy each year as Austria. Achtung!
Until this week, that’s how it has worked. But the explosion in crypto popularity over the last 18 months meant a fierce light was shone on how business was being done. Change was needed.
Powering up by powering down
In August of this year, at the Blockchain Futurist Conference in Toronto in August, Ethereum founder, Vitalik Buterin, signaled this change when he proclaimed: “The Merge is coming. Ethereum will finally become a proof-of-stake system. Yay!” The audience roared their approval. But what does the change mean? And why were Buterin’s adoring disciples so hyped?
The Merge took place on the 15th September at 02:43 EST and Ethereum shifted from PoW to proof of stake (PoS), which doesn’t need anywhere near the same computer power. Instead of racing to solve problems using brute force computing power , validators are randomly selected to solve puzzles. These validators stake their own ETH to become part of the validation process before collecting new ETH. They lose their stake if they fail to validate or if they behave badly. Due to the random selection of validators, the power needed is tiny when compared to PoW, as energy-guzzling competition is removed.
Yes, it’s a bit complicated, but even crypto newbies will find this Medium post a good explainer about the benefits/shortcomings of PoW/PoS: Vulnerability: Proof of Work vs. Proof of Stake.
By taking away the energy consumption argument – a stick sceptics frequently use to batter crypto – some believe the Merge will be the moment that propels crypto truly into the mainstream, creating swifter, bolder and more meaningful adoption and innovation.
Far from perfect
As with all great change, this upgrade does not come without risks. Critics point to how PoS creates more vulnerabilities in a system already rife with Ponzis, pyramids, criminality and fraud.
Problems can be seen when you learn how a validator’s power (and ability to work) is closely linked to the amount of ETH they own i.e. their wealth. As a result, it’s hard not to see this ending up with a huge consolidation of power in the hands of a few (wealthy) ETH whales. Once that happens, the susceptibility to fraud and mismanagement goes through the roof.
It also flies in the face of a lot of what the ETH community has been seeking to build to date – a place where governance is dealt with by the many, not by the few. It will be interesting to see how these thoughts shake out over time, and whether ETH and the Ethereum blockchain turns into a currency and a system dominated by a few players, arguably, much like trad-fi today.
One problem that will be tested in the next few days is the risk of deploying a series of untested mechanisms. It’s rumoured to be one of the largest open-source software endeavors in history, and whilst the initial Merge rollout seemed to go well, it’s ongoing deployment is unlikely to go off without a hitch – how significant those hitches will be, nobody knows.
Why Ethereum matters
When faced with these criticisms, Ethereum believers revert to the reason Ethereum was built in the first place and remind us how PoS was always in the Ethereum roadmap.
In theory, from a practical and branding perspective, the reasoning behind the Merge makes sense. A greener, leaner Ethereum will be better positioned for any inbound regulation and reducing energy consumption can only be a huge positive for our spluttering planet. In addition, today, Ethereum is expensive to use (gas fees make transacting expensive) which has created a barrier to entry for less wealthy participants. PoS should make transaction speed quicker, too.
Greener, cheaper, quicker… this all sounds like good news and a successful Merge will set the scene for bolder innovation, particularly if the Ethereum blockchain can continue to scale and handle heavier workloads in the hope of enticing more cutting-edge businesses onboard, such as NFT marketplaces, like OpenSea, or decentralised crypto exchanges, like Uniswap.
Ultimately, the first inklings of answers to these questions will only become clear once the world gets comfortable with a post-Merge Ethereum. We’ll find out more in the coming days. But if it goes to plan, the future looks bright, both for Ethereum fanatics and investors. Perhaps, more importantly, Mother Earth will be able to breathe a sigh of relief, too.
