Cover The Ethereum 'merge' is upon us, and it's about to change the crypto scene (Zoltan Tasi)

The Ethereum blockchain is about to get better, faster, and stronger. Here's what it means

September is upon us, and with it looms a highly anticipated event more exciting than the return of Starbucks' pumpkin spice lattés: the long-awaited Ethereum merge.

In simple layman’s terms, the existing Ethereum blockchain will undergo an overhaul from its current Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus model (more on that later), improving its efficiency and, notably, its environmental impact. Crypto enthusiasts have been hawking this change over the past few years, as the Ethereum foundation confirms the software upgrade to happen on September 15. This has caused a ripple amidst crypto winter as investors buy in a frenzy, resulting in a price jump over the anticipated move. To get yourself prepared, here’s what you need to know about the upcoming Ethereum merge.

Before we begin: a refresher

Ethereum is a decentralised ledger or database with a smart contract functionality that relies on peer-to-peer validation, and is used to fuel the crypto ecosystem, like its currency Ether (ETH) and non-fungible tokens (NFTs). Much as how transactions are verified by a bank institution, blockchains remove the middleman involved as transactions are validated by a scattered network of computers.

Many businesses and projects vouch for blockchain technology for its secure and transparent network, leading to an increase in user adoption and an influx of transactions, thus the need to scale. Currently the two independent blockchains are running in parallel, in which the merge will switch off the old system to pivot Ethereum from its current PoW consensus to the PoS model.

This is what will happen after the switch

The merge will make massive changes to Ethereum’s verification system. The current Proof-of-Work model requires miners with heavy hardware to solve complex equations to validate a transaction. Miners compete for a portion of the transaction fee in Ethereum rewards, but the act of mining and hardware usage has proven to be energy intensive and damaging to the environment—its carbon footprint is comparable to a whole country’s emissions. Without the need for mining, however, this process uses less energy and significantly reduces its carbon footprint by up to 99 per cent. The new Ethereum blockchain is said to be Environmental Social and Governance (ESG) compliant, a call for more gamers and artists to be a part of the Web3 experience.

To maintain the security of the network, the Proof-of-Stake model will instead employ validators among investors who will stake their own crypto asset into a shared pool. Investors are required to hold at least 32 ETH as contribution in order to be entered into a lottery system; if selected, the validator will verify the transaction and win rewards. The more coins staked, the higher the likelihood of being chosen to validate transactions—similar to holding savings in a bank and earning interest, albeit with a higher return.

The merge is expected to happen seamlessly with no evident changes to the user as it will operate at a network level. No history or funds will be lost, and no action is required from users.

What this means for investors

Hype around the merge has led to surges in Ethereum prices, and is further expected to push prices to new levels as people are bullish towards the impending change. Ethereum has largely held the lion's shares in applications and investor’s portfolios, with promising potential for upgrades when sharding happens to further scale the network. Interest in Ethereum will also trigger more demand, but supply will be massively reduced and the circulation of new coins will slow as mining rewards will cease.

As Ethereum becomes more deflationary, more coins will be destroyed than minted, which will have an implication to its price. Unfortunately, gas fees (the transaction charges) will not change as the merge will not expand its network capacity.

 

We are not financial advisors so, as always, do your own research if considering buying Ethereum before the merge—know the risk when buying into any rumour. The uncertainty of the events and the fluctuation of cryptocurrency price swings cannot guarantee positive returns due to its high volatility.

That said, big changes are afoot and things are about to get a whole lot greener.

 

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