One of the world’s largest cryptocurrencies is about to go through an immense change with ramifications for the whole technology.
Ethereum, the second most-used cryptocurrency in the world, is expected to go through a major technical change in September known as the “Merge.” The update is years in the making and will refine the currency’s operation. It has significant implications for the political and environmental status of the cryptocurrency industry.
“It’s changing the engine as the car is driving,” Ben Edginton, the global product lead at the blockchain software company Consensys, told the Washington Examiner.
The “Merge” will change the handling of tokens in the Ethereum system. If a user wanted to be involved in creating or transacting Ethereum before the “Merge,” they would do so via a method known as “proof of work.” The “proof of work” method has users “mine” the currency by having a computer process a series of algorithms in competition with other computers to earn Ether, the tokens used by the Ethereum blockchain, which is the ledger of transactions maintained online by users.
The “proof of work” process is used by most crypto-related blockchains but consumes a large amount of energy and has been the subject of scrutiny by regulators in New York and elsewhere. The “Merge” would help diminish that energy consumption by swapping Ethereum from “proof of work” to “proof of stake” through a merging of the main Ethereum blockchain with the Beacon chain, a separate blockchain that Consensys helped launch in 2020.
“Proof of stake” creates Ethereum by having users install “validators,” which are pieces of software that help process transactions on Ethereum. Validators require users to hold a minimum of 32 ETH — or $54,000 worth of currency (as of Thursday). An algorithm selects validators randomly to “mine” coins and validate a related block. This approach would decrease energy consumption significantly since it no longer requires the competing miners to be online constantly.
“By moving to ‘proof of stake’ and doing away with a proof of work mechanism that is too energy-intensive, you’re reducing the energy demand,” Bill Hughes, the senior counsel and director of global relations at Consensys, told the Washington Examiner. A shift to “proof of stake” could save 99.5% of the energy consumed by the Ethereum blockchain, according to an estimate from the Ethereum Foundation.
This “Merge” has been discussed for several years. Ethereum creator Vitalik Buterin wrote about “proof of stake” in a 2014 blog post before the currency came into existence, and he has been making efforts to pursue the “Merge” for at least two years. The most notable effort was the creation of the Beacon chain, a separate blockchain from the main Ethereum cryptocurrency that ran on “proof of stake,” in 2020. Consensys has been involved in the operation of Beacon since its inception and has run several tests to ensure that the chain will operate without any problems.
What remains unclear is whether the “Merge” will affect efforts by lawmakers to regulate the cryptocurrency industry. Hughes said that several lawmakers had approached him seeking information about the “Merge.” However, other analysts don’t see many reasons for regulators to take action about the protocols that operate Ethereum. “Given the wide range of applications and use cases that a protocol like Ethereum supports, we anticipate that policy and regulatory efforts will target the application layer, rather than the protocol layer,” Sumedha Deshmukh, a policy specialist at the Crypto Council for Innovation, told the Washington Examiner. “We’re seeing this approach in proposed legislation around the world.”
The Ethereum Foundation announced that the software update required for the “Merge” would be implemented on Sept. 6. Edginton has been involved in preparing for the “Merge” and claims that the update is expected to go seamlessly and to have minimal effects on any transactions that may occur during the update process. The update is the first in a five-phase update to the Ethereum protocol that Buterin hopes will increase scalability and move Ethereum toward becoming more than a financial tool.