The Ethereum Merge Finally Happened: Now What?

Ethereum has been preparing for a process known as a "merge," which may result in momentary interruptions to trading various cryptocurrencies and perhaps open up new chances for investors.

The Merge has now been successfully completed.

However, what does this really signify?

In terms that are straightforward but maybe not well understood, Ethereum has transitioned from a cryptocurrency token supported by a blockchain based on proof-of-work to one supported by a blockchain based on proof-of-stake.

Beacon was a proof-of-stake chain that had been evolving in tandem with the Ethereum blockchain from the year 2020. This process needed the assistance of Beacon. Although Beacon did not execute transactions in the past, it had previously served as a testing ground, enabling a seamless transition to the Point of Sale update.

In order to make a complete transition to PoS, Ethereum's Proof-of-Work mainnet, also known as the Execution Layer, needed to join with Ethereum's Beacon Chain, also known as the Consensus Layer.

"The greatest graphic I've seen looks somewhat of like what you see in subway stations," said Richard Smith, CEO of the fintech investment tool RiskSmith and an expert on market risk and uncertainty. "The worst diagram I've seen looks sort of like what you see in airports." "There are maps of the subway lines, and occasionally two lines run in parallel. When this happens, one line will 'stop' at a shared station, and everyone who was riding that line will need to transfer to the line that goes on if they wish to continue their journey. In a nutshell, it is what takes place with Ethereum once the Merge takes place.

The Issue with The Proof-Of-Work System

Ethereum, like Bitcoin before it, was constructed on a blockchain based on a proof-of-work protocol. In this protocol, transactions are validated by a network of computers working together to solve cryptographic puzzles.

Although a proof-of-work blockchain has the potential to build a trustworthy and widely spread network of miners, who are rewarded with tokens for the work done by their computers, using such a blockchain needs an extremely high degree of energy consumption.

According to Omid Malekan, a crypto specialist, professor at Columbia Business School, and author of "Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms," the tremendous energy drain of proof-of-work blockchains was a feature, not a flaw at the same time.

Malekan said, "the idea was to be able to govern who is updating and curating a digital ledger while maintaining our decentralized nature." "Therefore, mining was a brilliant and convoluted solution that included volunteers who demonstrated their sincerity by squandering money and spending energy," the author writes. The energy has nothing to do with the operation of the blockchain; rather, it is a method of using a financial incentive to net out an honest conclusion that may lead to a secure system. And it has been successful."

How will Proof-Of-Stake Work?

Participants in a blockchain that uses proof-of-stake can lend their tokens to the network to receive a return on their investment. In the case of Ethereum, following the Merge, anyone who has at least 32 ether (ETH) tokens may set themselves up as a validator on the token's network and receive a payout of between 5 and 10 percent of the token's value.

Proof-of-stake requires users in a network to deposit some of their money into what is effectively an escrow account to demonstrate that they are acting in good faith rather than forcing them to consume unimaginable quantities of power.

The risk-reward dynamics of Ethereum will be significantly altered as a result of the change. According to Smith, the fact that an investor may produce a guaranteed dividend from Ethereum mitigates a portion of the market risk associated with the investment.

On the other hand, there is still a potential loss of money. According to what Smith had to say, "You can't conceive of it like a CD where at least you know you'll get your principal back." "You have to ask yourself whether placing a gamble on the price of Ethereum right now is worth 4% to 5% of your whole investment."

Drawbacks of Proof-Of-Stake

In spite of the fact that proof-of-stake might have a number of advantages, including reduced energy consumption, there are at least a handful of limitations to consider.

To begin, there is still some degree of disagreement over the outcomes of the newly implemented energy expenditures. According to Malekan, it is not quite obvious whether or not there would be a lesser environmental effect from Ethereum as a result of the Merge. However, it is possible that this will be the case.

The argument that proof-of-stake blockchains are too simple to corner is another common criticism leveled against them. If a significant investor stakes a high number of transactions at the beginning of the blockchain's life, they will have the ability to dominate the staking and verification processes on the network. This might, in theory, present weaknesses that malicious actors could exploit.

Likewise, proof-of-stake blockchains have the potential to be centralizing by their very nature. Large investors have the ability to enter networks first, stake the most currency, and subsequently get a greater return on their investment than anybody else.

Having said that, starting with a proof-of-work protocol enabled Ethereum's network to develop and extend to the point where any individual or group of players does not readily control it. This is in contrast to the situation with Bitcoin, which began with a proof-of-work system.

Alternatives to Proof-Of-Stake

Smith is of the opinion that there are alternative strategies that can make energy-intensive blockchains based on proof-of-work more efficient.

One such instance is the Bitcoin Satoshi Vision, often known as BSV. The BSV blockchain is a direct offshoot of the original Bitcoin blockchain. Bitcoin split in two, creating Bitcoin Cash, often known as BCH. After some time, BCH split off once again, producing BSV. BSV decreases the amount of money spent on electricity by increasing the size of the blocks that miners process. The cost of entry to become a miner on the BSV network is much higher, which is the trade-off for the ability to participate.

The Advantages of Proof-Of-Stake

In the long run, there is the possibility that the Ethereum network and its token may see an increase in value as a result of the move to proof-of-stake, which will in turn encourage investment.

To begin, it is possible that the change will have a significant financial effect, despite the fact that the environmental impact may or may not be debatable.

According to Malekan, "what will happen is a big decline in Ethereum inflation." This is in part due to the fact that you will no longer have individuals wasting billions of their dollars for power. "As a result, you won't have to strike quite as many coins in order to compensate them for their labor. And due to the fact that everyone may participate in staking, this makes Ethereum more interesting to a large number of institutional investors.

According to Malekan, switching to proof-of-stake might make it simpler for layer 2 products, also known as companion blockchains, to be created on the Ethereum blockchain. This, in turn, could, over the course of time, lead to a rise in the value of both the network and its token.

But whether we like it or not, the Merge has already taken place. And only the passage of time can inform us with certainty what the short-term and the long-term repercussions of this action will be.

"Ethereum is adopting a new approach, and it's absolutely an experiment worth conducting," said Smith. "Ethereum is the first cryptocurrency to implement a smart contract."