The official specifications for the long-awaited Merge blockchain upgrade to a proof-of-stake consensus mechanism were made public by the Ethereum Foundation. The most popular blockchain, Ethereum, is about to undergo a significant protocol upgrade, switching from proof-of-work to proof-of-stake.
The upgrade will significantly alter the Ethereum network and could alter the popular blockchain’s investment outlook. Advisors should be ready to inform their clients about the transition as a result. This entails first educating them about what Ethereum is, including some of the fundamental network architecture. And also about how the switchover might affect their current cryptocurrency holdings.
What is Ethereum
Ether (ETH), one of the top 5 cryptocurrency in India after bitcoin (BTC), has a market cap of more than $180 billion at the moment.
Ethereum uses its own cryptocurrency, ether, to power its decentralized blockchain. The development of smart contracts on Ethereum is what underpins many of the most significant crypto initiatives, including non-fungible tokens, decentralized apps, and decentralized finance (DeFi) (NFT).
A proof-of-work (PoW) consensus mechanism, which rewards network users for resolving arbitrary mathematical puzzles, powers, and secures Ethereum at the moment. The current PoW system pays Ethereum miners 2 ETH for each block that is mined, which happens roughly every 10–19 seconds.
What Will The Merger Achieve
The Ethereum Merge will significantly alter the tokenomics of the blockchain and switch Ethereum’s proof-of-work security mechanism to proof-of-stake (PoS).
Users stake their coins in exchange for the right to validate new transactions on the network. This powers the proof-of-stake consensus mechanism (currently used by many protocols, including Cardano).
With the new PoS system, validators rather than miners will protect Ethereum. When selected by the blockchain and verified by others, these validators will produce blocks, aiding in network security. Reward tokens will be distributed in ETH proportional to each validator’s stake whenever a new block is added to the network.
Even though operating an Ethereum validator will require a high level of technical expertise, many investors will be able to do so by staking in a pool or with a third party’s help. A validator must stake 32 ETH in order to take part in the validation mechanism, according to the network.
By “staking” their ether, validators will protect Ethereum. Though it takes 32 ETH to become a validator, the likelihood of being chosen by the network increases with the amount of ETH staked. The network chooses a staker and rewards the validator.
The “gas fees” users pay to conduct transactions on the blockchain are the transaction fees paid to validators. Sharding, a technical advancement that divides the Ethereum network into various pieces in order to speed up transactions and lower network fees, will be introduced as part of the PoS transition. Sharding will be implemented, which should reduce costs and speed up transactions.
The Impact Of The Merger On Supply
In contrast to any existing fiat currency, investors have long held that bitcoin’s supply cap of 21 million BTC is one of its strongest characteristics.
In this regard, Ethereum differs from bitcoin at the moment. Since the project’s inception, the rate of ether inflation has been steadily rising. While many cryptocurrency India enthusiasts have frequently cited as a drawback of Ethereum.
Historically, Ethereum has experienced much greater inflation than the top cryptocurrency in India Bitcoin and has no theoretical supply limit. The foundations of Ethereum may alter with the anticipated upgrade.
The Ethereum upgrade will probably reduce the total supply of ETH and give token owners the chance to stake their tokens. The total market interest in Ethereum is likely to rise as a result of the anticipated yield from staking. And as investor can take part in income generation by holding their ETH.
The most popular cryptocurrency in India will probably benefit from a reduction in the total supply of ETH. According to Christine Kim, a research analyst at Galaxy Digital, “Supply should decrease over time rather than increase. I believe that gives Ethereum’s case for investment as a store of value and an inflation hedge a major boost.
Effects of the Merger On Energy Efficiency
The Ethereum network will operate more effectively as a result of the merger. The PoS upgrade will significantly reduce the energy requirements of the Ethereum blockchain. And, as a result, the network’s overall energy consumption.
Instead of running expensive and inefficient mining equipment, those who want to secure the network will be able to run validator nodes.
Although from a network security standpoint, PoW blockchains are very secure, the PoW consensus mechanism necessitates heavy energy consumption from miners. According to ConsenSys, a blockchain software company founded by Joseph Lubin, co-founder of Ethereum, the amount of electricity needed to secure the Bitcoin blockchain has a carbon footprint comparable to many small nation-states.
Many investors who care about the environment have spoken out against the energy use of PoW blockchains. Due to the rising popularity of ESG investing, many investors are now unable to fund initiatives that have a detrimental impact on the environment or the climate. PoS blockchains are significantly more energy-efficient than PoW blockchains and use a tiny fraction of the energy. The merger will make investments into ether more appealing to investors with stringent environmental standards.
They have expressed concern about the energy needs of PoW networks and are governed by environmentally conscious investment standards (ESG). While PoW networks are secure, Ethereum’s transition to PoS will probably satiate the stringent ESG requirement and open the market to new players.
Benefits Of The Merger In Practice
The Merge will have a huge impact on the cryptocurrency market. The switchover of Ethereum from PoW to PoS will demonstrate how energy-efficient a decentralized, permissionless network can be. A successful switch to PoW will probably rekindle interest in Web3 initiatives aiming to construct on top of the Ethereum network.
When we consider the overall state of the cryptocurrency markets, Web3 is currently experiencing a surge in popularity. Despite the general bear market in cryptocurrency prices, non-fungible tokens (NFT), decentralized finance, and decentralized apps (dapps) are all expanding significantly. As more developers continue to enter the blockchain space, venture investment into Web3 has increased.
The development of Web3 is being held back by two main issues.
1) Developing secure, decentralized, and energy-efficient blockchains that can be built upon
2) Attracting talent and developers to the area to aid in the construction of these ambitious projects.
In other words, due to the high transaction costs and environmental restrictions imposed by the current PoW mechanism, the Ethereum blockchain cannot support any more high-volume projects.
Many Web3 companies will be able to develop their projects on an incredibly efficient and secure network. And this is likely to address these concerns in a way that PoW networks have not been able to. The network’s increased effectiveness will offer a reliable and effective base upon which to build.
The merge improves nearly all Ethereum blockchain metrics. This will be like opening the door for new applications and experiments in the future. Millions of people have joined Ethereum thanks to its smart-contract capabilities. Further, it also generated billions of dollars for users and investors.
We have witnessed the development of numerous significant projects thanks to Ethereum’s capabilities, including:
Decentralized autonomous organizations (DAO)
Decentralized finance (DeFi)
Initial coin offerings (ICO)
Security token offerings (STO)
Non-fungible tokens (NFT)
How Investors Can Get Ready
Ethereum’s transition to a PoS mechanism will change its tokenomics, increase its diversification, and reduce its energy needs.
To keep in mind that, Ethereum upgrade is still pending when contrasting the tokenomics of ether with those of bitcoin. Since the upgrade has been planned for years, there is a chance that it will be further delayed. And that it will probably take longer than expected, and that problems could possibly occur. The price of ether as well as bitcoin and other cryptocurrencies may suffer from announcements of additional delays.
In contrast, Bitcoin has the most secure blockchain in use and is incredibly transparent. Before the upgrade, investors who prefer less volatility might find Bitcoin to be a safer investment.
Several variables, especially the general market environment, will determine whether or not investors stand to gain by investing in ETH before the upgrade. Advisors should inform about the risks to investors. Though many features will have changed significantly. Investors will need to view an investment in Ethereum through a different lens than they have in the past. Assuming that the Ethereum upgrade is successful.
The biggest and most established cryptocurrency that supports smart contracts at the moment is Ethereum. In which, is currently the second-largest cryptocurrency by market cap, just after bitcoin. There are many blockchains that compete with Ethereum, including Solana and Cardano. These networks for programmable smart contracts already use the PoS mechanism and are attempting to draw in new users. A successful implementation will guarantee that Ethereum stays the top smart-contract network. And set it up for future expansion.
The Ethereum Merge Has an Official Start Date
The Ethereum Foundation has made the long waited for Merge blockchain upgrade public.
Proof-of-stake is a technique for preserving a blockchain’s integrity that prevents cryptocurrency users from minting coins they haven’t earned. It uses less energy than Ethereum’s current proof-of-work architecture. On September 6, the Bellatrix upgrade will go into effect on the Beacon Chain. The upgrade launches the remaining steps in the merging process.
After that, the value of the Terminal Total Difficulty (TTD) that causes the Merge to occur is 58,750,000,000,000,000,000. The TTD expects to reach between September 10 and September 20. The Ethereum developers have hinted that they are aiming for September 15–16 in previous calls.
During this time, the level of difficulty will rise to the point where proof-of-work crypto mining will eventually become impossible.
The network will combine its Execution layer with the new Consensus layer and switch to the new proof-of-stake consensus protocol when TTD reaches 58,750,000,000,000,000,000.
The Merge follows a series of dress rehearsals where proof-of-work to proof-of-stake transitions and tested on various test network (testnet) environments, such as Ropsten, Sepolia, and Goerli.
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