In the news: Crypto’s big moment

The ‘Ethereum Merge’ is planned to significantly change the way the cryptocurrency works and drastically reduce its energy usage
by Fred Heritage


Ethereum, the blockchain that produces the cryptocurrency ether – the world’s second largest cryptocurrency behind bitcoin – has set in motion the first stage of its planned ‘Merge’, which moves its ‘consensus network’ from an energy intensive ‘Proof of Work’ (POW) to a more energy efficient ‘Proof of Stake’ (POS) mechanism, according to an article for Forbes Advisor by Mark Hooson.

According to the article, the first stage of the Merge, dubbed ‘Bellatrix’, took place on 6 September, while the second stage – ‘Paris’ – should be completed by 20 September 2022. Hooson writes that the action will “fundamentally change” how Ethereum functions by combining the two versions of the cryptocurrency that have been running in parallel since 2016 to create a “new record-keeping paradigm”.

Joining consensus mechanisms

Hooson explains the difference between the two versions of Ethereum by first outlining definitions for both blockchains and consensus mechanisms. A blockchain, he says, is a “decentralised ledger” that records every financial transaction made by customers, like a bank, except the information is not held centrally, but by a network of “normal people who volunteer to maintain it”.

A consensus mechanism, meanwhile, is how a blockchain ensures that honesty is maintained by those that are keeping a record of transactions, and that there isn’t more in their – or other – accounts than there should be. Hooson explains: “It works like this: a member of a network is chosen to have their record of the ledger become the official record of transactions. A majority of members (51%+) have to agree that theirs is an accurate record." That record is then added to the blockchain, with the owner of the record – the block writer – receiving cryptocurrency rewards for doing this.

“To cheat the system, you’d have to control at least 51% of devices connected to the network. This would take either a tremendous amount of computing power or a large amount of money to pull off, depending on the consensus mechanism in use,” says Hooson.

According to Hooson, since 2016 the Ethereum network has been split across two consensus mechanisms: Proof of Work and Proof of Stake. With POW, members compete with each other, using significant computing power, to solve a puzzle, and the answer is checked by the community before the puzzle solver’s record of transactions is added to the blockchain and they are rewarded with cryptocurrency. POW is criticised for its environmental impact. “For example, the Bitcoin [POW] network is thought to use more energy than the entire country of Argentina,” says Hooson.

He adds: “[POS] asks people to put up their own crypto assets as collateral for the chance to have their record of transactions made official, and earn the rewards for doing so … The more you stake, the better your chances of being chosen as the next person to add their copy of the ledger to the blockchain.”

After the Merge, the ethereum network will use POS as its sole consensus mechanism. This is “predicted to consume 99.5% less energy than it did while it used [POW]”, he adds.

Biggest event in crypto history?

The Merge has been described as the “biggest event in crypto history”, according to an article for Yahoo Finance by Anthony Cuthbertson. Crypto miners will no longer need to “verify transactions on the network by solving complex mathematical puzzles”, thereby using vast amounts of computing power.

“The stakes are huge for the planet,” writes Justine Calma in an article for The Verge. “Instead of using enormous energy costs as a deterrent to bad behaviour, [POS] requires validators to lock up crypto tokens as collateral. … If anyone else on the network finds that someone has added faulty blocks to the chain, the guilty party loses tokens they’ve staked. ... Overall, we’re talking about serious energy savings.”

Calma provides insights from Alex de Vries, a researcher whom she says runs the website Digiconomist that tracks Bitcoin and Ethereum energy use. According to Calma, de Vries expects the Merge to slash 30 to 35 million metric tons of carbon dioxide emissions a year if successful.
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Published: 13 Sep 2022
  • Fintech
  • Proof-of-Work
  • Proof-of-Stake
  • cryptoassets
  • environmental
  • ethereum
  • cryptocurrency

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