Ethereum’s biggest-ever upgrade has gone into effect, in what industry experts are calling a game-changer for the entire crypto sector. So far, all indications are that the alleged merger – designed to reduce cryptocurrency energy consumption by more than 99% – has been successful.
The first batch of Proof of Stake transactions has been completed with nearly 100% customer participation. This was, by far, the best-case scenario.
The overhaul of the Ethereum network fundamentally changes the way the blockchain secures its network and verifies transactions. Most of these changes happen under the hood and the hallmarks of a successful upgrade are if the end user does not feel the difference in the coming hours and days.
Cryptocurrencies such as Ethereum and Bitcoin are often criticized for the mining process to generate new coins. Prior to the merger, both blockchains had their own extensive network of miners across the planet running highly specialized computers that solve mathematical equations in order to validate transactions. Proof of work uses a lot of energy, and it’s one of the industry’s biggest targets for cash.
But with the upgrade, Ethereum moved to a system known as Proof of Stake, which replaces miners with validators. Instead of running large banks of computers, validators are taking advantage of the existing cache of ether as a way to verify transactions and mint new tokens. This requires much less energy than mining and experts say will make the protocol more secure and sustainable.
The price of ether jumped after the merger. It is trading at around $1,640, up more than 3% in the last hour.
Nine teams and over 100 developers have worked on the integration for years. In the coming hours, this decentralized network of programmers spread across the planet will monitor the rollout and, if necessary, correct errors as quickly as possible.
Danny Ryan, the principal developer in Denver who has been working on the merger for five years, tells CNBC that they will monitor any irregularities via automated and manual monitoring systems. If issues arise, the corresponding team will debug and release a patch to users, but Ryan says they’re very confident going into the integration given all the successful trials in the past few months.
“There might be some kind of little fire that’s being put out very quickly,” Ryan said. “But the network as a whole – because of redundancy across all these different programs – is probably going to be stable and good.”
Part of the reason the merge is so great has to do with the optics.
Last week, the White House released a report warning that proof-of-work mining operations could derail climate change mitigation efforts. Reducing power consumption by approximately 99.95% would not only create greater grid sustainability, but would also go a long way toward lowering the barrier to entry for institutional investors, who have struggled with optics to contribute to the climate crisis.
The matter is significant, Bank of America said in a note on September 9 Lower power consumption after the merger could “enable some institutional investors to buy tokens that were previously prohibited from buying tokens that run on blockchains that take advantage of Proof of Work (PoW) consensus mechanisms.”
Analysts said that the entry of institutional funds into the large-scale digital asset space is critical to its future as an asset class.
The update also changes the tokens around Ethereum’s native currency, Ether.
“Ether itself becomes a productive asset,” Ryan said. “It’s not something you might just speculate on, but something that could earn returns.”
In the post-merger era, ether takes on some of the typical characteristics of a traditional financial asset, such as a certificate of deposit, which pays interest to its holders.
“This is potentially the lowest risk return within the Ethereum ecosystem,” Ryan explained, adding that the return in other corners of decentralized finance, or DeFi, involves taking smart contract risks and other types of counterparty risk.
The upgrade will also lead to a significant decrease in the supply of Ether tokens in circulation, which could pave the way for Ether to become a deflationary currency in the coming weeks and months. Some investors say that this could also help push up the price of the token.
This lower offer is the result of a new validation model that replaces miners with “verifiers.” The rewards for validators are much smaller than those that went to proof-of-work miners, which means that less ether will be poured in as a result of this upgrade. Validators are also required to lock their tokens for an extended period of time, which results in the ether being withdrawn from circulation.
In addition, as part of the upgrade that took effect in August 2021, the network is already working to “burn” or permanently destroy a portion of the digital currency that could have been recycled back into circulation.
The developers say that enhanced network security is another important feature of the upgrade.
“There are changes to the chain’s security safeguards,” said Shaun Anderson of Sigma Prime.
Take a 51% attack, where a person or group of people controls 51% or more of a cryptocurrency, and then weaponizes that control to make changes to the blockchain.
Anderson says it’s much easier to recover from a 51% attack on the Proof of Stake network, because there are mechanisms built in to financially punish malicious actors by reducing their stakes.
“Because that economic asset is inside the protocol, you get a much better recovery mode, so you end up with a better kind of security profile,” Ryan told CNBC.
Next few hours, days are key
The next few hours and days will be key to measuring the health of the ethereum network after the upgrade. Behind the scenes, developers will monitor metrics such as the engagement rate of auditors to determine how things are going. But programmers tell CNBC that in an ideal world, users would be completely oblivious to the upgrade.
“If all goes well, the end user will not notice any difference,” Anderson said. “If anyone trying to transact on ethereum didn’t realize it, it was smooth sailing.”
Upgrading does not immediately make Ethereum faster, cheaper, or more scalable. But these features come with future upgrades that are now possible after integration.
Scalability, in particular, is something Ryan says he desperately needs in order to move the network forward.
Currently, Layer 2 technologies like segmentation and aggregation are working to address exactly that.
“More scalability, and more ability to process user transactions, is coming online in parallel through second-layer constructions called assemblies, but the scaling is not improved in the underlying protocol itself,” Ryan continued. That comes in later upgrades instead.
Katie Talati, head of research at Arca Asset Management, says her team is keeping a close eye on anything in the Tier 2 space, especially projects trying to provide scalability.
“The biggest problem right now is that it is very fragmented,” Talati said. “You end up with these people who are now on ethereum, but they are isolated from each other, because L2s don’t necessarily talk to each other very easily. And so it’s not a seamless experience,” she said.