After years of planning and promises, the Ethereum Merge – once referred to as Ethereum 2.0 – is due to take place this week, radically altering the way the second largest cryptocurrency functions.
The Merge, so named because it is the ‘merging’ of Ethereum Mainnet with proof-of-stake system called the Beacon Chain, will dramatically reduce the amount of energy the blockchain uses and open the door for future updates.
Moving Ethereum to proof-of-stake is a fundamental change to the blockchain’s consensus mechanism – the way we know the blockchain is accurate – moving from an energy intensive proof-of-work (mining) system to one in which the network’s validators are incentivised to behave by putting up collateral.
In proof-of-work, computers race to complete computationally-intensive problems in the hopes of ‘mining’ the next block and being rewarded.
Competition for mining the next block makes it difficult for bad actors to fully control the blockchain, but it also creates an arms race between miners who need ever-more computers – and electricity – to get rewards.
On the new proof-of-stake Ethereum, anybody can put up, or ‘stake’, 32 ETH (currently around $80,000) and become a validator, receiving regular ETH as a reward. People can also stake smaller amounts of ETH in pools with other crypto holders but there is no obligation to do so.
In Ethereum’s proof-of-stake model, validators are chosen at random to add a new block to the chain – the idea being that the whole network will be supported by investors who risk losing their ETH if they misbehave.
The Ethereum Foundation expects the move to proof-of-stake to reduce the cryptocurrency’s overall energy consumption by 99.95 per cent.
The lower environmental impact of the proof-of-stake could entice investors who have previously baulked at the amount of energy used in running Ethereum.
Elon Musk famously turned his back on accepting cryptocurrency payments at Tesla because of environment reasons, saying that “cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment”.
The end of Ethereum proof-of-work could also put more downward pressure on the price of GPUs, if it hasn’t already.
Ethereum’s proof-of-work was designed to be resistant to the application-specific integrated circuits (ASIC) that make up much of Bitcoin mining, so Ethereum miners instead use GPUs.
Ethereum has made up an estimated 97 per cent of revenue for GPU miners but in a few days that cash will dry up.
“Does this mean that millions of once-productive GPUs will now sit idle, their owners bereft of opportunities to make money in cryptocurrency? Not necessarily,” wrote cryptocurrency research company Chainalysis.
“There are several services built on the Ethereum blockchain that tap into the power of distributed GPUs to accomplish specific computing tasks in a decentralised manner, with GPU owners receiving Ether or ERC-20 token rewards in return.”