What You Should Know About the Upcoming Ethereum Reform

The day that the cryptocurrency world has been waiting for for many years is approaching: the reform of the Ethereum blockchain, the data protocol of the second largest cryptocurrency after Bitcoin, is due to take place in September. According to Coinmarketrate.com, in the future, new digital coins will be created not based on the Proof-of-Work process, but on the basis of the Proof-of-Stake process.

What sounds like terminology for nerd developers actually has serious implications for the cryptocurrency sector. It is assumed that after the transition (also called The Merge) Ethereum will become greener, faster and cheaper. Many crypto investors assume that the price of Ether will only benefit from this. The price has already increased significantly on the eve of this event. But what does this merge mean and what are its advantages and disadvantages?

Let’s start by trying to answer the most important questions:

• Ethereum Merger: Why is there a transition from Proof of Work to Proof of Stake?

Ethereum merge is a term used to describe the transition of the Ethereum blockchain from Proof of Work to Proof of Stake. This means that over the past few years, the Ethereum Foundation has developed a new blockchain that follows the Proof of Stake system. It will be merged with the old Proof of Work blockchain in September.

• Why is the merger happening on Ethereum?

The merger is designed to make transactions on the blockchain faster. At the same time, switching to Proof of Stake reduces the consumption of clean energy, since miners are not needed to ensure the security of the system. Mining involves solving complex mathematical problems on high-performance computers. Miners are rewarded in the form of coins. This requires a lot of computing power and therefore a lot of energy.

Unlike Bitcoin, in the future, transactions will no longer require the approval of a significant part of the Ethereum network, but only a certain proportion of validators who stake their Ether deposits, that is, provide them to ensure the security of the network. Transactions on the network are verified or rejected through these people. This significantly reduces the need for energy, as the computing power required for verification drops sharply. People who delegate their cryptocurrencies to the system receive a reward in the form of Ether coins.

• When will the Ethereum Merge happen?

The Ethereum merger is scheduled from September 15 to September 20, 2022. Crypto traders and miners are now eagerly waiting to see if the deadline will be met this time. The date has been postponed several times in the past. In fact, the transition to Proof of Stake was supposed to happen already in 2019.

• What advantages should Merge Ether bring?

Switching to Proof of Stake will significantly reduce the power consumption of the Ethereum blockchain, since a smaller computing pipeline is required to confirm transactions. It is estimated that energy consumption will decrease by 99 percent.

At the same time, transactions are carried out faster than before, since fewer participants confirm transactions on the blockchain. In addition, a significant reduction in transaction fees on the Ethereum blockchain is expected. Currently, these indicators are still very high compared to many other cryptocurrencies. Therefore, Ether is sometimes considered a “coin for the rich.”

Ethereum in its current form suffers a scaling issue. With a throughput of about 15 transactions per second, the performance of the Ethereum blockchain is significantly lower than the requirements as the largest smart contract platform. Smart contracts are automatically executed contracts on the blockchain. Many NFT (non-fungible tokens), i.e. non-interchangeable tokens, and DeFi (decentralized finance) applications are based on the Ethereum blockchain.

A shortage in terms of scaling can always be noticed when transaction requests increase dramatically, and with them transaction costs. Merging will not directly solve the scaling problem. But it paves the way for subsequent decisions.

5. What disadvantages can a merger on Ether have?

Switching to Proof of Stake can make the Ethereum network a little less secure, since its security is now provided not by miners and their computing power, but by so-called validators. These are people who delegate their deposits on the Air. Thus, people with large deposits can place more bets and thus have a greater impact on the network. People who have only small deposits in the Ether place these funds through central providers such as Coinbase or Kraken.

Therefore, some experts fear that individual participants may gain too much influence and power. In addition, the influence of central platforms such as Coinbase or Kraken may increase, as they allow small investors to delegate to staking in the first place. Decentralization will suffer as the Ethereum network will depend on fewer retail crypto traders.

Is the Proof-of-Work (PoW) process really that bad?

So far, Ethereum, like Bitcoin, is based on the Proof of Work consensus method. This method is often criticized in Europe and in the United States of America, because it is considered that this procedure is very energy-intensive and, therefore, harmful to the climate. In order for the system to exist, it requires a lot of energy: miners who provide more computing power increase their chances of processing a block and thus receive income.

But, Bitcoin requires a lot of energy to ensure the highest level of security, so energy consumption is not a “mistake” in the Bitcoin blockchain, but serves a clear purpose. Therefore, proponents of proof of work are not talking about consumption when mining Bitcoin, but about the demand that the network needs for secure and decentralized operation. Bitcoin miners also use renewable energy, making it usable in the first place.

Moreover, 60 percent of the energy needed for so-called coin mining already comes from sustainable energy sources such as wind or solar energy. Thus, Bitcoin mining has the highest share of sustainable energy sources, and thus significantly outpaces the share in the EU or the US, as data from the Bitcoin Mining Council shows.

How does the price of Ether react to the upcoming merger

Since the price fell on June 18, 2022, the price of Ether has increased by more than 100 percent in a short time and reached about $ 2,000. Today, Ether is trading at $1,590. Therefore, crypto traders are increasingly betting on the upcoming Ethereum merger and stimulating price growth. For comparison: Bitcoin has “risen in price” by only 40 percent over this period. However, the Ether is still far from its previous record high, reached in November last year. The price there was 4892 dollars.

However, it remains interesting how the ETH price will react to the merge. The miners who have been securing the Ethereum network so far could then support another Proof-of-Work system with their computing power.

What benefits will Ethereum Merge bring

It is not surprising that the easiest way for investors who believe in price growth as a result of the merger is to stake on the Ether cryptocurrency. Meanwhile, not only crypto exchanges offer trading in the second largest digital currency, but also many smartphone brokers.

Today, there is already another cryptocurrency, Ethereum Classic, which uses a slightly modified protocol compared to Ethereum itself. This is practically a modified Ethereum blockchain that works in parallel.  It was originally developed in 2016, in response to the hacking of the parent blockchain project.

It can also benefit from the Merge. It’s true that Ethereum Classic wants to stick to the old Proof-of-Work model. But, that is why many consider this blockchain as a kind of backup insurance in case the merger fails. Since June 18, the price of this coin has increased even more than the price of Ether: by 183.7 percent.

NFTs can also benefit from a change in consensus. Most non-interchangeable tokens are based on Ethereum technology. NFTs are also criticized for harming the climate. Demand may increase due to the fact that transaction fees are now being reduced. 

Summarizing

Even if the Merge can give Ether and NFT a positive boost, the general conditions for the cryptocurrency world are not the best right now: cryptocurrency prices have been under pressure since the beginning of the year.

To tame inflation, central banks announced the end of the policy of low interest rates. This is a burden for speculative assets like cryptocurrencies because safe investments like bonds are becoming more attractive.

It is also doubtful to what extent the cryptocurrency market was able to really assess the successful merger already. In this case, the merger itself will have virtually no further price effect on the crypto market.