The first block of proof-of-stake transactions was completed with nearly 100% customer participation. This was, by far, the best case scenario. The ethereum network overhaul fundamentally changes the way the blockchain secures its network and verifies transactions. Most of these changes happen under the hood and the hallmark of a successful upgrade is if the end user doesn’t feel a difference in the next hours and days. Cryptocurrencies like ethereum and bitcoin are often criticized for their mining process to create new coins. Before the merger, both blockchains had their own massive network of miners across the planet running highly specialized computers that crunched mathematical equations in order to validate transactions. Proof-of-work uses a lot of energy and is one of the industry’s biggest targets for reviews. But with the upgrade, ethereum has migrated to a system known as proof-of-stake, which trades miners for validators. Instead of running large banks of computers, validators leverage their existing ether cache as a means of verifying transactions and generating new tokens. This requires much less energy than mining, and experts say it will make the protocol safer and more sustainable. The price of ether skyrocketed after the merger. It is trading around $1,640, up more than 3% in the last hour. Nine teams and more than 100 developers worked on the merger for years. Over the next few hours, this decentralized network of developers spread across the planet will monitor traffic and, if necessary, debug as quickly as possible. Danny Ryan, a Denver-based core developer who has been working on the merger for five years, tells CNBC that he will be watching for any irregularities through automated and manual monitoring systems. If there are issues, the respective team will find bugs and release a patch to users, but Ryan says they’re pretty confident they’ll go ahead and merge data from all successful dry runs over the past few months. “There may be some kind of small fire that goes out very quickly,” Ryan said. “But the network as a whole – because of the redundancy in all this different software – is very likely to be stable and fine.”
What changes?
Part of why the merger is so great has to do with optics. Last week, the White House released a report warning that proof-of-work mining could hinder efforts to mitigate climate change. Reducing energy consumption by around 99.95% will not only create greater sustainability for the grid, but also help lower the barrier to entry for institutional investors, who have struggled with the prospect of contributing to the climate crisis. Bank of America said in a note on September 9 that the significant reduction in energy consumption after the merger “may allow some institutional investors to purchase the token that was previously prohibited from buying tokens running on blockchains leveraging proof-of-work (PoW) consensus.” . mechanisms”. Analysts have said that institutional money entering the digital asset space at scale is critical to its future as an asset class. The upgrade also changes the tokenomics around ethereum’s native currency, ether. “Ether itself becomes a productive asset,” Ryan said. “It’s not something you can just speculate about, but it’s something that can earn returns.” In this post-merger era, ether takes on some of the characteristics of a traditional financial asset, such as a certificate of deposit, which pays interest to holders. “It’s probably the lowest return on risk within the ethereum ecosystem,” explained Ryan, who added that return on other corners of decentralized finance, or DeFi, includes taking smart contract risks and other types of counterparty risk. The upgrade will also result in a significantly reduced circulating supply of ether, which could pave the way for ether to become a deflationary currency in the coming weeks and months. Some investors say this could also help boost the token’s price. This reduced supply is the result of the new verification model that replaces miners with “validators”. The rewards for validators are much less than what proof-of-work miners received, meaning less ether will be mined as a result of this upgrade. Validators must also lock their tokens for an extended period of time, pulling ether from circulation. Additionally, as part of an upgrade that went into effect in August 2021, the network is already “burning,” or permanently destroying, a portion of the digital currency that would otherwise be recycled back into circulation.
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Developers say improved network security is another critical feature of the upgrade. “There are changes in chain security guarantees,” said Sean Anderson of Sigma Prime. Take a 51% attack, in which someone or a consortium 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 a proof-of-stake network because there are built-in mechanisms to financially punish malicious actors by reducing their stake. “Because that financial asset is inside the protocol, you have a much better recovery function, so you end up with a better kind of security profile,” Ryan told CNBC.
The next few hours, days are the key
The next few hours and days will be key to gauge the health of the ethereum network after the upgrade. In the background, developers will monitor metrics such as validator participation rate to determine how things are going. But coders tell CNBC that in an ideal world, users would ignore the upgrade entirely. “If everything goes perfectly, then an end user wouldn’t notice a difference,” Anderson said. “If someone trying to transact on ethereum doesn’t realize that, then it was smooth sailing.” The upgrade does not immediately make ethereum faster, cheaper or more scalable. But these features come with future upgrades that are now possible after the merge. Scalability, in particular, is something Ryan says is desperately needed for the network going forward. Currently, two-tier technologies such as sharding and roll-up are working to address just that. “More scalability, more ability to process user transactions is coming online in parallel through layer two constructs called roll-ups, but the scale is not improved in the core protocol itself,” Ryan continued. This is coming in future updates. Katie Talati, head of research at asset management firm Arca, says her team keeps a close eye on anything in tier two, especially projects that try to deliver scalability. “The biggest issue right now is that it’s very fragmented,” Talati said. “You end up with these people who are now on ethereum, but they’re cut off from each other, because the L2s don’t necessarily talk very easily to each other. And so it’s just not a seamless experience,” he said.
