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What is Merger? Ethereum upgrade is huge crypto moment

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What is Merger?  Ethereum upgrade is huge crypto moment

Several months into a likely crypto winter, token prices have fallen like the leaves of a tree, touching the ground where they could remain for months or even years. But even though the bitcoin industry star has struggled to recover from losses that halved its value, Ethereum has risen like a phoenix from the snowy ashes – its value has soared nearly 70% in recent years. weeks.

Its revival most likely stems from a promising narrative in the crypto world: that of “the merger,” an upcoming technological upgrade to the Ethereum blockchain. More than two years in the making, the merger is already heralded by crypto experts as a defining moment for Web3, a moment that could evolve into the blockchain technology that could one day power the world.

On August 10, Ethereum developers conducted their third and last test of the update before it goes live on September 15. The test, which took place on a training network dubbed Goerli, successfully prepared the engineering team for the big arrival, as well as the investors for a big rally.

“It would not be an understatement to say that the Ethereum merger is the most anticipated event in crypto history,” said Tom Dunleavy, principal analyst at crypto research firm Messari. written this week. And according to James Butterfill, head of research at crypto management firm CoinShares, more than $159 million flew to Ethereum over the past two months.

For some, it has sparked hype that a long-awaited “turnaround” — the hypothetical moment at which Ethereum overtakes Bitcoin as the premier crypto token, first predicted in 2017 — might finally be on the horizon.

The Fusion Promise

The merger is significant, in part because Ethereum is the blockchain variant that makes up the vast majority of Web3 technology today. The world’s second largest cryptocurrency is built on it (ETH), along with most NFTs and blockchain games such as the huge Axie Infinity and Alien Worlds. He also pioneered the architecture of smart contracts, or coded programs that run automatically when certain conditions are met, to do anything from auctioning off a rare collectible to selling a rare collectible. cancellation of a real estate lease.

But if we were ever to live in some sort of techno-future, where virtual money exchanges hands in the blink of an eye and algorithms distribute floating digital assets among billions of people, there must be a blockchain. with the ability to log billions of transactions every day. Currently, the Ethereum blockchain can only crunch approximately 6 kilobytes of data per second (in the 7 years since its founding, it has raised more than 9 terabytes of archive data). Now imagine transaction volumes inflating exponentially, as crypto goes from fringe to default, and its applications expand beyond finance into the spheres of art, music, and games. Could blockchains experience such a surge without servers freezing, consumption fees skyrocketing, or energy costs skyrocketing?

That’s the looming question, and the merger is the first step toward finding an answer. Crucially, it won’t immediately affect Ethereum’s scalability – the blockchain’s transaction capacity, including the rate of transactions and the so-called accompanying gas prices, will remain the same – but the hope is that its new infrastructure will support a future system that can proliferate.

It will be the first of five major improvements on Ethereum’s roadmap in the coming years: the others, meanwhile, have been dubbed the “surge”, the “verge”, the “purge” and the “splurge”. By its final destination – and after a rewiring said “partitioningtakes place – blockchain will be able to record 100,000 transactions per second, chain founder Vitalik Buterin said at a conference in July. Today, its capacity is only 15 per second, according to Coinbase.

Altogether, it is quite literally a beacon of light in the crypto winter darkness. The first prototype of Ethereum 2.0, created in December 2020, is dubbed the “Beacon Chain” – and it has run alongside our version of Ethereum for nearly two years, recording every transaction in tandem as the developers tinkered with its mechanics. When he’s ready, the two chains will “merge”, converging like trains on a railroad (Goerli, in fact, is named after a train station in Berlin). The old system will disappear and a new one will be born, bringing with it the possibility of a better Web3.

Towards a greener world

One of the most vocal criticisms of the growing Web3 economy has been its carbon footprint, primarily due to a consensus mechanism known as proof of work (PoW). Consensus mechanisms allow blockchains to determine how much money exists in anyone’s digital wallet, and therefore should be designed to defend against entities misusing the blockchain for nefarious purposes. PoW ensures this by requiring immense payloads of energy from those encoding blockchain transactions, more than any company could reasonably control. The whole process, known as “mining”, can consume carbon equivalent to the country of the Netherlands in a year.

But there is a much less carbon-intensive consensus mechanism. Called Proof of Stake (PoS), it works instead by requiring a sum of cryptocurrency as collateral, in a process known as “staking”. A number of newer blockchains are now using PoS for its sustainability, but so far the two major cryptocurrency tokens, Bitcoin and Ethereum, which together control almost 60% of the global crypto market capitalization , both used PoW.

That will change when the merger moves Ethereum’s blockchain from PoW to PoS, making it the biggest test yet of this consensus mechanism in the wild. According to the developers, the move could reduce energy consumption by 99.95%bringing greenhouse gas emissions from the grid back to earth.

Symbolic News

As Dunleavy says fast business, the merger will also disrupt the tokenomics of a $200 billion cryptocurrency, which has perhaps been its biggest draw for investors. Part of that, he says, comes from a shift in supply and demand. In the current system, the so-called validators, who encode blockchain transactions, receive 2 newly created Ethereum tokens, which means that every time a new block is added to the chain (every 15 seconds), 2 ETH are put into circulation. But when the merger happens, the price will be reduced to 0.2 ETH, which will significantly reduce the inflationary pressure on Ethereum. Some believe that this dynamic could even propel a reversal within the next 12 months.

Another factor, he explains, is the elimination of forced sellers in the market: “Every day when miners receive their tokens, they have to sell some of them to pay for their electricity and mining equipment. . . but stakers do not have to sell their tokens. This takes a lot of selling pressure off Ethereum.

The Ethereum realm is coming

As with most companies of such gargantuan proportions, the merger had been perpetually delayed, frustrating so-called crypto degenerates waiting for the next phase of the Web3 revolution, as the timeline for the merger stretched from mid-2021 to the end of 2022. When, in July, he finally revealed his target date, the price of Ethereum jumped 20% in a single day.

But it is not without controversy. There are concerns that proof-of-stake is less secure than proof-of-work: in theory, an entity with a cryptocurrency war chest could put enough stake in Ethereum to be able to manipulate the blockchain on its own by coding defective transactions. .

Then there are the miners. Ethereum mining – which tasks supercomputers with solving complex mathematical puzzles, only to generate a huge payload of energy – has become a lucrative business, as the fastest miners are rewarded with chunks. of ETH. The unrest has spawned an industry worth an estimated $19 billion, according to a recent report from Messari. Miners produced over $620 million in July alone and, according to Dunleavy, can rake in as much as $20-30 million a day. Many of them made their fortunes in cash, investing in supercomputer equipment, akin to business capital. But the transition to PoS could spell the end, rendering mining mostly obsolete as a relic of PoW.

This looming concern led some to call for a “hard fork” of the Ethereum blockchain, in which the new Ethereum would launch as planned, but the old Ethereum would live on, with one chain becoming two instead. Both are said to have tokens traded on crypto exchanges – one proposal, from prominent Chinese crypto miner Chandler Guo, lists them as ETHS and ETHW respectively. Although it is a rather niche campaign, it has won at least one reputable lawyer in Chinese crypto mogul and Tron founder Justin Sun.

This won’t be the first time Ethereum has forked. In 2016, during one of the most tense sagas in blockchain history, the network split after hackers exploited a flaw in smart contract code for one of the earliest organizations. Decentralized Autonomous, or DAO, which was built on the Ethereum blockchain. After attackers drained $60 million and threatened to hold the blockchain hostage, developers made the controversial decision to fork the chain, creating a new Ethereum with fund allocations restored to pre-hack status and returning the loot to its rightful owners. The hacked chain now exists as Ethereum Classic, but many have stuck with the original – its token, ETC, is still in the top 20.

But now, with all phases of the merger greenlit, Ethereum is heading towards its destiny in September. Time will tell if it’s green enough to pull the market out of the crypto winter.

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