Ethereum’s biggest-ever upgrade has just gone into effect, with industry experts calling it a game-changer for the entire crypto sector. So far, all indications are that the so-called consolidation — designed to cut the cryptocurrency’s energy consumption by more than 99% — has been successful.
The first proof-of-stake trading block completed with close to 100% customer participation. This is the best case scenario so far.
The overhaul to the ethereum network fundamentally changes the way the blockchain secures its network and verifies transactions. Most of these changes are happening in the background, and the sign of a successful upgrade is if the end user doesn’t feel the difference in the coming hours and days.
Cryptocurrencies like ethereum and bitcoin often criticized for the mining process to create new coins. Prior to the merger, both blockchains had their own extensive networks of miners across the planet running highly specialized computers that processed mathematical equations to validate transactions. It’s called proof-of-work, uses a lot of energy, and is one of the industry’s biggest critics.
But with the upgrade, ethereum switched to a system known as proof of stake, which swaps miners for validators. Instead of running mainframe banks, validators use their existing ether cache as a means of verifying transactions and minting new tokens. This requires much less energy than mining, and experts say it will make the protocol both more secure and more sustainable.
Ether is trading at around $1,610, down more than 1.5% over the past 24 hours.
Nine teams and more than 100 developers have been working on the consolidation for many years. In the coming hours, the decentralized network of programmers spread across the planet will monitor the implementation and, if necessary, debug as quickly as possible.
Danny Ryan, a core developer based in Denver who has worked on the merger for five years, told CNBC that they will monitor any anomalies through an automated monitoring system. dynamic and manual. If problems occur, the respective team will debug and release the patch to users, but Ryan says they are pretty confident going forward with the merge with all successful dry run inside A few months ago.
“There could be a small fire that gets extinguished very quickly,” Ryan said. “But the network as a whole – because of the redundancy across all of this different software – will most likely be stable and good.”
Part of the reason why fusion is such a big deal has to do with optics.
Last weekReleased by the White House a report warns that proof-of-work mining activities could hinder climate change mitigation efforts. Cutting energy consumption by around 99.95% will not only establish more sustainability for the network, but will also help reduce barriers to entry for institutional investors, who already struggle with optical energy. learning contributes to the climate crisis.
Bank of America said in a note on September 9 that reducing post-merger energy consumption “could allow some institutional investors to purchase tokens that were previously barred from purchasing tokens that run on blockchains that leverage proof-of-work (PoW) consensus. “
Analysts have said that institutional money entering the digital asset space at scale is crucial to its future as an asset class.
The upgrade also changes the tokenization around ethereum’s native coin, ether.
“Ether itself becomes a productive asset,” Ryan said. “It’s not something you can just speculate on, it’s something that can be profitable.”
In this post-consolidation era, ether takes on some of the characteristics typical of traditional financial assets, such as certificates of deposit that pay interest to holders.
“That’s probably the lowest risk return inside the ethereum ecosystem,” explained Ryan, who added that the returns in other angles of decentralized finance, or DeFi, involve adoption. smart contract risks and other types of counterparty risks.
The upgrade will also result in a significantly reduced supply of ether tokens in circulation, which could pave the way for ether to become a deflationary currency in the weeks and months ahead. Some investors say that this can also help increase the price of the token.
That reduced supply is the result of a new verification model that replaces miners with “validators”. The validator reward is much smaller than the proof-of-work miner reward, meaning less ether will be generated as a result of this upgrade. Validators are also required to lock their tokens for a long time, pulling the ether out of circulation.
Also, as part of the upgrade effective from August 2021the network has “burned” or permanently destroyed a portion of the digital currency that would otherwise be 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 guarantees,” said Sean Anderson of Sigma Prime.
Perform a 51% attack where someone or a group of people control 51% or more of a cryptocurrency and then weaponize that control to make changes to the blockchain.
Anderson says that recovering from a 51% attack on the proof-of-stake network is much easier, because there are built-in mechanisms to financially punish the bad guys by reducing their stake.
“Because that economic asset is in the protocol, you’ll have a much better recovery mode, so you’ll have a better kind of security profile,” Ryan told CNBC.
The next few hours and days will be key to assessing the status of the ethereum network upgrade. Behind the scenes, developers will be monitoring metrics like validator engagement to determine how things are going. But the programmers told CNBC that in an ideal world, users would be completely oblivious to the upgrade.
“If everything goes perfectly, then like the end user won’t notice the difference,” says Anderson. “If anyone trying to transact on ethereum doesn’t realize that, it’s all gone.”
The upgrade does not immediately make ethereum faster, cheaper, or more scalable. But those features come with future upgrades which is now possible after the merge.
In particular, scalability is what Ryan says is essential for the network going forward.
Currently, layer two technologies like sharding and roll-up are working to solve that problem.
Ryan continued: “Higher scalability, more ability to handle transactions of users who are online through a layer two structure called roll-up, but scale is not enhanced at the transaction itself. core knowledge”. Instead, that comes in subsequent upgrades.
Katie Talatihead of research at asset management firm Arca, says her team is keeping a close eye on things in the second-layer space, especially projects that are trying to provide scalability .
“The biggest problem right now is that it’s very fragmentary,” says Talati. “You end up with people who are currently using ethereum, but they don’t have a relationship with each other, because L2 doesn’t necessarily talk to each other easily. And so it’s not a seamless experience. circuit,” she said.