In the early morning on September 15, the Ethereum Merge finally occurred, marking a new era for the crypto industry. The transition from Proof-of-Work (PoW) to the Proof-of-Stake (PoS) mechanism is a big breakthrough. It is like changing your old Nokia to a new iPhone. In fact, the Merge can shape not only ether’s future but investing as a whole.
The Ethereum blockchain was launched by Vitalik Buterin back in 2015. Today, ether (ETH) is the second-largest cryptocurrency by market capitalization. It is closely tied to NFT, Web3, and DeFi.
The Ethereum blockchain is known as the “main network”. In December 2020, the developers of Ethereum created a new network called the “beacon chain,” which became, in fact, the base for the new Ethereum.
Following the successful Merge, data stored on the main Ethereum network was moved to the beacon chain, which became its main blockchain. In fact, the Merge can be compared to the transition of a heating system running on fuel to one that is powered by solar energy. In terms of heating, nothing has changed. The system just got greener and more advanced.
Earlier, the Ethereum blockchain, like the Bitcoin one, worked on the Proof-of-Work (PoW) mechanism where nodes — computers that are part of a large network — compete with each other to solve complex mathematical problems. The successful nodes can mine the next transaction block and create new coins.
Ethereum mining was quite expensive due to high power costs and a plunge in cryptocurrency prices, which made even successful mining transactions unprofitable. In order to offset costs, miners had to sell most of the digital assets they earned. It triggered mass sell-offs in the market worth millions of dollars every day.
Ethereum 2.0 works on the Proof-of-Stake mechanism where nods are selected based on an algorithm that picks nodes holding more ETH.
In other words, miners have been replaced by validators, users who stake at least 32 ETH to their Ethereum addresses where these coins cannot be either bought or sold.
These staked ETH tokens are used as lottery tickets: the more ether validators stake, the more likely it is that one of their tickets will be drawn and they will add a record of a transaction to the Ethereum digital ledger. In other words, validators use their ETH as collateral to win newly created tokens.
Upgrade to make blockchain more secure
This time, it is not just about crypto technologies but also about the fact that PoS requires that people willing to mine/process transactions staked their coins in a deposit.
From now on, attackers will need 51% of the staked ETH to bypass the system. The more ETHs are staked, the more secure the network becomes, as the value of the system’s 51% capital increases.
What is more, if a 51% attack happens, thanks to Proof of Stake hackers can now be correctly identified and kicked out of the system. Moreover, they can now be punished by destroying all their bets. If they want to attack you once more, they will have to buy out 51% of all the staked ethers.
Merge’s enormous environmental benefits
Proof of Work (PoW) is a crypto mechanism that consumes a lot of energy, forcing all computers of miners to solve complex mathematical problems. In fact, bitcoin still runs on PoW.
On the other hand, using Proof-of-Stake is like running Google Chrome or Netflix. It makes Ethereum more scalable, secure, and sustainable, as it no longer requires buying costly mining equipment, which is responsible for high CO2 emissions.
Most blockchains are incredibly energy-consuming and have been harshly criticized by environmentalists and some investors. Thanks to the upgrade, Ethereum, the second-largest blockchain platform, was able to reduce its power consumption by 99.95% overnight.
Ethereum’s carbon footprint, once as big as Finland’s, is now the same as of the Faroe Islands. In other words, the carbon footprint of one Ethereum transaction is now equivalent to that of 44 Visa transactions or 3 hours of watching videos on YouTube.
Benefits of Merge for investors
The Merge offers companies and large financial institutions a greener platform and new investment opportunities.
In a letter to clients, two Bank of America analysts suggested that some institutional investors who used to be forbidden from putting in money in PoW-generated tokens would now be able to participate in the buying process thanks to the greener PoS mechanism.
Traditional financial institutions will also see other perks of the Merge. The update to the PoS protocol makes ether an asset that can bring interest to its holders as well as a more attractive investment instrument.
You can expect a reward of about 5% annual interest yield (APY) for staking your ETH as an Ethereum PoS validator. This is a pretty good indicator with relatively low risks.
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