Ethereum is one of the main drivers in the crypto market. According to sources, it hosts more than 2,900 decentralized applications. And when it comes to non-fungible tokens, Ethereum is the largest crypto currency when sales volume is considered.
Though it’s such a mainstream cryptocurrency, Ethereum has encountered significant issues that has been related to energy consumption, speed, as well as the fees. Because of this, its engineers have been tirelessly working to ensure the currency gets a massive multi-stage upgrade.
One of the step, has been the Merge which has been celebrated by its users.
Here we want to dig more into this Ethereum and the Merge Upgrade.
So what is this merge?
The long-awaited “merge upgrade” is Ethereum’s transition to a “proof-of-stake” consensus mechanism from its existing “proof-of-work” system. The Bellatrix and Paris upgrades are the two steps through which The Merge really takes place. On September 6, 2022, Bellatrix The Merge formally launched.
Due to the potential material and philosophical implications, The Merge, which took six years to come, is seen by many as a turning point in cryptocurrency history. After months of market instability caused by factors including inflation and rising interest rates, this milestone could help boost market confidence and inject some much-needed optimism.
A merge like this is an extremely unusual occurrence in crypto and may never happen again, as one commenter put it “to prove that a decentralized and permissionless network can operate in an energy-efficient manner.”
Before the blockchain was officially implemented in 2014, the transition from Ethereum to Proof of Stake was planned. Due to the technical difficulties and the significant sums of money at stake, it has been postponed several times. The merge is one component in a series of improvements that are changing the fundamentals of the blockchain and was once known as “Ether 2.0”.
What does “the merge” mean?
By combining two blockchains; the Mainnet and Testnet, Ethereum made the switch from Proof of Work to Proof of Stake.
Mainnet refers to the Ethereum blockchain that users access, as opposed to other “testnet” blockchains that only developers can access. Ethereum engineers set up a brand new network called “Beacon Chain” in December 2020. The new Ethereum is simply the Beacon Chain.
Since its inception 19 months ago, the Beacon Chain, a proof-of-stake network, has operated independently. The chain has grown as blocks added by validators did not contain any information or transactions. It’s like a bus running empty to make sure the engine is working properly.
The primary blockchain on the Ethereum network, the Beacon Chain, has replaced mainnet data after The Merge. In keeping with the bus metaphor, it seems like all commuters are migrating from the older, less efficient buses to the newer, more energy-efficient vehicles.
Are there any dangers?
Absolutely. Ethereum critics, who are often Bitcoin fans, liken the integration to swapping out an airplane engine in the middle of a passenger flight. Not only is the plane at risk, but so is the $188 billion worth of Ether that is now being used.
Technically, there could be many unforeseen bugs with the new blockchain. The security of the proof of use is another concern of the critics. Essentially, validators can burn their staked ether and terminate their network access if they’ve been proven to have acted maliciously, according to Charbonneau, who believes this makes it potentially more secure. This is in contrast to Proof of Work, where if someone manages to control 51% of the power, that control cannot be removed.
How will the merge help?
Ethereum will completely abandon Proof of Work, the resource-heavy approach it now adopts, after The Merge in favor of Proof of Stake.
Staking in the Bitcoin world refers to adding cryptocurrency to a protocol. This can sometimes be done to generate interest. Clients can invest $10,000 and withdraw $11,900 after one year by taking advantage of the 19.5% interest rate that the developers of the terraUSD stablecoin put on the staked TerraUSD (until it crashed).
In other cases, tiered cryptocurrency contributes to the security of a protocol, as in the case of a proof-of-stake blockchain. The post-merger blockchain will be more secure as more ether is staked, as we will see in a moment.
With the introduction of Proof of Stake, miners no longer need to solve energy-consuming cryptographic puzzles to validate brand new blocks. They will add ether tokens to a pool instead. Think of each of these tokens as a lottery ticket: when your token number is called, you get the privilege of validating the upcoming block and the incentives that come with it.
It’s still a costly endeavor. The minimum bet for prospective block verifiers, referred to as “validators” rather than “miners,” is 32 ether ($52,000). In this approach, participants validate blocks by providing cash instead of electricity. Unlike a proof-of-work system, which requires 51% of the network’s power to be used, a proof-of-stake system requires 51% of the total amount of ether staked. The network becomes more secure as more Total Ether is staked since it costs more to reach 51% of its capital.
The Ethereum Foundation estimates that eliminating cryptographic difficulties would reduce system power consumption by 99.65%.
What does the merger mean for investors?
Should you wait to buy Ethereum? That is always the key question. Since cryptocurrency is still relatively young, it is a dangerous field. What the environment will look like in a few years is unknown. Never spend more than you can afford to lose, that’s the most important rule.
Against this background, Ethereum appears promising. This cryptocurrency is currently the leader and is working to keep it that way. Ethereum has what it takes to be one of the top players if cryptocurrencies actually change the way trading is done. And because of that, it is a fantastic moment to invest in this fascinating cryptocurrency.
Why did Ethereum’s value fall after the merge?
Since The Merge, which has been hailed as a major improvement to blockchain, ETH to USD value has fallen about 20% (ETH -0.33%). Why do investors sell rather than rejoice?
Ethereum’s price drop has a number of factors.
The US Federal Reserve’s 75 basis point rate hike was the first reason ETH fell against the US dollar.
The second factor is the increased negative attention ETH received after the merger. 60 percent of the blocks have so far been created by just five staking pool providers. These five organizations are Lido Finance, Kraken, Binance, Coinbase and Staked Us. Lido Dao has the largest stake among them, having deposited 4.19 million ETH or 30% of the total amount of ETH invested in the network.
Next is the decline in institutional investor or “smart money” interest in Ethereum-based investment products. There was a capital outflow of $15.4 million from Ethereum funds. In parallel, $17.4 million was invested in Bitcoin mutual funds. On the other side, the volume on P2P cryptocurrency Exchanges has increased lately and specially the transactions of people who buy ethereum with paypal.
Finally, Ethereum’s Proof-of-Work (PoW) miners put pressure on the company, selling $40 million worth of Ether in a single day.
Consequently, the deteriorating macroeconomic environment could lead to further falls in the asset price.
Conclusion
None of the above is a financial advice. The merger is win situation to some staker. For sure, With the new approach coming after the combination of the two blockchains, the mainnet and testnet, a staker has a greater chance of getting a reward by staking more money. But since every ether pledged earns interest (about 5.2 percent), everyone gets at least something, making it more akin to investing in bonds or saving at a bank.