"One small step for ESG, one giant leap for Ethereum..."
That is how Deutsche Bank's Marion Laboure described the events that occurred in the world's second largest cryptocurrency overnight.
After years of anticipation, Ethereum's seismic shift from Proof-of-Work to Proof-of-Stake went off without a hitch.
Ethereum co-founder Vitalik Buterin said he is “absolutely excited about being exited from the proof-of-work era," adding:
“[It] has obviously been a dream for the Ethereum ecosystem since pretty much the beginning. We started the proof-of-stake research with that blog post on Slosher back in January 2014.”
As CoinTelegraph reports, the Merge can be seen as reinventing the laws of physics, according to Buterin. PoW operates with the usage of real-world functionalities such as electricity, hardware and computers. Whereas with PoS, everything is virtualized, “basically letting us create a simulated universe that has its own laws of physics.”
Buterin congratulated the community and ushered in the next era of Ethereum via Twitter:
And we finalized!— vitalik.eth (@VitalikButerin) September 15, 2022
Happy merge all. This is a big moment for the Ethereum ecosystem. Everyone who helped make the merge happen should feel very proud today.
While price action has been a little choppy, the 'Merge' successfully completed - as we predicted - in a very 'boring' way.
Speaking to Cointelegraph, StarkWare president and co-founder Eli Ben-Sasson that “the immediate importance of the Merge is the dramatic effect on energy consumption.”
Ben-Sasson said it also marks “the first step in a process that will lead to exceedingly widespread adoption of Ethereum,” stating:
“It starts a chain reaction of changes. The end result will be the very broad use of Ethereum’s computing power, and the general population using blockchain-based apps in many different areas of life.”
The Merge has come on the back of several years of hard work from the Ethereum Foundation.
With the Merge complete, the “Surge,” “Verge,” “Purge” and “Splurge” are the final stages left on the Ethereum technical roadmap.
.@VitalikButerin claims that #Ethereum will be able to to process "100,000 transactions per second", following the completion of 5 key phases:— Miles Deutscher (@milesdeutscher) July 22, 2022
• The Merge
• The Surge
• The Verge
• The Purge
• The Splurge
A quick breakdown of what each stage means for $ETH. 👇 pic.twitter.com/FnaWww8mHZ
The Surge will increase scalability for rollups through sharding, the Verge will achieve statelessness through Verkle trees, the Purge will eliminate historical data and technical debt, and the Splurge will involve a number of small miscellaneous upgrades.
As Deutsche Bank reflects, if the proof-of-stake system in fact proves to be a greener alternative, then regulators might increasingly force the proof-of-work cryptocurrencies to cut down energy usage.
Regulatory pressures on PoW may increase
In first drafts of MiCAR, there were proposals to ban all PoW consensus mechanisms, primarily due to concerns about energy intensity. This would have essentially been a de facto ban on cryptocurrencies such as Bitcoin and Ethereum. However, that proposal never advanced through the voting process and the final wording of the bill stalled. In August, another attempt to undermine PoW through regulation was stopped when EU parliamentarians voted against funding a study on the environmental impact of PoW Bitcoin mining. With Ethereum's transition to PoS now almost complete, the pressure to restrict cryptocurrency energy consumption will likely increase. We can also expect more heated discussions about the costs and benefits of PoW.
In the US, the White House Office of Science and Technology Policy recommended in a September report that environmental impacts from crypto mining should be limited. This report raised concerns that energy demands associated with cryptocurrency mining could hinder inflation reduction efforts set out in the Inflation Reduction Act, as well as test electricity reliability. For example, the report estimates that Texas could see an additional 25 gigawatts of new demand for electricity because of crypto mining over the next decade. The report highlights that PoS is an energy-friendly alternative, with each PoS computing device requiring 10 to 500 times less power (watts/device) than a typical ASIC Bitcoin rig. The paperdid not set out specific regulations but concluded that the US must take action to limit pollution associated with cryptocurrencies.
But is it secure?
PoS systems have not been tested at a scale as large as Ethereum’s before, which raises questions about security. However, the Ethereum developers suggest that PoS will offer a more secure consensus mechanism than PoW. Under PoW, an attacker will need to have the majority of computing power used to mine the currency, around 51%, in order to launch an effective attack. The Economist estimates that it would only cost $5-10 billion to attack the PoW system. In comparison, to attack a PoS blockchain, the attacker would have to purchase and stake the majority of tokens (51%). According to Ethereum and The Economist estimates, it would cost $15-20 billion to purchase enough Ethereum to mount an effective attack under PoS.
If such a situation did occur, the minority validators can launch a counterattack, forcibly remove the attacker from the network and destroy their staked Ether through slashing. If a validator is absent or fails to act when necessary, they may lose some of their stake, and miss out on rewards on staked capital. In other words, there is an incentive to behave well under the PoS system.
Is Ethereum the new digital silver?
Ethereum operates on a decentralised, open source blockchain with smart contract functionality. In terms of market cap, Ethereum is the second most prominent cryptocurrency. Its share of the market is approximately 50% less than Bitcoin’s share, and three times more than the third cryptocurrency.
Ethereum has been seen as “digital silver,” because, unlike Bitcoin, Ethereum has a real use case in day-to-day life. Its primary purpose is to facilitate and monetise the operation of Ethereum smart contracts and its decentralised application platform. It is not designed as an alternative monetary system, as is the case with Bitcoin. Perhaps for this reason, most DeFi applications are primarily based on Ethereum blockchain smart contracts.
For now, it is likely that institutional investors who participate as stakers - as a result of the Ethereum Merge - may see the cryptocurrency as an alternative bond or commodity, due to its attractive yields.