Upcoming ethereum “merger” will be crucial for the future of the crypto world

Bloomberg — Sometime this year, ethereum (XET) is going to make the biggest change in its nearly decade-long history, an event that is sure to ripple through the entire cryptocurrency and digital asset ecosystem. Think of it like this: Cryptocurrency’s most important trade highway is about to be completely resurfaced..

Ethereum is essentially computer software that uses so-called blockchain technology to provide a digital ledger to record transactions.. It has become the most popular foundation for a growing range of crypto assets and trading applications, including lending products, non-fungible tokens (NFTs), as well as its native token, ether.. Ethereum is not owned by anyone, but has been built and perfected by a community of developers, and runs in a network of data centers around the world. These data centers operate as “miners” in the network, ordering the transactions that are published in the digital ledger.. In return, they are paid in ether. This system has been calledwork test” (“proof of work” or POW).

Developers working on perfecting ethereum software release regular updates, but none have been as important as the one expected this year.. Baptized as “the fusion” (“the fusion”), will replace the miners with the so-called strikers (gamblers). Miners order transactions by solving complex calculations using millions of powerful servers, a system that has been criticized for its high electricity consumption. The strikersinstead, they will order transactions by putting their own ether into a new system, which has been in testing since December 2020.

People can now use their digital wallets to bet (bet) ether on this test system, called beacon chain (Beacon Chain); after the fusion they will begin to be randomly selected to become what are known as validators, ordering transactions on the ethereum digital ledger in blocks and receiving payments with new ether. This is called “proof of participation” (“proof of participation” or POS for its acronym in English, cryptocurrency consensus mechanism to process transactions and create new blocks in a blockchain).

The $415.3 billion of ethereum: Market capitalization depends on the fusion be carried out without problems, but also that the thousands of companies that operate on the blockchain, in addition to the millions of users, do so. Some $121.5 billion of capital is locked up in Ethereum decentralized finance applications (known as DeFi), according to tracker DappRadar. Most NFTs (also worth a total of billions) use ethereum.

“There has never been, in the history of blockchain networks, a change to the scale of Ethereum transitioning from proof-of-work to proof-of-stake,” says Chase Devens, an analyst at researcher Messari.

the fusion it will be really desperate because many things can go wrong. There could be software bugs or hacks, or miners could create an alternate ethereum network. During a network upgrade in 2020, a bug split ethereum in two, wreaking havoc on its fledgling DeFi ecosystem, the apps that let people buy and sell.request loans and lend without intermediaries such as banks.

Most centralized cryptocurrency exchanges are expected to halt ether withdrawals and deposits around the merger as a precautionary measure.. DeFi apps can also pause if something goes wrong.

“With all the technical updates from all these big chains, you have to be cautious,” says Katie Talati, director of research at digital asset manager Arca. “At the end of the day, we are dealing with unknown technology.”

The miners are the ones who worry the most. It is possible that many leave the network just before the fusionthinking that they can make more money selling their equipment than waiting for the latest rewards. ORtoo steep a drop in network mining power, or “hash rate”, could weaken ethereum’s security, spelling disaster for its token and the various applications that use the network. Ethereum core developers have foreseen this scenario. “If we see the hash rate drop, we could take the fusion go ahead,” says Tim Beiko, a computer scientist who coordinates ethereum developers. “All software is built with an emergency option.”

Miners can also choose to fork ethereum, taking existing POW software and continuing to support it.. That would create two different versions of Ethereum that work in parallel: proof of work and proof of stake.

“We think that POW and POS will co-exist for a period after the change,” says Danni Zheng, vice president of BIT Mining, a mining provider that is also expanding its staking services.

In this stage, cryptocurrency exchanges and users could be confused about which ether chain they hold or trade. Two networks will mean more work for app developers, says Dieter Shirley, chief technology officer at Dapper Labs, creator of an ethereum cat-breeding game, CryptoKitties.

“A controversial hard fork is likely to accelerate our exit from the ethereum ecosystem,” says Shirley. Dapper could consider moving CryptoKitties to its own blockchain, named Flow, she says.

A hard fork, or at least a lot of public criticism, is very likely because many ethereum miners don’t seem to know that the fusion approaches. Ethereum developers communicate about the fusion on Discord and Telegram, messaging apps that many miners don’t use, says Beiko. The mining pools, which provide most of the ordering of transactions in ethereum today, take a percentage of the miners’ profits, and it is in their interest not to notify their members of the fusion for mining to continue at least until the network update, he says.

“I’m more concerned about people who don’t even know this is happening, and they buy this $3,000 miner, and three months later it stops working,” says Beiko.. “It would be a bad idea to start mining today.”

AND some miners just don’t believe the fusion really gonna get therebecause it has been delayed in the past.

“There is a lot of skepticism because ethereum has promised POS for five years,” says Beiko. “It’s hard to convince people that this time it’s for real.”

Shutting Down Old Ethereum Chain Will Send Shockwaves through the cryptocurrency industry. Miners will strive to find other uses for their equipment and will migrate their machines to other similar chains, such as dogecoin, litecoin (XLC), and monero. The hash rate on those other chains will multiply 5-10 times overnightsays Sam Doctor, chief strategy officer at Bitooda, a digital asset fintech company. Total revenue from this type of mining could drop by as much as 90%, forcing many miners out of business, he says.

US miners will look for customers outside of the cryptocurrency industry, in areas such as artificial intelligence and genome sequencing, Doctor says. “But none of them have experience in customer acquisition.”

Investors can benefit from the fusion. The number of new Ethereum coins issued as rewards for ordering transactions should drop by 50% to 90% as the proof-of-stakes chain will offer lower rewards, says Beiko.

In the next two years, the amount of ether that is used for bet will probably increase from 8% to 80%, depending on the service provider gambling, gambling. That will reduce the ether in circulation, which could drive up its value.

The strikers they will be able to use the ether they receive as a reward for ordering transactions, but not the ether they stake, at least until another software update, which is expected to come about six months after the fusion. It is more likely that strikers hold onto their ether for the long term than miners, who often need to sell some to cover electricity costs, says Kyle Samani, co-founder of Multicoin Capital.

After the fusionthe power consumption of the ethereum network should drop more than 99%. To order transactions on the new POS network, a validator can use a high-end laptop instead of a server farm. The entire ethereum POS is expected to consume about 2.62 megawatts, about the same as a small city with 2,100 American households.. Instead, the current configuration of the POW consumes the energy of a medium-sized country.

“Even my daughter has caught the ‘NFTs are boiling the oceans’ hype,” says Ben Edgington, product manager at ConsenSyswhich builds the infrastructure for the ethereum blockchain. “I hope that getting rid of the negative aspects of POWs will definitely help make applications like DeFi and NFT much more socially acceptable, leading to significantly accelerated adoption.”

Much will depend on what the fusion runs smoothly, of course. “If we do our job right, no one will notice when ethereum goes from POW to POS,” says Edgington.

This article was translated by Andrea González

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