As if the crypto world wasn’t already complicated to understand, the recent Ethereum Merge has thrown it further into ambiguity, and to some extent, optimism.
So what was the merge? On 15th September 2022, the second-largest network on the blockchain, Ethereum, adopted a new method of carrying out transactions.
It’s going to switch from proof-of-work to proof-of-stake! We know, that might not make much sense; keep reading as we dive into what that means and where that leaves the wider crypto market!
The Difference Between Proof of Work and Proof of Stake
Disclaimer: as much as we try to explain this, to a lot of people, this will still be the most frustrating thing to understand!
However, here is our go:
Proof of Work
We’ll use an example by Stewart Fortier to explain how a proof-of-work system functions:
So take for example the prospect of sending an email; specifically, around the time when the internet was in its infancy. Loads of people misused its reach and efficiency-of-getting-the-message-across.
Those trying to sell something were constantly sending out spam emails to flood users with their products, services, etc.
And according to Mr. Fortier – who speaks like one reeling from flashbacks of a very traumatic first impression of the internet – this was so not cool!
To save you the pain (read: joy – the piece was really well written) of reading through his account, it explained that spamming was easy to do because
- The internet was free to use
- It didn’t take much (on the sender’s part) to send A LOT of emails
Hence, it became obvious that sending a massive amount of emails needed to be made a bit more demanding – senders wouldn’t have to fly through hoops to do it, but maybe just jump.
The idea was that to restrict more spam emails: we should only get emails from senders who have proven that they’ve put in the work necessary to send the email.
This resulted in proof-of-work systems: proving you’ve put in the necessary effort to justify a big action, a cryptocurrency transaction perhaps?
Proof of Stake
Where in proof-of-work systems, a sender’s ‘effort/work’ validates a transaction, in proof-of-stake systems, a vast number of participants validate impending transactions.
It is based on ‘consensus’; when a group of ‘participants’ can ‘stake’ a certain amount of cryptocurrency on a transaction, essentially ‘vouching’ for it!
Therefore, as compared to the former, in proof-of-stake systems, the validity doesn’t come from how much effort is being exacted in a transaction, it comes from how many participants vouch for it.
The more stake participants hang on a transaction, and validate ‘good’ transactions, they will earn higher interest on it.
Is Switching to Proof of Stake a Good Thing?
Here is why switching to PoS is seen as a good thing:
- It doesn’t ask for the same kind of computational ‘effort’ that proof of work does, making it a more eco-friendly and sustainable way to build crypto assets
- This element also makes them easier to adopt for governments and easier to understand for regulators
— Inery Blockchain (@IneryBlockchain) September 26, 2022
Here is why it’s not:
- Miners don’t have to wager a stake on validating a transaction, they solely rely on computing power
- Most people are familiar with this format because of its stint as the go-to
So, basically, it isn’t a good or bad thing – there are benefits and caveats both ways. On the one hand, the transition will allegedly cut ETH’s energy usage by 99.95% and take mining out of the hands of the few who could afford tricked-out GPUs.
On the other hand, proof of work advocates claim that ill-meaning participants can essentially wrestle control of the network through purchase.
Additionally, as a result of its newness, there are certain security loopholes that still might not be accounted for.
Why do They Call it a ‘Merge’?
According to the Ethereum website:
“The Merge refers to the original Ethereum Mainnet merging with a separate proof-of-stake blockchain called the Beacon Chain, now existing as one chain.”
To explain: Beacon Chain is a proof of stake network that Ethereum already had, they’re simply merging it with their proof of work network for the purpose of processing transactions.
Since the Merge
So understandably, since the merge happened on the 15th of September, there have been shuffles, market shifts, and fluctuations.
Here is some of what went down prior to and within hours of the shift:
1. Citi Re-affirms the Stability of Ether
Since eliminating the need for mining, Ether is seen as a “yield-bearing asset” by Citi. This yield is more significant than most conventional financial tools, standing at 4.5%.
2. Miners Have Cashed in Big!
In the week leading up to the big day, fair-weather Ethereum Miners sold approximately 15,000 ETH, totaling an estimated $20 million!
Up until the 21st of September 2022, Ethereum’s value had nosedived by 16%.
3. GPU Prices Around the World Have Dropped
Gamers, designers, and content creators rejoice! Graphics Processing Units, which are integral parts of computers wanting to run extensive graphics or mine cryptocurrency, have been quite difficult to source over the last few years.
Not to mention, in countries like Pakistan, they are not only hard to find, they are also very expensive. However, as a result of the Merge, prices have drastically dropped, at least in China!
Will the Merge Hurt Widespread Global Adoption of Cryptocurrency?
Buying cryptocurrency in Pakistan was never a straightforward task. And according to Mufaddal Darbar, despite the existence of platforms like Binance, State Bank policies have put up significant barriers to purchasing cryptocurrencies.
However, there is a conversation to be had about the effect of the Merge on global adoption. But before that, here is a little more about Pakistan’s place in the crypto world:
Usability of Crypto in Pakistan
“As of now, cryptocurrency trading and staking are banned in Pakistan with minimal work being done to regulate it on a government level due to a lack of initiative and experts.”
Alongside this, DUNIA’s Research and Development specialist, Talha Lakho, also explains that Pakistan is better placed to capitalize on the burgeoning Web3 industry.
Taking a leaf out of Uzair Younus’s paper, Realizing the Promise and Potential of Web3 in Pakistan, Talha reiterates Web3’s potential of potentially being a $100 billion industry!
And this is down to the interest Web3 has garnered in the country, including cheap labor and the thousands of trained developers entering the market annually.
Hence, the Ethereum Merge will have little to no direct implication on the 9-million-strong crypto-holder base in Pakistan.
Mufaddal Darbar goes on to explain how there are two opinions on how the Merge will affect global adoption:
- The Merge centralizes things too much because the staking is concentrated mostly to a handful of organizations
- The Merge makes Ethereum green. As a result of transitioning to staking from mining alongside Ethereum’s rank as the second-largest cryptocurrency by market cap, there is a significant net-positive impact on the holistic crypto carbon footprint
Since there will always be differing opinions, it’s too early to say if the Merge will affect global adoption. As it stands, there hasn’t really been any shift in Gwei (a denomination of Ether); however, future changes could affect that.
And Thats the Merge!
So now that Ethereum is completely upending the way it functions, what happens to miners who spent years functioning on the proof-of-work format of transactions?
Firstly, their expensive mining rigs are of no use now. They will now have to begin ‘staking’ to earn rewards. However, if you are one of those still attached to their mining rigs, you can move to Ethereum Classic or another network functioning on PoW.