The Ethereum merger and the benefits of becoming more of the same

From September 15, Ethereum will take a big step towards becoming even more different from bitcoin and, in some ways, more similar to the traditional economy.

ON Ethereum It is the second largest cryptocurrency in the world and is very similar and very different from Bitcoin. In this article we will talk about these similarities and differences; and how from September 15 Ethereum will take a big step towards becoming even more different from Bitcoin and, from a certain point of view, more similar to the traditional economy, while preserving its special innovations and, among other things, positioning itself as an interesting passive income generation option .

In Ethereum, there is also that difference between “Root” and “Nutella” that we talked about in the previous article: Ethereum Nutella is the one you see in your balance on the broker’s website, which is nothing more than a representation of the debt the broker has with you, measured in Ethers (Ethereum’s currency unit).

It is important to remember this difference because in this article we are talking about Ethereum root, “real” Ethereum, which you only really get if you withdraw them from the exchange. If you’ve never withdrawn funds, or if your exchange doesn’t offer a withdrawal option, you’ve never messed around with Ethereum, and maybe a lot of what we’re going to talk about in this article seems a little far-fetched and abstract to you.

Ethereum has a fantastic feature that Bitcoin does not: the recipients of transactions can be computer programs known by the unfortunate name of “smart contracts” (unfortunate because they are not contracts in the legal sense, nor are they smart – a topic for a future article). These programs can implement “business rules” and can pay and be paid in a fully automatic way that can also be audited.

A classic example is the lottery: it is easy to write a program that receives ethers players, draw a number, pay out the winners and take the winnings from the bank. All this automatically, without human intervention, and leaving an audit trail that makes it possible to prove, at any later time, that the draw was random and fair.

This example also illustrates the biggest limitation of such “smart contracts”: they must be independent within the system and cannot depend on external factors. You can’t create a “smart contract” that detects when an order arrives at your door and automatically pays the supplier, for example.

Another extremely popular use is to write a program that creates a “sub-cryptocurrency”, whose rules of issuance and circulation can be freely defined by the creator. There are tutorials and pre-made templates on how to do this, so create your own cryptocurrency on the Ethereum network can be done in just five minutes.

There are thousands of “tokens” and other “coins”, some with even intriguing value propositions and operational rules, but the vast majority are so ignorant that it is unlikely anyone takes them seriously. It’s this versatility that makes Ethereum so cool and so crazy, with a thriving community particularly prone to radical experimentation.

Despite this, Ethereum has many similarities to Bitcoin: it is a global network of volunteers running computer programs that create an independently audited, continuous history of value transfer transactions. All computers participating in the core network check each other’s accounts, resulting in “perfect accounting”, in which it is possible to prove that all transfers have been made correctly to the last decimal and that no currency has been lost or created outside the computer. rules. Any cheating is immediately detected and rejected – this is a level of perfection that even the most advanced traditional financial systems in the world that predate cryptocurrencies have never been able to achieve.

As with Bitcoin, participants in the ethereum network they compete in a kind of “lottery” (also continuously revised) to see who wins the right to create a new “page” of transaction history, which also contains a prize with new units of currency put into circulation.

In Bitcoin and Ethereum until then, “tickets” for this “lottery” were “bought” using computing power; As with any lottery, to increase your chances of winning, simply buy more tickets. That’s why these “miners” immobilize fairy tales about “real money” – dollars, euros, etc. – buying lightning-fast computers to find these winning tickets before everyone else, in a system known as “Proof-of-Work”.

So many computers are involved in this task today that they already consume 0.5% of global electricity, which is equivalent to the electricity consumption of countries like Argentina or Sweden. Hence the criticism, neither entirely true nor entirely wrong, that “cryptocurrencies are polluting” or “ecologically unsustainable”.

Here’s what will change: from mid-September 2022, the second ethereum network which has been prepared and tested for years will merge with the current network – hence the name of the event “The Merge”, or “A Fusão” in Portuguese. In this new network, the probability of a participant closing the next block and receiving a reward of newly created Ether becomes proportional to the amount of Ether they have left locked “in escrow”, a system known as “Proof-of-Stake”. ” (“Proof of Participation”).

In other words: before, miners immobilized money “in real life”, in the form of expensive equipment and physical objects to “mint” new Ethereum units, and had to sell some to brokerage houses to pay their energy bills; after the merger, everything becomes virtual: they immobilize the Ether native to the system itself, making this selling pressure disappear.

It’s one of the most complex and ambitious infrastructure migrations ever made, and despite being in the works for years (delayed so many times that it was joked it would never happen), many exchanges have announced that they will pause Ethereum trading for a few days.. Nothing that may not be resolved in a few weeks, but stay tuned for announcements from your brokers.

This is where the great merit of the new system lies: by abandoning ultra-fast computers, it is expected that the energy consumption of the network will become between a hundred and a thousand times lower, burying once and for all criticism of ecological unsustainability.

On the other hand, whoever “rules the network” they already have a lot of money: it is necessary to commit at least 32 Ether (about R$ 250 thousand) to become a validator, giving Ethereum an even stronger smell of an oligopoly like any other. Since the creation of these new currency units and the collection of transaction fees should yield somewhere between 4 to 7% annual returns, the trend is for the rich to get even richer – which is nothing new in the history of economics.

This whole episode particularly clearly illustrates the difference in position between Bitcoin and Ethereum: Bitcoin proposes to maintain the original formula, slow development, preserve compatibility with previous versions, project long-term stability and solidity, less sensitive to transient random interests. . already Ethereum he is not ashamed to be a walking metamorphosis, unrestrained in trying new models despite the risks and costs. By responding more deftly to the wishes of its audience, it may be paving the way, optimists hope, to dethrone Bitcoin as the dominant cryptocurrency. Becoming “more of the same,” history teaches, can be one of the shortest paths to popularity.

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