ADVFN News | Merger: An Ethereum update has been released

Biggest update ever Ethereum (BINA:ETHUSDT) just went live, which industry experts are calling a turning point for the entire cryptocurrency industry. So far, all signs point to the so-called merger — designed to reduce the cryptocurrency’s energy consumption by more than 99% — to have been successful.

The first block of proof-of-stake transactions was completed with an almost 100% customer participation rate. This was by far the best scenario.

The ethereum network overhaul is fundamentally changing the way the blockchain secures its network and verifies transactions. Most of these changes happen under the hood, and the hallmark of a successful upgrade is if the end user doesn’t notice a difference in the next few hours and days.

Cryptocurrencies like ethereum and bitcoin are often criticized for the mining process to generate new coins. Before the merger, both blockchains had their own vast network of miners across the planet running highly specialized computers that ran mathematical equations to validate transactions. Proof of work consumes a lot of energy and is one of the biggest targets of criticism in the industry.

But with the upgrade, ethereum switched to a system known as “proof of stake,” or PoS, which replaces miners with validators. Instead of running large banks of computers, validators use their existing ether cache as a means to verify transactions and create new tokens. This requires much less energy than mining, and experts say it will make the protocol more secure and sustainable.

The price of ether spiked after the merger. It is trading at around $1,640, up more than 3% in the last hour.

Nine teams and over 100 developers worked on the merger for years. Over the next few hours, this decentralized network of developers spread across the planet will monitor the release and, if necessary, fix bugs as quickly as possible.

Danny Ryan, a Denver-based lead developer who has worked on the merger for five years, said he will watch for any irregularities through automated and manual monitoring systems. If issues arise, the respective team will debug and issue a patch to users, but Ryan says they’re pretty confident going into the merge, given all the successful testing over the past few months.

“There could be some kind of small fire that goes out very quickly,” Ryan said. “But the network as a whole — because of the redundancy in all these different software — is likely to be stable and good.”

Part of the reason fusion is so important has to do with optics.

Last week, the White House released a report warning that proof-of-work mining operations could derail efforts to mitigate climate change. Reducing energy consumption by around 99.95% will not only establish greater sustainability for the grid, but will also significantly contribute to reducing the barriers to entry for institutional investors, who have struggled with the optics of contributing to the climate crisis.

Bank of America said in a Sept. 9 note that it is The significant reduction in power consumption after the merger “could allow some institutional investors to purchase a token that was previously prohibited from purchasing tokens that run on blockchains using proof-of-work (PoW) consensus mechanisms.”

Analysts say the entry of institutional money into the digital asset space is key to its future as an asset class.

The update also changes tokenomics around ethereum’s original currency, ether.

“Ether itself becomes a productive asset,” Ryan said. “It’s not something you can just speculate on, but it’s something that can generate a return.”

In this post-merger era, Ether takes on some of the typical characteristics of traditional financial assets, such as a certificate of deposit, which pays interest to holders.

“It’s probably the lowest risk return within the ethereum ecosystem,” explained Ryan, who added that the return in other parts of decentralized finance, or DeFi, includes taking smart contract risk and other types of counterparty risk.

The upgrade will also result in a significantly reduced supply of Ether tokens in circulation, which could pave the way for Ether to become a deflationary currency in the coming weeks and months. Some investors say it could also help boost the token’s price.

This reduced supply is the result of a new verification model that replaces miners with “validators”. Rewards for validators are much lower than those for proof-of-work miners, which means that less ether will be minted as a result of this update. Validators are also required to lock their tokens for an extended period of time, taking Ether out of circulation.

Furthermore, as part of an update that went into effect in August 2021, the network is already “burning,” or permanently destroying, some of the digital currency that would otherwise be recycled back into circulation.

Developers say improved network security is another critical feature of the update.

“There are changes in chain security guarantees,” said Sigma Prime’s Sean Anderson.

Take a 51% attack, where someone or a consortium of people controls 51% or more of a cryptocurrency and then later weaponizes that control to make changes to the blockchain.

Anderson says it’s much easier to recover from a 51% attack on a proof-of-stake network because there are built-in mechanisms to penalize bad actors by reducing their participation.

“Because these economic assets are inside the protocol, you get a much better way to recover, so you end up with a better security profile,” Ryan said.

The next hours and days will be critical

The next few hours and days will be crucial to assess the health of the ethereum network after the upgrade. Behind the scenes, developers will monitor metrics such as validator participation rate to determine how things are going. But the coders say that in an ideal world, users would be completely unaware of the upgrade.

“If everything goes perfectly, the end user won’t notice the difference,” Anderson said. “If someone trying to transact on ethereum doesn’t notice, that’s fine.”

The upgrade does not immediately make ethereum faster, cheaper or more scalable. But those features come with future updates that are now possible after the merge.

In particular, scalability is something Ryan says is desperately needed for the network to thrive.

Layer 2 technologies such as sharding and roll-ups are currently working to address just that.

“More scalability, more capacity to process user transactions comes parallel to the network through layer-two upgrades called roll-ups, but the scale doesn’t improve in the underlying protocol itself,” Ryan continued. This is coming in the next updates.

Katie Talati, head of research at asset management firm Arca, says her team is keeping a close eye on everything in the second-tier space, especially projects that try to offer scalability.

“The biggest problem right now is that it’s very fragmented,” Talati said. “You end up with these people who are now on Ethereum but are isolated from each other because L2 is not necessarily easy to talk to each other. And so it’s not a perfect experience,” she said.

With information from CNBC

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