How the Ethereum Merge is Affecting the Blockchain Industry

Ben Gehmlich
September 28, 2022
How the Ethereum Merge is Affecting the Blockchain Industry

Ethereum’s protocol merge was finally triggered on Thursday, September 15, after the blockchain achieved a Total Terminal Difficulty of 58,750,000,000T. At least 41,000 people joined the “Ethereum Mainnet Merge Viewing Party” for 15 minutes on YouTube, where they watched with bated breath as the key metrics trickled in when the Merge was finalized.  

The hottest topic in the crypto sphere has recently been developing for the last seven years. Ethereum co-founder Vitalik Buterin took to Twitter to announce an event that brought a mixture of excitement and anticipation among crypto community members.

So great was the event that several days to the D-day, tech juggernaut and the world’s leading search engine and most popular website, Google, showed their support for the event by creating a Google Doodle. This countdown ticker counted down to the Ethereum Merge. The highly anticipated Merge marked the end of the proof-of-work consensus mechanism and has ushered in the proof-of-stake consensus algorithm following Ethereum’s Mainnet merging with Beacon Chain’s proof-of-stake system.

Also known as “The Paris Stage,” anticipation for the upgrade to the Ethereum blockchain, the second largest crypto and the leading ecosystem that’s the bedrock of technologies like non-fungible tokens (NFTs), ignited a boom in crypto investment over the years. If you’re wondering what the Merge is, why there’s so much excitement surrounding it, and what it means for you, we’ve got you covered.

This article offers a detailed guide on everything you need to know about the Ethereum Merge, a few brief technicalities, and what it means for the environment and cryptocurrency prices, besides debunking the most common misconceptions about the Merge.  

What is The Merge?

Ethereum, the world’s second-largest blockchain network, completed the long-awaited transition from the power-hungry proof-of-work (PoW) consensus algorithm pioneered by Bitcoin to the energy-efficient proof-of-stake (PoS) mechanism on September 15, 2022. Ethereum’s PoS network, known as the Beacon Chain, was already in place beginning in 2020, it’s not been used for processing transactions.

The Ethereum blockchain that people have been using is known as the Mainnet. That distinguished it from numerous testnet blockchains, such as the Beacon Chain that developers created in December 2020. Since its inception, the Beacon Chain was mainly used as a staging area for computers operating the Ethereum network as it prepared for the upgrade.  

The transition from the PoW Mainnet by merging the two blockchains finally made the Beacon Chain the New Ethereum. Since its creation some 19 months ago, validators were able to add blocks that contained neither data nor transactions to the chain. You want to compare their work to a bus running around a city’s routes but without passengers to ensure that the engine would run aptly at the official launch.

Why Was the Merge Necessary? 

The Merge was necessitated by the need to radically change how the Ethereum blockchain processed transactions and how ETH tokens were created. The Proof-of-Stake system has replaced the proof-of-work system, which reduces Ethereum’s energy consumption by up to 99.9%. The upgrade is also intended to eliminate slow and high-cost transactions.

For years, the two most prominent blockchains – Bitcoin and Ethereum – depended on the proof-of-work mechanism operated and safeguarded by crypto miners to approve and validate transactions by solving complex mathematical equations. The miners got rewarded using the blockchain’s currency for their efforts in solving the tricky math puzzles that made it difficult for hackers to infiltrate the system.

The greatest undoing for the system of solving puzzles was the vast amount of electricity consumed by the miners’ giant computing rigs that ran day and night. Research showed that Bitcoin miners consumed more electricity globally per year than in some countries like Kazakhstan and the Philippines.

The enormous electricity consumption made the proof-of-work consensus algorithm subject to widespread criticism from environmental support groups even as most countries struggle to reduce emissions responsible for climate change. The design structure of the PoW mechanism has also been blamed for system challenges such as security and scalability. Understandably, whereas Ethereum developers built the network on proof-of-work, there were already rumors they were considering developing the untested Proof of Stake system.

The proof-of-stake system doesn’t depend on miners using powerful computers to solve complex mathematical puzzles. Users who own some ETH must lock up a set amount of their cryptocurrency on the blockchain, where they can earn interest on their “staked” cryptocurrency. Instead of energy-guzzling miners, the new watchdogs, known as validators, deposit 32ETH in the network to validate the network and earn rewards. The system has also been designed to discourage hackers or actors in bad faith who must deposit a considerable amount of money on the blockchain. They risk losing and getting kicked out if their bad intentions are discovered.  

Effects of the Merge on the Blockchain Industry  

Even though the crypto market slumped slightly on Thursday, the Merge happened with Ethereum’s price falling at least 5.5% lower, and the event went on smoothly. The reason may be the ongoing crypto winter that has pressured the crypto market for the last few months. Still, pundits believe that more significant Merge effects will be seen when the broader crypto market finally recovers. Some of the earliest effects of the Merge on the broader blockchain market include:

Attention from the SEC 

According to the Chairman of the Securities and Exchange Commission (SEC), Gary Gensler, ETH may now be considered a security following the Merge. The SEC chair said on the day of the Merge that any cryptocurrency that allows users to stake their crypto assets qualifies to be a security according to the Howey Test.

From Ethereum’s perspective, the concept of staking involves inviting users to stake their coins in anticipation of earning interest based on the efforts. Before the Merge, the SEC and the Commodity Futures Trading Commission (CFTC) agreed that ETH wasn’t a security. However, with the new development, only time will tell whether the token will get embroiled with regulators like the ongoing lawsuit between the SEC and Ripple Labs concerning their XRP token.  

Ethereum’s Potential Centralization 

Decentralization has been the most crucial cog in the wheel of the blockchain and cryptocurrency industries. However, the Ethereum Merge seems to have pushed the world’s second biggest blockchain towards centralization. Statistics from the staking rating show that Coinbase and Lido currently control over 50% of the entire network, which portends an unhealthy distribution of staking power. Such a situation is potentially dangerous for the Ethereum ecosystem; users have expressed apprehension on Twitter and fear the two platforms could effectively take control over the blockchain.

Lido, a Decentralized Autonomous Organization (DAO) that allows anyone to join its DAO and become part of the Ethereum network, is currently the leading entity on the network. Coinbase comes in second at 14%, which shouldn’t raise any eyebrows regarding decentralization. The emerging scenario raises questions on the chances that the proof-of-stake could easily lead to Ethereum’s centralization.  

GPU Mining Hit Hard  

Large-scale crypto mining using Graphics Processing Units (GPU) has ended as Ethereum miners become redundant. Before the Merge happened, most miners are said to have dumped their cards, leading to dwindling sales and prices falling to half at the beginning of 2022. However, some miners still held on to their cards to cash in on the last few blocks before the switch, while others could have switched to other PoW coins. Bitfarm’s Ben Gagnon tweeted, “GPU mining is dead less than 24 hours after the Merge.” Since Ethereum has been the most profitable PoW coin in recent days, it could be difficult for miners to maintain their previous profit levels.

The Surge, Verge, Purge, and the Splurge

According to Ethereum co-founder Vitalik Buterin, the recently concluded Merge is not the be-all and end-all but more of the beginning of an ongoing upgrade. Buterin recently intimated that the Ethereum Foundation would eventually have to tackle “the Surge, the Verge, the Purge, and the Splurge” to make the blockchain faster, safer, and more decentralized.

The Ethereum network’s developers aim to upgrade the network that is the bedrock of a $60 billion ecosystem home to numerous crypto lenders, cryptocurrency exchanges, non-fungible tokens (NFTs), and several Web3 applications. Meanwhile, crypto enthusiasts, potential investors, and blockchain skeptics continue to keep an eye on how the Merge will continue to impact the broader blockchain industry.

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