Time Magazine: Why is the Ethereum merger so important?

When the Ethereum blockchain completes a software update known as a “merge,” one of the most significant transitions in crypto history will occur.

The merger, tentatively scheduled for September 15, will significantly reduce Ethereum’s energy usage, making it more environmentally friendly than Bitcoin. The merger could also have a range of far-reaching effects, both good and bad: it could bring about a sharp drop in the price of ether or a sharp rise; spur mainstream adoption or reduce confidence in crypto; reduce some security risks, or exacerbate others. Here are a few things the layman should know about this transition.

How the Ethereum blockchain will work — and why it matters

To understand the merger, it’s important to understand why people use blockchain in the first place. One of the most important ideas about the technology is that there is no central authority that can control it. For example, while a government can manipulate its central bank to its whim, blockchain should not be subject to such pressures. It should be self-sustaining and decentralized in power.

For years, Bitcoin and Ethereum — the two largest blockchains — have been operating without a controlling entity, thanks to a process called Proof of Work. In this mechanism, the blockchain is operated and secured by “miners,” who approve new valid transactions by solving complex mathematical puzzles and are rewarded in the blockchain’s “currency.” The complexity of these mathematical puzzles makes it difficult for hackers or tamperers to game the system.

But solving these puzzles requires a huge amount of energy. Miners have set up giant computing facilities around the world that run day and night, consuming huge amounts of electricity while solving these puzzles. Studies estimate that Bitcoin mining consumes more electricity globally each year than most countries, including the Philippines and Kazakhstan.

The huge energy consumption of proof of work - which is also built into the mechanism - has attracted widespread criticism from environmental groups, especially as countries try to reduce greenhouse gas emissions to combat climate change. Some engineers believe that proof of work also has design problems in terms of security and scalability. So when Ethereum's first developers began building the network based on proof of work in 2014, they were already considering eventually switching to a new, untested system - proof of stake.

In proof of stake, energy-intensive miners are replaced by gatekeepers called “validators” who deposit large amounts of money into the Ethereum network (32 ETH, worth about $50,000 at the time of writing) in order to be able to approve or reject transactions. Just like miners, they are rewarded with funds for doing so. Under this system, hackers or malicious actors need to invest a large amount of money in the system and in the process risk losing these funds if they are caught doing evil and kicked out of the system.

Core ethereum developers have been working on the switch for years. But they have encountered numerous challenges that have forced them to delay the transition again and again, turning the state of the merge into a running joke. Developers explain that making updates to what is essentially the operating system of the ethereum network is extremely difficult, especially given that the network runs nonstop: It’s like swapping out a gas engine for an electric one while a car is running at full speed on the highway.

Potential positive impacts of the merger

Developers hope that such a risky move will be worth it for several reasons. The first is environmental. Researchers at the Ethereum Foundation say that since miners will no longer have a financial incentive to keep their computers running 24 hours a day, the network's energy usage will drop by more than 99%. Mike Brune, the head of the climate change movement "Change the Code/Not the climate," wrote in a statement to Time magazine that the merger is an important step in the right direction and that he hopes Bitcoin can follow the same path. He wrote:

“As fires rage around the world and historic floods destroy lives and livelihoods, state and federal government leaders and corporate executives are racing to decarbonize as quickly as possible,” said Ether. “Ethereum has shown that it is possible to switch to an energy-efficient protocol and significantly reduce the impact on climate, air, and water pollution.”

Improvements in energy efficiency could be good for business. Many traditional companies and financial institutions have expressed concerns about going all-in on Ethereum due to its large carbon footprint. Ethereum founder Vitalik Buterin acknowledged this in February of this year, and actually encouraged skeptics to wait to use the blockchain until it is less damaging to the environment.

If the merger goes through, corporate adoption could accelerate, especially among institutions with environmental, social and governance (ESG) requirements. Joe Lubin, co-founder of Ethereum and founder of blockchain company ConsenSys, told Time that he has spoken to several “major financial institutions” that have been waiting for the merger to “significantly participate” in Ethereum.

Many other potential users have stayed away from Ethereum due to its high fees and congestion. The network is not ready for the dramatic increase in users expected in 2021, forcing some to pay hundreds of dollars in transaction fees.

The merger won’t eliminate those fees, but Ethereum developers say its completion will set them up for new technology to scale the Ethereum network. The key tool is called sharding, which splits network data into smaller partitions, making the network faster and cheaper to use. Vitalik Buterin said in February that sharding could eventually reduce fees to around 5 cents and bring back many Crypto users who have abandoned Ethereum for other, cheaper blockchains like Solana and Avalanche.

“It’s going to take time to get there, but it’s basically taking us to a throughput architecture that’s going to handle unlimited transactions per second,” Lubin said. “It’s going to be internet scale.”

Ethereum developers also believe that moving to proof-of-stake will improve security and make the network more resilient to attacks. A report from Consensys said that an attacker would need more than $11 billion to gain control of 51% of the network — which would allow them to rewrite parts of the blockchain as they wish.

But there are also many risks

But the merger comes with huge risks. Ethereum is the main network behind the frenzy of crypto activity that has emerged in the past two years, including NFTs, decentralized finance (DeFi), and decentralized autonomous organizations (DAOs). If something goes wrong during this transition, the wealth of all these applications and organizations—which collectively manage more than $50 billion in user funds—will be at risk.

Joe Lubin predicts that the merger will be seamless and non-disruptive to users regardless. “It’s like Apple upgrading the iPhone’s operating system overnight and you turn on your computer in the morning and you don’t even know what happened,” he said.

The merger could also result in a split in Ethereum’s user base. Given that Ethereum is decentralized, no one is forcing users to switch to a new system. If enough users or platforms decide to stick with Ethereum’s old proof-of-work version, there could be massive chaos and confusion about where the token’s true value lies. Some proof-of-work miners have already said they intend to resist the merger and have begun jumping back to an older version of the Ethereum blockchain, now known as Ethereum Classic.

However, many of these miners are simply looking out for their bottom line, as the mining equipment they have invested in will soon be useless to Ethereum once it switches to proof-of-stake. Almost all other Ethereum users have said they will switch to the proof-of-stake chain, making an all-out civil war unlikely.

“I think at least a temporary fork is possible: it’s an opportunity to get ETH quickly, and there are a lot of opportunists out there,” Lubin said. “But I can’t imagine building anything, or putting anything of significant value, on an old chain where so much is fundamentally broken and abandoned.”

Finally, some worry that the merger will make Ethereum more vulnerable to censorship in the larger struggle between cryptocurrencies and the U.S. government. Last month, the U.S. Treasury Department banned Americans from using Tornado Cash, a service that helps Crypto owners protect their anonymity. Any user who interacts with Tornado Cash-related addresses is at risk of violating U.S. sanctions. As a result, large-scale proof-of-stake validators like Coinbase may choose to censor any Tornado Cash-related transactions to comply with government requests. And such an action would run counter to Crypto's decentralized philosophy.

But Coinbase CEO Brian Armstrong said he would rather his company shut down its staking business than enable censorship. Collins Belton, a prominent Crypto lawyer and managing partner at Brookwood LLP, told Time that he was skeptical that the merger would have much of an impact on the U.S. government’s regulatory strategy. “I think it’s unlikely that the argument will hold up that the stakes are so different that the U.S. government is going to change its approach and start locking up validators,” he said. “I think that overestimates the ability of the U.S. government to really analyze these technical arguments.”

What happens next

Over the past few years, Ethereum developers have been rolling out test versions of the merger, searching for possible glitches and vulnerabilities in their code. On Tuesday, the last test run of the merger (called the Bellatrix upgrade) was successfully activated, clearing the way for the real merger. The merger is expected to take place on September 15, although a series of complex technical factors may delay it again. At that time, experts will closely watch the market to see whether the old version of Ethereum will surge in use or drop to zero. In any case, the merger marks the beginning of a new chapter for Ethereum and Crypto.