In what’s been labelled a new era for Ethereum, the blockchain has completed the Merge, a new and more energy-efficient system for processing transactions. Ethereum developers say the move will also make the network more secure and scalable.
The shift is from a Proof-of-Work (PoW) system of authenticating transactions to Proof-of-Stake (PoS). Proponents of PoS argue that it hands control of the network to those who stake crypto with it, which makes any attack on it self-defeating, and that it requires crypto miners to consume less power when validating a transaction. Critics say PoS gives bad actors potentially greater control of the network, and has not been as rigorously tested in use.
As the second largest cryptocurrency in terms of market cap after Bitcoin, self-described open source blockchain platform Ethereum is leading the way in trying to make the cryptocurrency mining process less energy intensive. While it moves away from PoW, Bitcoin continues to use this model, whereby nodes in a computer network compete by solving complex mathematical puzzles. PoS on the other hand allows cryptocurrency owners to validate block transactions based on the number of staked coins.
According to the Ethereum Foundation, the Merge has reduced Ethereum’s energy consumption by around 99.95%.
Regulatory tussle
The news comes alongside a White House announcement on its comprehensive framework for responsible development of digital assets. Debate is currently ongoing as to whether the industry should be regulated by the CFTC, SEC, or both. SEC Chair Gary Gensler has called crypto assets securities, while CFTC Chair Rostin Behnam’s position is that digital assets are typically commodities.
“There are a number of bi-partisan bills pending both in the House of Representatives and the Senate that, if enacted, would help clarify the regulatory landscape for crypto intermediaries, and provide clearer and more practical avenues for entities that want to be law abiding,” says Gary DeWaal, Special Counsel at Katten Muchin Rosenman LLP. “It’s not clear how the Merge will impact regulation at this time – and it may be different country by country. In the US, the SEC views decentralization as one of the characteristics that might make a crypto asset considered a security and subject to securities regulation. Moreover, it is possible that the sharing of staking rewards by crypto intermediaries with their customers may also be seen as a securities activity.”
Cryptocurrency has gradually gained acceptance in the mainstream financial world after many years on the sidelines. Various self-styled investment gurus have made predictions about the future price of Bitcoin and the acceptance of cryptocurrency more generally.
One of the most prominient, Cathie Wood of Ark Invest, said in 2021 Bitcoin would reach a value of $500,000 by 2026.
“On the one hand, potentially shifting to a PoS model should make Ethereum more decentralized as the cost of staking (in order to realize rewards) should be lower than purchasing expensive mining equipment necessary in a PoW model like Bitcoin,” says DeWaal. “However, the initial threshold for staking is currently approximately $50,000 of ETH, which may be out of reach for many investors and may ultimately lead to just big actors participating in staking. Indeed, early evidence suggests that centralization not decentralization increased following the Merge. It has been reported that more than 40% of new blocks were added solely by two entities immediately after the Merge on September 13.”
A greener cryptocurrency ecosystem?
The World Economic Forum said “Crypto has been waiting for a recalibration towards sustainability: one that not only optimizes the value proposition that crypto and blockchain applications present for crypto users, but also for Web3 climate innovators, the new generation of environmental advocates, as well as US climate efforts more broadly.”
According to a Bitcoin Mining Council Report, over half (57%) of energy used for crypto mining comes from renewables.
“Criticism around the carbon footprint of blockchains like Bitcoin relate to the incredibly energy intensive PoW consensus mechanism,” says Hayley Moller, Head of Marketing at Blockchain company Thallo. “There are many other blockchains that use PoS as a consensus mechanism, which only uses something like <0.5% of the amount of energy used by PoW. Most climate-related projects that I’ve seen are building on these very energy efficient blockchains, for example Polygon and Celo.”
