Last week, cryptocurrency giant Ethereum took a long-awaited step and switched its technology infrastructure to more environmentally sustainable software. The new infrastructure, called The Merge, reduced Ethereum energy consumption by 99%.
Although this is a highly anticipated change in the cryptocurrency market, it comes with risks.
What has Ethereum changed?
Before we talk about The Merge, let’s take a look at what’s changed in the Ethereum mainnet.
A mainnet (short for “main network”) is the blockchain technology that is responsible for transmitting cryptocurrency from sender to receiver. Since its inception, Ethereum has used Proof of Work mechanisms to validate transactions and mine new coins.
However, to mine new coins, proof-of-work transactions required computers to compete with each other to solve complicated mathematical problems. Bitcoin also uses proof-of-work systems to validate transactions.
This process consumes terawatts of energy and releases megatons of carbon dioxide into the environment. We think that bitcoin mining requires the same amount of energy as would power a small countryor about 130 terawatt-hours, according to Digitconomist’s Bitcoin Energy Consumption Index.
Proof of Stake mechanisms secure block transactions by requiring cryptocurrency holders to use Ether collateral to validate new transactions. Thus, for Ethereum, the era of cryptocurrency miners is over and cryptocurrency validators are emerging.
Validators add newly validated transactions to a shared block, and a group of validators will vote and approve the legality of the transaction. Once this happens, the block is closed and validators receive more coins in exchange.
The main difference between mining and validation is that cryptocurrency holders are rewarded for their stake in a proof-of-stake network, while they are rewarded for their computing power in a proof-of-work network.
What is The Merge?
The Merge refers to the merging of the original Ethereum mainnet with a separate, more energy efficient and environmentally friendly blockchain to create a single chain. The Ethereum blockchain powers much of the crypto market, including NFTs.
Ethereum founder Vitalik Buterin considered turning Ethereum’s consensus layer into a proof-of-stake system as early as 2014, a year after the creation of Ethereum. The new infrastructure helps to significantly reduce Ethereum’s energy consumption, amid growing concern and criticism from national authorities and environmental advocates.
This Merge strategy is good news for potential cryptocurrency investors who were hesitant because of the effect of cryptocurrency on the environment. This is also good news for current investors, as this merger has no effect on current assets.
Just before The Merge, the price of Ethereum rose as investors and cryptocurrency enthusiasts became convinced that the new infrastructure would allow Ethereum to overtake Bitcoin. The hype surrounding the merger has given investors hope that the price of all cryptocurrencies will increase and revive struggling market.
But that didn’t happen. Ethereum plunged, as did the rest of the cryptocurrency market.
What does The Merge mean for the cryptocurrency market?
The Merge was an impressive technological achievement and a victory for green people. However, major changes in Ethereum’s infrastructure are changing the meaning of crypto investing.
Contrary to blockchain dogma, proof-of-stake networks and cryptocurrency investors may have to deal with a third party: the US government. Following the merger, the US Securities and Exchange Commission introduced a new element to the plan to adopt the proof-of-stake infrastructure.
Blockchain is all about decentralization, which means the government should be involved as little as possible, if at all. But SEC Chairman Gary Gensler concluded that proof-of-stake type transactions mean that tokens could be considered securities and not currencies.
Gary Gensler spoke before a Senate Banking, Housing, and Urban Affairs Committee last week and told reporters, “From a coin perspective…this is another clue that according to the Howey test, the investing public anticipates profits based on the efforts of others,” according to the wall street journal.
Gary Gensler suggested that any cryptocurrency, not just Ethereum, that uses proof-of-stake infrastructure could be considered a security and pass the Howey test. Howey’s test is a U.S. Supreme Court decision that determines whether a transaction is an “investment contract,” and then requires government regulation, which cryptocurrency investors avoid like the plague.
This statement means that staking coins in a proof-of-stake system must include protections for investors that are not suitable for blockchain transactions. As a result, Ethereum fell by 11% and Bitcoin by 8%.
Overall, the cryptocurrency market has fallen well below its all-time high of $2.9 trillion in 2021 to just under $1 trillion in the first half of 2022. Cryptocurrency market experts say the decline is a result of changing economic conditions in the United States, rising inflation, and now concerns about the legality of cryptocurrency trading.
Crypto trading may not be the one-way ticket to millionaire status it was on its way to, at least not yet.
Source : ZDNet.com
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Ethereum is moving to a new blockchain infrastructure: what does it change?
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