Ethereum, a blockchain platform supporting over 50% of the total value of the decentralized finance industry, is shifting to a less energy-intensive way of validating transactions.
Why it matters: ‘The Merge’ will allow Ethereum to use 99.95% less energy, which could move the industry towards being more economically efficient and environmentally friendly.
Catch up: The blockchain currently operates on a Proof of Work concept, where whoever can solve complex math puzzles–using energy-intensive computers–the fastest is allowed to confirm a block of transactions and then awarded digital currency for their efforts.
- Through this process (called mining), Ethereum alone consumes as much electricity as the Netherlands and produces a carbon footprint the size of Finland’s.
Ethereum is moving to a Proof of Stake concept, which replaces the people solving math puzzles with computers for those who stake a sizable amount of digital currency—in this case, Ether, the native cryptocurrency token to Ethereum—to monitor transactions.
- These validators will also be rewarded for their work with more Ether (or punished if they make a wrong call) and see their stake build up before eventually cashing out.
With the barrier to entry shifting from buying expensive computers that run 24/7 to solve puzzles to putting up your own nest egg instead, energy use will drop.
Yes, but: Critics argue the Merge will stymie decentralization, a tenant of cryptocurrency, by creating a very centralized group of overpowered and crypto-rich validators.
- It could also create a schism between users. No central body is forcing users to switch to the new system, and some have already pledged allegiance to the old way.
Even though the Merge has been compared to changing an airplane’s engine while it’s still in the air, several major Canadian crypto companies have already staked Ether, per The Logic.
Zoom out: This summer’s crypto market crash wiped ~US$2 trillion in value and bankrupted several of the industry’s major players. The Merge could help drive a rebound by attracting new investments for its green appeal and pressuring competitors to green their operations.