Explained | What Ethereum’s Merge means to cryptocurrencies’ future?

Ethereum finished switching to a new way of verifying transactions on the blockchain. Instead of using proof-of-work via mining, the platform will use a model known as proof-of-stake. The switch happened after months of delay and shifting timelines

The story so far: September 15 is an important day for crypto trackers as it marked the day the Ethereum blockchain fully transitioned to a new way of processing transactions. Ethereum’s Merge event, as it is known, could change the nature of crypto and Web3 itself. Developers say the transition to what is called a ‘proof-of-stake’ consensus mechanism will cut Ethereum’s energy consumption by 99.95%.

Ethereum is one of the most used platforms by developers to build decentralised apps (dApps), smart contracts, and even crypto tokens. The platform’s currency, Ether is only second to Bitcoin in terms of market capitalisation. The change in the way Ethereum builds the blockchain comes with not just environmental consequences, but also major cyber and financial security implications.

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Decentralised transactions are processed on blockchains using consensus mechanisms. Ethereum’s former method, ‘proof-of-work’, which is also used by Bitcoin, needs powerful mining hardware that consumed a lot of electricity and generates enormous amounts of heat to solve extremely difficult mathematical puzzles. The solution would let new transactions be added to the blockchain - and reward the miners with crypto.

Many environmentalists, policy makers, and regulators have strongly criticised the impact of Bitcoin mining on local communities. Common centres for mining included China (before a near total crypto ban), the U.S.A, Russia, and Kazakhstan - countries with cheap electricity rates and colder climates. Ethereum’s website admitted that the crypto’s total annualised power consumption nearly matches that of Finland while its carbon footprint is comparable to Switzerland. For some time, European countries even mulled a crypto mining ban, while China actually carried out a nationwide crackdown on crypto miners, sending them fleeing overseas.

Ethereum decided to switch to a ‘proof-of-stake’ consensus mechanism, where Ether owners will stake their own coins in order to serve as collateral and help process new blockchain transactions, in return for rewards. Crypto experts as divided as to which consensus mechanism offers better protection from hackers. Theoretically, there are ways to hack both verification methods. But Ethereum claims the proof-of-stake consensus mechanism offers better security.

Highly unlikely! To understand why, we need to look at how Bitcoin and Ethereum are different, in spite of both dominating the crypto space. Satoshi Nakamoto, the pseudonymous creator of Bitcoin, authored a white paper in the late 2000s that explicitly stresses on the importance of the “proof-of-work” mechanism to secure the blockchain. No one knows who Nakamoto is or whether it is a person or an organisation till date.