What is the Ethereum merge and how does it affect you?

TL;DR

• Ethereum’s merge is expected to happen on 15 September (Thursday), according to the Ethereum Foundation
• Through the merge, Ethereum will switch from a proof-of-work to a proof-of-stake blockchain.
• This could help to improve energy efficiency and thereby resolve high traffic and transaction fees. 
• If successful, some analysts expect that the merge may encourage broader adoption of Ethereum amongst institutional investors. However, there remains various risks including transaction safety. 
   

What happened? 

You might have heard a lot about Ethereum merge or what was previously known as Ethereum 2.0. 

Some have called the merge the most important crypto event since the creation of ether and bitcoin. 

Here’s why everyone in the crypto space is looking out closely for this event and why it matters. 

What you need to know about the Ethereum merge

#1 - Ethereum merge will reduce energy consumption of Ethereum

Ethereum is the second largest blockchain and currently emits carbon dioxide roughly equivalent to that of Singapore. 

This is partly because it runs on a proof-of-work concept, which uses a decentralised method of validation and hence takes up more effort. Like Ethereum, Bitcoin also uses proof-of-work. 

According to experts, Ethereum could massively reduce its electricity consumption by over 99% through this merger. 

How will this happen? 

The update will transform Ethereum from a proof-of-work to a proof-of-stake consensus mechanism.

This could help to bring transaction costs on the network down. 

#2 – Ethereum merge could enable the network to handle more transactions

With the move to proof-of-stake, transactions on the blockchain could happen much faster than before. 

Ethereum could potentially handle up to 100,000 transactions per second. 

This is way above the amount that Visa and Mastercard can currently handle. Visa is able to handle up to 5,000 transactions per second and Mastercard is able to handle up to 24,000 transactions per second.

With the merge, more can potentially be done on the Ethereum, including handling financial payments, storing non-fungible tokens and hosting smart contracts. 

#3 – Merge is not without risks

This Ethereum merge is being compared to changing the engine of an aeroplane in the middle of a passenger flight.

It is important to note that this upgrade is happening while there’s $188 billion worth of Ethereum in circulation.

As such, you might also have received notifications from your crypto exchange that some transactions might be disrupted before the merge. 

We can take a look at what happened to other networks when they went through similar upgrades. 

Solana, a competitor of the Ethereum, faced many unforeseen bugs with their new blockchain technology. This resulted in several failures in the network. 

The most recent one outage happened on 1st June due to “resource exhaustion”, shutting down the network for four hours and 10 minutes. This meant that a peak potential of 975 million transactions did not occur during that blackout.

However, Solana could be more significantly impacted because its fees are extremely small, making it more vulnerable for bots to overwhelm the blockchain. 

Why should you care?

Ethereum is the most popular cryptocurrency amongst Singapore investors, according to a survey done last year by Gemini, Seedly and CoinMarketcap. 

78% of personal investors in Singapore own Ethereum, compared to 69% who own Bitcoin. 

Since the crypto crash in July, Ethereum's price has rebounded more significantly than Bitcoin, as many anticipate the improvements that could come through from the merge. 

In fact, Bank of America said that the merge may encourage broader adoption of Ethereum by institutional investors. 

According to them, the “significant reduction” in energy use could allow more buy-in from traders who could not invest in tokens built upon a proof-of-work framework previously. 

However, some proof-of-work advocates have argued that a smaller number of ether holders will have disproportionate control. 

There have also been questions raised about whether the blockchain will become safer after the merge. 

As the debate around proof-of-work vs proof-of-stake continues, we'd be looking out closely for whether Ethereum merge delivers on its expected benefits. 

In the meantime, you do not need to do anything in preparation for the merge if you are an Ethereum holder. 

It might also be wise not to perform any transactions nearing the merge time, just in case the transaction gets stuck or lost. 

Updated as of 15th September: The Ethereum Merge Is Done, Opening a New Era for the Second-Biggest Blockchain. 

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