Introduction
A few days ago, the Ethereum network launched the process of swapping its current consensus mechanism from a Proof-of-Work to a Proof-of-Stake protocol. This swap was supposed to transform Ethereum and make it eco-friendly by allowing for a reduced energy consumption, especially during the complex phases of mining and validation.
From Proof-of-Work to Proof-of-Stake
Proof of Work (PoW) is the historical protocol of the first and most famous cryptocurrencies such as Bitcoin or Ethereum. However, using a PoW protocol for a cryptocurrency to secure and validate a blockchain remains largely energy-consuming. These days, it has been estimated that the bitcoin network consumes an equivalent power of the whole city of Los Angeles.
On the contrary, introduced along the cryptocurrency Peercoin in 2012, the Proof-of-Stake (PoS) protocol does not require to process some algorithmic calculations and is therefore much less demanding in terms of power. Indeed, the PoS protocol requires for the member of a network to justify they own and store a define quantity of the cryptocurrency in order to create or validate some blocks in the corresponding blockchain.
In practice, Ethereum asks a miner to store 32 ethers to take part to a block validation (as of today, it means around $ 45 000). Critics argue that cost is against the concept of a peer-to-peer network and push the network towards more centralization, even though Vitalik Buterin, the founder of the Ethereum rejects the argument by saying this price is affordable for a majority of participants to the network. However, in practice, Ethereum has been synonymous of high transaction fees, with the average transaction price deemed one of the highest among all the cryptocurrencies.
The Immediate implications of the Merge
Since the Merge, Ethereum price has decreased more than 20%. One explanation lies in the concern that the SEC could potentially introduce regulations on PoS driven cryptocurrencies that would impact almost the entire world of cryptocurrencies. In addition, many fear an intensified scrutiny from the Federal Reserve Board in case Ethereum could be considered a security after switching to a PoS protocol.
In itself, the Merge was supposed to fix the issues of the Ethereum high fees and the congestion problem affecting the network. The congestion problem was notably due to the multiple interactions between token and smart contracts but, even if the Merge did not immediately solve this concern, it set up a new infrastructure that could solve the problem in the years to come.
The change of protocol finally implied a sharp reduction in the energy consumption of the whole network, an estimated 99% drop compare to the initial consumption of 112 TWh/yr under the initial PoW protocol.
Another consequence of the Merge was to reduce dramatically the issuance of ETH. This reduction has been estimated to be around 90%. Comparatively, staking for miners should produce an average estimated return of 10%; however skaters willing to withdraw their ETH will need to wait for a lock-in period of between 6 and 12 months.
A third consequence of the Merge was to induce a fork initiated by Ethereum miners willing to stay with the PoW protocol and then promote another crypto labelled ETHPoW.
Issues arising from the Merge
First issue immediately seen was that a huge part of validations have been concentrated on 2 different addresses soon after the Merge, which was one of the main worries initially raised by some nodes before that event.
In addition, a few days ago, Solana, the famous ‘Ethereum-Killer’ surpassed Ethereum in terms of transactions per second, overcoming Ethereum by 5 million transactions in one single day. Has the Merge of Ethereum induced a loss of competitiveness of Ethereum which pave the way to the rise of cryptos like Solana ? The future will tell.
