It’s the end of an era. The Ethereum blockchain is racing toward its long-awaited “Merge,” with the culmination of the network’s shift from proof-of-work to proof-of-stake expected in September. We’ll get to what those terms all mean in a second, but first, it’s important to understand the impact of this move beyond just increasing ETH’s value.
Ethereum is expected to get cheaper: The pain wasn’t just at the pump this year, as gas fees on the Ethereum blockchain severely cramped the ability of its users to realize the full potential of the crypto and web3 evolution of the last year. Cheaper fees will mean even more transactions for the network that already sees more than 1.1M transactions per day.
Ethereum is expected to get faster. Web3 technology’s potential to replace traditional web2 giants, particularly in the field of finance, has been stymied by its turtle-like transaction speed. As of April, Ethereum was able to process 12-25 transactions per second — while companies like Visa can process 1,700 tps or more. Starting with the Merge, Ethereum hopes to implement fixes that will lead to it managing 100,000+ tps in the near future.
Ethereum is expected to get more environmentally friendly. A recent study showed that Bitcoin, even with its cumbersome proof-of-work process, actually uses 50 times less energy than traditional banking. Still, addressing web3’s environmental impact has been a huge concern — one Ethereum is addressing by moving toward a less computing intensive model in proof-of-stake.
These are all good things for Ethereum! However, there has been a new twist, as a core set of Ethereum miners and investors have proposed adding a hard fork that would allow them to keep some elements of the proof-of-work concept they were profiting from.
Let’s dive in.
The two largest cryptocurrencies, Bitcoin (BTC) and Ethereum (ETH), use this decentralized consensus mechanism to power their blockchains. Miners on these blockchains use a tremendous amount of energy to process transactions through a series of complicated mathematical maneuvers.
This process allows the blockchain to keep its transactions tamper-proof and verify them seamlessly without a “trusted third party” — the role that historically has been served by banks, credit card companies, and other financial institutions.
Proof-of-stake has increasingly become the model of choice for cryptocurrencies trying to address the labor and environmentally intensive processes of proof-of-work, with Solana, Terra, and Cardono being among its largest adopters.
In this model, validators lock up set amounts of that blockchain’s cryptocurrency, staking their own coins or tokens as collateral. They are awarded more if they accurately confirm transactions being processed on the network, but lose their stake if they introduce errors or otherwise try to game the system.
Proof-of-work ensures verification by making it prohibitively expensive for somebody to hack its process: a user would have to contribute over half of the total computing power involved in verifying each transaction in order to hijack it.
Proof-of-stake ensures verification by harnessing its community, using their financial collateral as an early proxy for trust. The process isn’t nearly as complex as Bitcoin’s model, which is tough to crack by design.
It can verify transactions much more quickly, using just the computing power in any ordinary laptop, trusting that people won’t hijack the system because they will lose their hard-earned cash if they do.
No matter how you get there, blockchain technology has the potential to disrupt traditional financial services precisely because it offers a new form of allowing for trusted transactions — one that is theoretically even more trustworthy because it exists outside the purview of centralized governments or banks.
As September nears, some have suggested Ethereum should engage in a hard fork after it switches to its proof-of-stake system.
While the switch will likely benefit most users of the Ethereum network, it leaves countless miners out in the cold, since their services will no longer be needed for validation. A “hard fork,” would allow those miners to break off and keep working on their own proof-of-work version of the Ethereum blockchain.
Justin Sun, the founder of the blockchain operating system Tron, is one of the most famous investors to come out and back the move. Not only did Sun support the move, but he promised to donate some of Tron’s more than 1 million ETH to the miner-led proof of work system, which would theoretically be called “ETHW.”
It depends, of course. If you’re an ETH miner, you’re hoping that investors like Sun don’t just support the fork, but also keep their tokens and transactions on the proof-of-work system under the new ETHW banner. And there are other reasons one may want to stick with the old process.
Proof of stake is a newer validation method and not as proven. Validators with larger financial holdings could have more influence on validating transactions, theoretically increasing the chance of the ledger being compromised, although cryptocurrencies like Cardano and Tezos have already shown it can be effective at scale.
Still, the benefits of proof-of-stake are clear. As the second-largest cryptocurrency by market cap — and the one most casual investors are most likely to know besides Bitcoin — Ethereum shifting to proof-of-stake will go a long way to building a web3 future that is more sustainable and impactful.
Directly addressing some of the most common criticisms used against cryptocurrencies helps everybody in the web3 ecosystem.