The developers who work on improving the Ethereum release periodic updates, but none have been as major as the one expected this year. Named “the Merge,” miners were replaced with stakers.
The Merge will be a nail-biter because so many things can go wrong. Software bugs or hacks could occur, or miners could create a new Ethereum network. A bug in Ethereum’s 2020 network upgrade splintered the platform in two, causing havoc on the nascent DeFi ecosystem, which lets people trade, lend, and borrow without the need for third parties.
The miners are the biggest concern. It is possible that many will quit the network just before the Merge, figuring that they can make more money by selling their gear than by waiting to get the last of the rewards. A sudden drop in the network’s mining power, or the “hash rate,” could undermine Ethereum’s security, which could be disastrous for its token and the apps that use it. This has been planned by Ethereum’s core developers. “If we see the hash rate dropping, we could pull the Merge forward,” says Tim Beiko, a computer scientist who coordinates Ethereum developers. “All the software is built with an emergency option.”
“We believe POW and POS will coexist for a period of time after the switch,” says Danni Zheng, vice president of BIT Mining, which is also expanding its staking services.
ETHEREUM’s shutting down of its old chain will shock the cryptomining industry. Mining equipment will be migrated to similar chains such as Dogecoin, Litecoin, and Monero to find a better use for their equipment. Bitooda’s chief strategy officer, Sam Doctor, says the hash rate on those other chains will increase by 5 to 10 times overnight. Overall revenue for this type of mining could drop by 90 percent, he says, pushing many miners out of business.
INVESTORS MAY BENEFIT from the Merge. Beiko predicts a 50% to 90% decrease in the number of new coins issued as rewards for ordering transactions on the Ethereum network, since the proof-of-stake chain will carry lower rewards.
The amount of Ether used for staking is expected to rise from 8% to 80% in the next two years, according to staking services provider Staked. This will reduce the available supply, potentially pushing its price higher.
It is likely that holders will be able to use the Ethers earned from ordering transactions, but not the Ethers that they stake-at least not until the next software upgrade, expected six months or so after the Merge. According to Kyle Samani, co-founder of Multicoin Capital, holders of Ether are likely to keep it longer than miners, who often have to sell some to cover electricity costs.
It is expected that Ethereum’s energy consumption will drop by more than 99% after the Merge. A validator can use a high-end laptop instead of a server farm to order transactions on the new proof-of-stake network.
“Even my daughter has picked up the ‘NFTs are boiling the oceans’ hysteria,” says Ben Edgington, lead product owner at ConsenSys, which builds infrastructure for the Ethereum blockchain. “I expect that freeing ourselves from the negatives of proof of work will definitely help make applications like DeFi and NFTs much more socially acceptable, leading to significantly accelerated adoption.”
A lot depends on whether the Merge goes smoothly. “If we do our jobs well, nobody will notice the moment that Ethereum moves from proof of work to proof of stake,” Edgington says.