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The Merge: Changing Airplane Engine Mid-Flight

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Stockholm (HedgeNordic) – Last week, Ethereum, the world’s second-largest blockchain, completed “the merge,” a software update designed to significantly reduce the intensive energy consumption associated with Ethereum mining. In crypto jargon, Ethereum successfully transitioned from a proof-of-work to a proof-of-stake system. What is the significance of this transition for the cryptocurrency crowd? HedgeNordic reached out to two crypto-knowers, Walter Estlander of Estlander & Partners Investment and Ulrik Lykke, to discuss the “merge.”

“Ethereum Network has finally transitioned to proof-of-stake, which will improve the speed, efficiency, and scalability of the network and will redefine the fundamentals of the protocol,” says Lykke. Both Bitcoin and Ethereum have been relying on a process called proof-of-work, where “miners” operated and safeguarded their blockchains by approving new transactions by solving complex math puzzles – and, in the process, getting rewarded for their efforts with the blockchain’s currency.

“Ethereum Network has finally transitioned to proof-of-stake, which will improve the speed, efficiency, and scalability of the network and will redefine the fundamentals of the protocol.”

Solving these puzzles, however, requires an enormous amount of energy. Under the proof-of-stake system, “miners” are replaced by “validators,” who deposit coins into the Ethereum network as a type of security deposit in order to be able to validate transactions. And just like “miners,” “validators” earn rewards for validating transactions. “The Merge will essentially move Ethereum away from mining, where instead of using energy to mint new ETH, network participants will instead be able to earn passive income by staking their ETH,” explains Lykke.

“The key change is adopting the “Proof-of-Stake” mechanism to validate transactions, which makes the whole chain more efficient,” argues Walter Estlander. The “merge” upgrade process, the switch from proof-of-work to proof-of-stake, has been years in the making. “It is a big software update to the Ethereum blockchain,” Estlander tells HedgeNordic. “The name “merge” was chosen since the change merges two parallel chains into one.”

“A simplified way at looking at the update is that it is similar to “changing the engine of an airplane mid-flight.”

“The successful Merge of Ethereum is one of the biggest achievements made for open source development,” emphasizes Lykke. “Changing the consensus mechanism without any hitches is much like changing the engine of a plane while being mid-air,” he adds. Walter Estlander makes a similar “airplane” reference, saying that “a simplified way at looking at the update is that it is similar to “changing the engine of an airplane mid-flight.”

Implications of the Ethereum Merge

The Ethereum “merge” is mainly about efficiency, according to Estlander. “Previously Ethereum used as much electricity as a medium-sized country,” he says. “Prior to the Merge, Ethereum consumed around 85-ish TWh of electricity each year, roughly equivalent to the consumption of Finland. After the merge, however, usage will drop by more than 99%.” Lykke shares the same opinion, saying that “one of the biggest caveats of the Merge is that it will reduce the energy spent maintaining Ethereum’s network by roughly 99%.” According to Lykke, “the energy debate is sometimes wildly misunderstood and cannot be held in isolation but given authorities starting to focus on the topic and the merits of Ethereum, it is most likely a net positive for the protocol.”

“Prior to the Merge, Ethereum consumed around 85-ish TWh of electricity each year, roughly equivalent to the consumption of Finland. After the merge, however, usage will drop by more than 99%.”

This transition “makes Ethereum competitive again from a technology standpoint,” says Estlander. “The antiquated “Proof-of-work” mechanism that was used before is not viable anymore, even if it is still used by Bitcoin,” he acknowledges. “The success of the Merge manifests years of hard work of the Ethereum community and cements the Ethereum Foundation’s ability to innovate and change direction with the project – a very critical necessity for a digital asset that competes and feature functionality,” concludes Lykke.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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