Economy & Market
Ethereum had completed its mainnet merge on September 15 this year. It is deemed to be a substantial event in the history of Cryptocurrencies. The way Ethereum fundamentally works has now changed. But what is the Ethereum merge and why does it matter?
Why Ethereum merge?
In its simplest form, the Ethereum merge is essentially an upgrade of the Ethereum blockchain, which may explain why it is also known as “Ethereum 2.0”.
Cryptocurrencies have been criticized for using large amounts of electricity and computer power that may harm the environment. The crypto market is growing all the time and there are countless cryptocurrencies out there, but Ethereum (ETHUSD) alone consumes 78 terawatt hours of electricity each year, which is about the same as Hong Kong's annual emissions. Thus, the merge may be necessary. This could explain why the second largest cryptocurrency has promised to get rid of 99% of energy consumption by eliminating energy-intensive code. This elimination is therefore feasible through the merge which aims at reducing energy consumption and environmental impact, improves network security and scalability, and allows developers to add new features to the Ethereum network.
How does the merge happen?
The merger is done by combining another blockchain created in 2020 called Beaconchain with Ethereum's mainnet blockchain. The relationship between the two is: Ethereum mainnet is considered an execution layer that allows data transfers to occur on the blockchain. Ethereum, on the other hand, works on blockchain technology, so its transactions need to be verified, so the beacon chain is a consensus layer (execution layer) that verifies or invalidates transactions that are supposed to take place on the mainnet. Ultimately, this process must be done while protecting transactions from counterfeiting and cryptocurrency theft. To that end, Ethereum mainnet uses a Proof of Work (PoW) system. This is because PoW includes a mechanism called "mining". It uses energy-intensive computation to validate transactions by using nodes (intersections in data communication) to solve complex cryptographic algorithms and mathematical problems.
To combat environmental damage, the Ethereum merge will replace PoW with Proof of Stake (PoS). This can have a significant impact on the environment. PoW requires energy-consuming nodes to solve encrypted formulas, but PoS does not. The PoS consensus therefore protects the network by requiring users to stake a portion of their own cryptocurrency to increase the chances of being chosen by the system as a block validator. energy consumption is expected to be reduced by about 99%.
Market impact on ETH?
Ethereum started with an initial supply of 72 million Ether (ETH). In the original PoW model, a large portion of this token supply is used to incentivize miners to secure the network. After switching to PoS, mining rewards will no longer be issued. As a result, annual ETH issuance will be reduced by approximately 90%. According to the law of supply and demand, it could lead to an increase in ETH price. However, financial markets are unpredictable and volatile and are affected by many other factors.
The merge is a significant upgrades to the Ethereum network. It was designed to implement new scaling solutions for better scalability. After completing all listed upgrades, Ethereum will likely be primed to take on more transaction loads without compromising security or decentralization.