Caution: (ETH) Merge Ahead

Caution: (ETH) Merge Ahead

Ethereum*, which has been described as “the world’s most programmable blockchain,” is powered by a decentralized and open source blockchain with smart contract functionality. Many dApps are powered off the Ethereum platform, and ETH – the official coin of Ethereum – is the second most dominant cryptoasset by percentage of total market capitalization. In the coming weeks, the Ethereum network will undergo “The Merge” in what is said to be the most significant update to a blockchain network in crypto history.

*Need a refresher on crypto terminology? View our Digital Economy Glossary.

What is The Merge

The impending merge, which has experienced numerous delays, is garnering increased media attention as its stands to mark a transformative event in the crypto ecosystem. As the network deploys the Ethereum 2.0 upgrade, the purpose of The Merge is to transition the Ethereum from a Proof of Work (POW) consensus mechanism to a Proof of Stake (POS) mechanism. This upgrade should effectively eliminate the networks carbon footprint by drastically reducing the energy consumption per transaction and thereby increase the network’s energy efficiency and sustainability. It also sets the stage for future upgrades to the network, currently impossible under the POW mechanism, that will allow Ethereum to increase its scalability. Watch the Finematics video below for The Merge explained in more detail.

The Start of a More Sustainable, Eco-Friendly Ethereum

A common criticism of Bitcoin and Ethereum relates to the energy consumption and carbon footprint the networks require.  Both blockchain networks operate under the POW system, which is the driver for heavy energy consumption and therefore the lack of sustainability.

The chart depicts how Bitcoin and Ethereum combined would rank among the electrical energy consumption of entire nations.
Source: Digiconomist (Accessed 09/02/2022); EthereumEnergyConsumption.com

According to Digiconomist, at the time of writing this article, the annualized total Ethereum footprints for electrical energy and carbon footprint are comparable to the power consumption of Chile (77.14 TWh) and footprint of Hong Kong (32.02 Mt CO2), respectively. On average, a single Ethereum transaction has the electrical footprint equivalent to the power consumption of an average US household over 6.65 days (196.79 kWh) and the carbon footprint equivalent to more than 243,000 VISA transactions or watching more than 18,000 hours of YouTube.

The result of The Merge should be a more sustainable, eco-friendly era for the Ethereum network. The POW process is highly energy intensive, as crypto miners extend computational energy to solve complex mathematical problems to mine the blockchain. As noted above, the Ethereum network under the POW system required similar annual electricity usage as the entirety of a medium-sized country. According to the Ethereum Foundation, after The Merge, Ethereum’s energy requirements are expected to reduce by 99.95% (0.01 TWh/Yr), requiring annual electricity usage closer to that of a small town (e.g., 2100 American homes). Thus, after The Merge, Ethereum.org touts Ethereum “should become an environmentally-positive technology.”

The  chart depicts the estimated annual energy consumption in TWh per year for  various industries (retrieved in June 2022 by Ethereum.org).
Source: Ethereum.org (Accessed 09/02/2022)

How Important is Ethereum to Crypto?

Transitioning to POS is not the end of the road for the Ethereum network. There are additional planned upgrades that aim to make Ethereum into the “internet of crypto,” by increasing throughput and reducing usage fees to achieve the full scale, security, and sustainability outlined in its Ethereum vision. At present, Ethereum is already a critical component in the crypto space, and these upgrades seek to extend this dominance. According to Barron’s, the daily transaction volume that flows through Ethereum exceeds $3 billion. Further, approximately $60 billion in cryptoassets sit on its blockchain via third-party dApps powered by Ethereum. According to Defi Llama, more than 50% of all decentralized finance (DeFi) activity is built on the network. With a market capitalization of almost $200 billion, after Bitcoin (BTC), ETH is the second largest cryptoasset.

The graph on the left depicts the percent of Decentralized Finance (DeFi) activity that is locked on all blockchains as of September 2, 2022. The graph on the right depicts the major cryptoassets by percentage of total market capitalization as of September 2, 2022.
Sources: Defi Llama (Accessed 09/02/2022) and CoinMarketCap (Accessed 09/02/2022)

Is it all Sunshine and Roses?

Ethereum’s dominance in the space paired with the significance of The Merge indicates the success or failure of the Ethereum 2.0 upgrade may be a pivotal moment for crypto. While BTC and ETH, along with other risk assets, have experienced a tumultuous 2022, in recent months ETH has been on the rebound as investors display hopeful sentiment surrounding The Merge. In addition, the Ethereum Naming Service (ENS) has reported that ENS domain registration numbers have been rapidly accelerating, with the ENS reporting its third highest month of revenue in August.

This graph depicts the price of Bitcoin (BTC) and Ethereum (ETH) in terms of USD.
Source: FactSet Research Systems (Accessed on September 2, 2022)

However, the success or failure of The Merge will not affect ETH in a silo. Countless dAPPs, DAOs, and NFTs rely on the ETH network and would be impacted by any glitch in the upgrade. Additionally, crypto and NFT exchanges (e.g., Coinbase and OpenSea) will be impacted by the transition, along with numerous other companies directly (e.g., Companies formed for Mining ETH) or indirectly (e.g., NVIDIA) tied to the Crypto and Web 3.0 space. In our article “Crypto Crash and a LUNAr Eclipse,” we discussed the significant decline in assets and confidence in the crypto markets that has taken place over the last year. It is likely that all eyes will be on Ethereum as it attempts to make The Merge, setting up a pivotal moment in drawing investors back into the space or bolstering the arguments of digital economy doubters.

Sources

Beekhuizen, C. (2021, May 18). Ethereum foundation blog. Ethereum’s energy usage will some decrease by ~99.95% https://blog.ethereum.org/2021/05/18/country-power-no-more

Chains. Defi Llama. Retrieved September 2,2022 from https://defillama.com/chains

Ethereum Energy Consumption. (Last updated 2022, September 1) Ethereum.org. Retrieved September 2, 2022 from https://ethereum.org/en/energy-consumption/

Ethereum Energy Consumption Index. Digiconomist. Retrieved September 2, 2022 from https://digiconomist.net/ethereum-energy-consumption

Global Cryptocurrency Charts. Coinmarketcap. Retrieved September 2, 2022 from https://coinmarketcap.com/charts/

Light, J. (2022, September 2) Ethereum’s Big Moment is Coming With ‘The Merge.’ What It Means for Crypto. Barron’s. https://www.barrons.com/articles/ethereum-aims-to-become-the-internet-of-crypto-with-the-merge-51662096601?st=vihrexwehk0roan

Muzzy, E. (2020, May 12). What is Ethereum 2.0.Consensys. https://consensys.net/blog/blockchain-explained/what-is-ethereum-2/

Nelson, J. (2022, September 1)Ethereum’s Name Service Touts Third-Highest Monthly Revenue  as Merge Approaches. Decrypt. https://decrypt.co/108787/ens-touts-third-highest-month-of-revenue-as-ethereum-merge-approaches

The Merge. (Last updated 2022, September 1)Ethereum.org. Retrieved September 2, 2022 from https://ethereum.org/en/upgrades/merge/

The Merge is Near. Consensys. Retrieved September 2, 2022 from https://consensys.net/knowledge-base/the-merge/

Vergolina, V. (2022, August 30). Anticipating the Coming Ethereum Merge. Bloomberg. https://www.bloomberg.com/news/articles/2022-08-30/ethereum-eth-merge-what-to-expect

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