Financial services giant, Citigroup, addressed the upcoming Ethereum “Merger” and explained the great potential it creates for the network.
As is already known, the transition from the proof of work mechanism to the proof of participation mechanism, known as the “Merge”, is expected to take place around September 15.
From the eyes of the Ethereum Foundation
Below we present how the Ethereum Foundation itself explains the “Merge”:
“The “Merge” represents the connection of Ethereum’s existing execution layer (the Mainnet we currently use) to its new proof-of-participation consensus layer, the Beacon Chain. It eliminates the need for energy-intensive mining and instead protects the network using ETH that have been staked. A truly exciting step towards realizing Ethereum’s vision of more scalability, security and sustainability.
Right now the Beacon Chain operates separately from the Mainnet. The Ethereum Mainnet – with all accounts, balances, smart contracts and blockchain state – continues to be secured with a proof of work mechanism, while the Beacon Chain operates in parallel using the proof of participation mechanism. The “merger”, which is approaching, is when these two systems finally merge and the proof of work is permanently replaced by the proof of participation.
Let us consider an analogy. Imagine Ethereum is a spaceship that is not quite ready for an interstellar journey. With the Beacon Chain, the community has built a new engine and a hardened hull. After considerable testing, it’s almost time to replace the new engine with the old one mid-flight. This will merge the new, more efficient engine with the existing ship, ready to cross some serious light years and conquer the universe.”
Citigroup’s remarks
After the clarification on the “Merge”, we return to our topic.
Citigroup published a research report examining the effects of the “Merge”, which include lower energy intensity, the transition to a deflationary asset and a potential roadmap for a more scalable future through sharing.
The merger means that block time will drop to 12 seconds from 13 and this could lead to speed increases, said the Citigroup report, which goes on to say: The transition from PoW (proof of work) will reduce total ETH issuance by 4.2% per year and thus ETH will eventually become deflationary, which enhances its likelihood of also becoming a value storage asset.
“The transition to PoS will turn ETH into a ‘performance asset’ with cash flows, Citigroup said, which can be interpreted as a form of revenue for the network. The existence of potential cash flows will enable the use of a range of valuation methods not available for the blockchain now, the bank added.
Because Ethereum will be efficient and deflationary, it is less likely to be the blockchain with the highest turnover. Given its “enhanced value storage properties”, it is more likely to be where an increasing amount of total value is secured and transacted that will have been locked into the network, Citigroup’s note said.
In addition, Citigroup noted: “ETH post-merger could be viewed as a relatively energy efficient and environmentally friendly cryptocurrency asset, as energy expenditure is expected to be reduced by 99.95%.”
An important moment in the history of cryptocurrencies
On August 11, prominent MIT artificial intelligence researcher Lex Fridman reported that he had a conversation with Ethereum creator Vitalik Buterin.
Interestingly, Fridman, who is not particularly prone to hyperbole, called the merger “an important moment in the history of cryptocurrencies.”
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