by Taylor Locke
The Ethereum community is more excited than usual. On weekly Zoom calls dedicated to technical matters, Ethereum developers are celebrating in jubilation as they move towards “merger” – an event hailed as the most significant technological upgrade in the history of cryptocurrencies
But what exactly is the “merger”? Those who follow news from the cryptocurrency space have probably heard of it and know that it represents a shift to something called transaction validation via “proof of participation”.
Once Ethereum moves to a transaction validation mechanism via proof of participation after the merger, the network will rely on trusted entities known as validators to verify transactions and add new cryptocurrencies to the blockchain. A validator will be randomly selected each time a new cryptocurrency is to be added, which will occur every 12 seconds or so after the merger.
READ ALSO: What will follow the Ethereum Merger
Anyone can apply to become a validator by depositing 32 Ethereum (about $61,000 at mid-August prices) – an amount meant to ensure that participants have a stake in the network’s success – and operate with up-to-date software.
Why is the merge both important;
First, Ethereum is the most used blockchain and powers Ether, the second largest cryptocurrency, with a market capitalization of $202 billion. Ethereum also hosts numerous decentralized applications (dApps) and decentralized finance (DeFi) protocols and validates the authenticity of millions of non-exchangeable tokens (NFTs).
This means that the merger outcome will affect not only the Ethereum blockchain, but a wide range of products and services based on it. And given Ethereum’s size and influence, the fate of the merger is likely to have significant implications for the broader cryptocurrency space.
Meanwhile, the transition to proof of participation will affect thousands of people who produce Ether, many of whom have spent significant capital in the effort. Most will likely switch to producing other currencies that use the proof-of-work transaction validation system, but the merger is still likely to ultimately hurt them financially.
But while the merger is bad news for producers, the vast majority of the Ethereum community and beyond sees the end of cryptocurrency production as a good thing – helping both the planet and Ethereum’s reputation. “The transition from proof of work to proof of participation [θα] reduce Ethereum’s overall power consumption by 99.9% or more,” Ethereum’s lead developer Preston Van Loon told Fortune.
Another important consequence of a successful merger will be a reduction in the issuance of new Ether cryptocurrencies. After the merger, Ether is likely to become “the largest deflationary currency,” according to Lucas Outumuro, head of research at blockchain intelligence firm IntoTheBlock.
In his latest newsletter, Outumuro predicts that because the cryptocurrency will no longer be awarded to producers, the amount of new Ether issued will drop by about 87%. “ETH net issuance is now forecast to range between -1.5% and 0.5% based on data from the last three months, compared to -4.5% to -0.5% using first and second quarter data,” he wrote on August 19.
This decline in new cryptocurrency issuance, in turn, means that Ethereum could eclipse Bitcoin in market capitalization over the next 12 months, according to an August 12 report by research firm FSInsight.
Finally, the merger is seen as a critical step in Ethereum’s overall growth. According to Ethereum creator Vitalik Buterin, the network is now about 40% complete and after the merger, “Ethereum can reach up to 55% completion,” he said.
Also on Ethereum’s roadmap are four other phases happening in parallel, all of which aim to make Ethereum much faster, more secure and more decentralized. “At the end of this roadmap, Ethereum will be a much more scalable system… At the end, Ethereum will be able to process 100,000 transactions per second,” Buterin said.
Why is the merge is controversial
While most of the Ethereum community strongly supports the merger, a vocal minority denounce it as a colossal mistake. While some of this criticism is rooted in self-interest – i.e., producers are concerned about their lost income – there are also ideological concerns.
Specifically, critics say that the proof-of-participation system will make Ethereum more centralized and less secure, and point to the dominance of a few entities holding “authenticated” Ether cryptocurrencies. As data firm Messari pointed out, Lido Finance controls 31.2% of all validated Ether, while Coinbase controls 14.7% and Kraken 8.5%.
These concerns draw fear that law enforcement authorities may treat validators as a target for censorship or surveillance. Buterin himself referred to this on Twitter. He advocated for the destruction of the cryptocurrencies of any validators that would censor the Ethereum protocol if requested by US regulators.
“I believe the Ethereum community is strong enough to fight against basic-level censorship,” EthHub co-founder Anthony Sassano tweeted on August 16. “Bitcoin is prone to the same censorship risks as Ethereum – no matter if it’s PoS [proof of stake] or PoW [proof of work]”.
Even the CEO of Coinbase, Brian Armstrong, claimed on 17 August that he would rather stop the cryptocurrency exchange than comply with possible censorship enforcement.