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The cryptocurrency community is abuzz over what could turn out to be a watershed event in the burgeoning world of digital currency: a major upgrade – dubbed “the merger” – to the Ethereum blockchain. Crypto enthusiasts say the merger, which went live on Thursday, will significantly reduce the environmental impact of cryptocurrency mining and more broadly to enhance its usefulness as a means of conducting financial transactions, among other uses.

But what exactly is the merger, and how could it change the future of crypto?

What is Merger?

Ethereum, which was started by Canadian computer programmer Vitalik Buterin in 2015, is a blockchain (or digital ledger) used when cryptocurrency investors buy ether. It is one of the most widely used blockchains in the world, second only to the bitcoin network. There are over 71 million crypto wallets on the Ethereum blockchain today, according to the Ethereum Foundation, a group of developers who now oversee the blockchain.

Think of the Merge as the next generation, or version 2.0, of ethereal. After nearly two years of thinking about and testing a new way to transact, Ethereum developers say it’s finally ready for prime time. Simply put, the merger aims to reduce the number of people and computers needed to add another block of data to the Ethereum network.

The change is called merging because previously there were several ways to create a new block of data. The developers have now combined (or merged) these methods into a single process.

When is it supposed to happen and why now?

The merger was officially launched on Thursday, and so far has had no discernible impact on the value of popular cryptocurrencies. Bitcoin and Ether were down more than 1% hours after the update went live.

The merger is happening now because Ethereum is mature enough to handle financial payments, store non-fungible tokens, exchange cryptos and host smart contracts, said blockchain expert Merav Ozair. But streamlining the process of adding data to the blockchain could make these and other transactions much faster, the developers say.

Ethereum can perform 15 transactions per second in its current form, said Ozair, founder of startup Blockchain Intelligence. But if the merger is successful, the blockchain could eventually handle up to 100,000 transactions per second — “far beyond what Visa and Mastercard can do,” she said.

How would fusion reduce carbon emissions?

In a blockchain network, transactions are not verified by a bank, credit card company or other third party. Rather, it relies on a network of computers in competition to solve complex problems in exchange for tokens. It takes thousands of computers to verify transactions on the Ethereum blockchain, a process known as “proof of work.”

All of these powerful server computers working together require large amounts of energy. The Ethereum blockchain uses approximately 112 terawatt hours of electricity per year – roughly the same amount of energy used to power the Netherlands. This level of energy consumption releases approximately 53 metric tons of harmful carbon emissions into the environment each year, the same amount that Singapore produces in a year.

The merge replaces the proof-of-work system with an alternative method called “proof-of-stake”. In this system, cryptocurrency owners known as “validators” put up a share of their coins in exchange for the right to be chosen at random to verify transactions and record them on a new block. Since proof-of-stake means fewer people using their computers to verify transactions, fewer terawatt-hours are burned.

Using proof-of-stake, the merger is expected to reduce Ethereum blockchain power consumption by 99.9%, the developers said.

Will the merger make it safer to use cryptocurrency?

Very probably. As of December 2020, Ethereum developers are essentially running two different versions of the blockchain at the same time. The Beacon version was used to test the proof-of-stake system, while the Mainnet version carried on as usual using proof-of-work. But having both versions running gave hackers twice as many entry points to potentially attack Ethereum.

With the merger now complete, Mainnet has been taken down and all financial transactions live only on Beacon. Deleting a version of the chain, combined with having a small group of validators, will reduce the chances of a hacker harming the blockchain, the developers said.

It’s important to note that these changes have yet to be proven to make accounts more secure, as they haven’t been tested on a large enough scale. Ethereum developers have released a Attention on the foundation’s website, explaining how hackers can try to scam users for digital currency.

Are there any risks or disadvantages?

The shift to a proof-of-stake system will likely create haves and have-nots among validators and anyone using Ethereum, said Bryan Daugherty, global director of public policy for the BSV Blockchain Association.

Indeed, to become a validator on Ethereum, someone must invest at least 32 ethers – around $52,000 – and agree to keep these tokens hidden in a separate account. Under those rules, anyone who doesn’t have that much cryptocurrency can’t be used to validate Ethereum transactions, Daugherty said.

“The way I see it is that the plan now is to eliminate mining altogether and allocate those coins to those in the most important positions,” he said.

Agreeing to hide ether on exchange could also come back to haunt validators, especially if the price of ether drops dramatically and someone wants to sell, Daugherty said.

“You make people lock up your coins,” he said. “That seems very concerning to me.”

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