The Ethereum blockchain, the most important behind bitcoin, is about to undergo the beginnings of a major update.
Nicknamed the “fusion”, Ethereum is moving to a more energy-efficient method of validating transactions that take place on the platform, known as proof-of-stake.
The upgrade is similar to how the transition from using dial-up modems to fiber optics has allowed the Internet to be used for a wider variety of things, such as video, online storage, and music streaming, Greg King, founder and CEO of Osprey Funds, tells CNBC Make It.
Here is an overview of what the merger means and how it will affect crypto investors.
The merger will move the blockchain from a proof-of-work (PoW) model to a proof-of-stake (PoS) model. Both are algorithms used to allow users to add new cryptocurrency transactions and keep track of them on a blockchain network.
The current proof-of-work model requires huge amounts of energy to power computers that race to solve complex mathematical equations to validate transactions.
Proof of Stake, on the other hand, requires users to have a “stake” in the blockchain, as the name suggests.
This means that Ethereum users will have to make quite a large investment to authenticate transactions. However, this model should be much less energy-intensive.
Although the Ethereum merger is not expected to speed up the network or reduce transaction costs immediately, investors may see the benefits over time.
“While no outcome is certain, the merger could be bullish for long-term crypto investors due to the groundwork it lays for future upgrades in speed, fees, and ecosystem development. “, says King.
Faster transactions and lower fees could also lead to more users, which could affect the value of Ether, Ethereum’s native cryptocurrency, which investors use to transact on the platform. .
If the number of investors increases, the supply of ether should decrease, says Vladimir Gorbunov, CEO and founder of the MetaFi ecosystem Choise.com. And as the supply of Ether decreases, the value of individual coins could increase, which would be good news for investors.
Ether is valued at around $1,600 per coin as of September 14, 2022, according to Coin Metrics – up from an all-time high of around $4,892 in November last year.
As mentioned earlier, the merger should make the blockchain more energy efficient.
Currently, Ethereum’s carbon emissions are comparable to those of Singapore and its total energy consumption is comparable to that of the Netherlands, according to its website.
The merger is expected to reduce Ethereum’s carbon footprint by more than 99%, which could make the platform more attractive to environmentally conscious investors.
“The merger will definitely make Ethereum more secure,” says Gorbunov. After the merger, the initial investment required to validate transactions on the blockchain would cost around $55,000 or 33 ETH, he says.
It’s a cost everyone, including hackers, would have to bear to gain access to the network in the first place. Due to this barrier, Gorbunov expects Ethereum to become much more secure.
However, the blockchain will still be vulnerable to hackers, King warns.
“After the merger, Ethereum’s susceptibilities may differ due to the underlying network design change, but the security risks will always remain the same,” he says. “Cybersecurity risk is always paramount.”
Remember that ether, like many cryptocurrencies, is a highly volatile asset that is subject to unpredictable fluctuations in value with no guarantee of making a profit. Experts recommend not investing more in these types of assets than you are willing to potentially lose.