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Ethereum Briefly Tops $2,000 as Historic ‘Merge’ Upgrade Draws Closer

Published 13/08/2022, 13:56
Updated 13/08/2022, 13:56
© Reuters

By Yasin Ebrahim 

Investing.com -- The “Ethereum Merge” an upcoming unprecedented network upgrade, promises a new dawn for ETH, the second most valuable crypto, that could propel it to the top of the sustainable crypto investment list, banish its miners and possibly spawn a rival crypto.

The proposed upgrade has been years in the making is now just a little over a month away, with a tentative launch date set for Sept. 19. Optimism over the upgrade has propelled ETH to briefly top $2,000 for the first time in more than two months.

Cutting the amount of energy used to power the Ethereum blockchain, or network, is at the heart of this change.

Under the proposed upgrade, Ethereum will move on from the proof of work consensus – the existing mining-driven method to validated transactions on the Ethereum network -- to a new proof of stake consensus. 

“The merge will move the consensus mechanism from proof of work, which is mining driven to proof of stake, which is stake-weighted random lottery driven consensus,” Bill Birmingham, Chief Investment Officer at Osprey Funds, a crypto investment firm, told Investing.com’s Yasin Ebrahim in an interview on Friday. “This is really driven primarily by environmental concerns.”

Miners have long been responsible for the upkeep of the network by reaching a consensus or agreement on whether transactions – grouped in blocks on the network -- are valid or not.

These miners receive a portion of the transaction fees, or block reward, for keeping the network secure and running smoothly. But they must win the right to validate a block by solving complex puzzle as quick as possible. It is this computational footrace against each other -- where puzzle solving speed is determined by expensive, energy-hungry hardware -- that has given crypto a bad reputation.  

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The merge will “eliminate the electricity consumption generated in the process of mining to confirm blocks in the proof of work consensus,” Birmingham said.

Proof of Stake to Give Ethereum the Sustainability Edge?

In the proof of stake chain, miners are referred to “validators” and tasked with the same responsibility of ensuring the upkeep of the network, but the route to winning the right to validate a block differs.

Under the proof of stake consensus, wining a block doesn’t depend on raw computing power, but on the amount of ETH the validator has “locked up” or staked on the network. The more ETH staked, the higher the odds of earning a block reward. if validators mess up, however, or fail to accurately validate blocks, they may lose some or all their stake.

The shift in the way block rewards are earned ensures the proof of stake consensus “uses much less computing power and therefore much less electricity,” Birmingham said. 

This promise of a less energy-sapping network could go a long way toward attracting institutional investors, who have remained on the side lines wary of the ‘crypto is bad for the environment' narrative.

“No one wants to be on the wrong side of shareholders when that list of published assets come out,” Birmingham added, the merge will "absolutely check a box for institutions to become involved with ETH.”

The move to proof of stake may also be good news for the price of ETH as validators - unlike miners in the proof of work chain - are incentivized - to ‘hodl’ rather than sell.

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“In proof of stake when a mining pool generates a reward for creating and validating a block, they immediately sell that to cover their costs and to lock in their return into the market,” Birmingham said.

“That's a selling pressure on the system, whereas in proof of stake, there's an incentive to hold your stake, take your rewards, and add them to your pool, increasing your total stake and [chances of validating blocks],” Birmingham added.

Bets on Miners Fighting the Merge Behind ETH’s Recent Rally?

Miners have grown to become a powerful force on the Ethereum network and are unlikely to go quietly when faced with the threat of extinction. Many expect them to fight back against the merge, potentially causing a split in the network, or hard fork, that could spawn a new crypto.

“The miners, given the level of capital they've invested and how much they have at stake, aren’t going to roll over. They’ll likely fork Ethereum and keep building blocks on the Ethereum proof of work network,” Birmingham said.

It wouldn’t be the first time that a civil war on the Ethereum network has resulted in a split and spawned a new crypto.  

Following the hack of The DAO, a decentralized venture fund operating on the Ethereum blockchain in 2016, there was disagreement over how to proceed. Some developers backed a move to erase the hack from the ledger and return the stolen crypto, while others – the so-called Ethereum purists - argued that the ledger should never be altered.

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The most popular decision among developers was to split or hard fork the Ethereum network erasing the hack from the ledger and returning the stolen ETH.

Ethereum Classic, supported by purists, was created and freely distributed to holders of ETH.

Some are betting that this could occur again and are piling into ETH in the hope of receiving the post-merge equivalent of ETH on proof-of-work network.

“[Y]ou may want to own a large amount of ETH going into the merge because you'll get an equal amount of that ETH in the proof of work chain, and if it has any value, you just basically got free money that you can try to sell to people who believe in that [proof of work] chain.”

A hard fork after the merge, however, will spur “chaos because two chains will basically be competing for legitimacy,” according to Birmingham, but “ultimately the proof of stake chain will emerge as the true Ethereum chain.”

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