Last week, crypto giant Ethereum achieved a long-awaited milestone, upgrading its technological infrastructure to greener software. The new infrastructure, called Merge, reduced Ethereum’s energy consumption by 99%. While this is a highly anticipated change in the crypto market, it comes with its risks.
What has Ethereum changed?
Before we talk about the merge, let’s talk about what has changed on the Ethereum mainnet.
A mainnet is the blockchain technology responsible for transferring cryptocurrency from sender to receiver. Since the early days of Ethereum, proof-of-work mechanisms have been used to validate transactions and mine new coins.
However, to mine new coins, proof-of-work transactions required computers competing with each other to solve complicated math problems. Bitcoin also uses proof-of-work systems to validate new coins.
This process consumes terawatts of energy and releases megatons of carbon dioxide into the environment. According to Digitconomist’s Bitcoin Energy Consumption Index, it is estimated that bitcoin mining requires the same amount of energy to power a small country, around 130 terawatt hours.
Proof-of-stake mechanisms secure block transactions by requiring crypto holders to use their ether coins as collateral to validate new coins. So for Ethereum, the days of crypto miners and income crypto validators are over.
Validators add newly validated transactions to a common block, and a group of validators vote and agree that the transaction is legitimate. Once this happens, the block is closed and validators receive more coins in exchange.
The main difference between mining and validating is that crypto owners are rewarded for their stake in a proof-of-stake network versus being rewarded for computing power in a proof-of-work network.
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What is the merge?
The merger refers to the merging of Ethereum’s original mainnet with a separate, more energy-efficient, greener blockchain to create one chain. Ethereum’s blockchain powers much of the crypto market, including NFTs.
The founder of Ethereum, Vitalik Buterin, had visions of turning Ethereum’s consensus layer into a proof-of-stake system back in 2014, a year after founding Ethereum. The new infrastructure results in a significant reduction in Ethereum’s energy consumption amid mounting concerns and criticism from US officials and environmentalists about the environmental impact of crypto mining.
The merger is good news for potential crypto investors who have had cold feet over crypto’s impact on the environment. This is also good news for current investors, as the merger has no impact on working capital.
Just before the merger took place, Ethereum saw its price surge as investors and crypto enthusiasts were confident that the new infrastructure would give Ethereum the upper hand to outperform Bitcoin. The hype surrounding the merger gave investors hope that all cryptocoins would rise in price and boost the ailing market.
But that didn’t happen. Ethereum crashed, as did the rest of the crypto market.
What does the merger mean for the crypto market?
The Merge was an impressive feat of technology and a victory for Tree Huggers. However, slight changes in terminology and major changes in Ethereum’s infrastructure are changing the meaning of investing in crypto.
Contrary to blockchain dogma, proof-of-stake networks and crypto investors may have to share the pavement with a third wheel – the US government. After the merger, the U.S. Securities and Exchange Commission added a new wrinkle to the plan to introduce proof-of-stake infrastructure.
Blockchain is all about decentralization, which means that the government should be involved as little as possible or not at all. However, SEC Chairman Gary Gensler concluded that proof-of-stake transactions mean tokens could be considered securities and not currencies.
Speaking before a Senate committee on Banking, Housing and Urban Affairs last week, Gensler told reporters, “From the coin’s perspective…this is another indication that the investing public under the Howey Test expects gains based on the efforts of others.” ‘ according to the Wall Street Journal.
Gensler hinted that any cryptocurrency, not just Ethereum, that uses proof-of-stake infrastructure could qualify as a security and pass the Howey test. The Howey Test is a U.S. Supreme Court decision that determines whether a transaction is an “investment treaty” and subsequently requires government regulation, something crypto investors avoid like the plague.
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This assertion means that staking coins in a proof-of-stake system should involve investor protections not suited to blockchain transactions. As a result, Ethereum is down 11% and Bitcoin is down 8%.
Overall, the crypto market fell well below its all-time high of $2.9 trillion in 2021 to just under $1 trillion in the first half of 2022. Crypto market experts claim the drop was a result of shifts in US economic conditions, rising inflation and now the SEC is raising concerns about the legality of post-merger crypto trading.
Crypto trading may not be the one-way street to millionaire status it used to be, at least for now.