Merger Brings Ethereum to Full Proof of Stake and Price Drops

The merger, as the Ethereum cryptocurrency drops proof-of-work for proof-of-stake validation, is complete. So far, all signs point to success, but not without a few footnotes that Ethereum investors should note.

Prior to early this morningEthereum was validated using proof of work (PoW), which required more electric power than some small countries to solve more and more mathematical problems to validate transactions.

Now under a proof of stake (PoS), Ethereum holders willing to shell out more than 32 ETH (about $48,000 currently) can become validators by staking their own cryptocurrency.

If randomly chosen to be a validator on a block, a staker is responsible for verifying the legitimacy of transactions in that block. Multiple validators are involved in verifying each block, which involves some simple math. If a positive consensus is reached, the block and its transactions are simply accepted on the blockchain.

If the block should not have been validated, or if a validator is wrong in some other way, a percentage – up to 100% – of their stake is lost and lost forever. By following the rules, bettors get paid a small percentage of newly minted Ethereum.

Classic miners are no longer needed, and instead people are risking their own coins to ensure the blockchain maintains its integrity. The more you bet, the more likely you are to be selected to validate and the more likely you are to win.

As miners no longer need to solve complex equations to validate blocks, Ethereum energy costs using PoS are expected to decrease by around 99.95%, according to the Ethereum organization. said. It’s just in time, as the Biden administration only released a report last week urging policy action against cryptocurrency miners.

This report echoed common concerns about PoW energy efficiency that it is inefficient and continually requires greater energy investments, which the White House says could derail efforts to move us to renewable energies. sources.

By CNBCthe now-merged Ethereum blockchain has already started processing proof-of-stake transactions in a way that has been described as “best-case scenario”, making Bitcoin the last of the greats PoW Energy Hogs.

Dogecoin, the second-largest proof-of-work cryptocurrency, consumes far less energy than Bitcoin, but even it isn’t immune to it. problematic levels electricity consumption.

What The Merge Doesn’t Do

The Ethereum organization said there are several things users believe the merger will simply accomplish. were not part of the scheme. Most notably, the merger would not speed up the Ethereum network substantially and it would still be expensive to add a transaction.

Gas fees are well known to anyone who has tried to buy anything using the Ethereum blockchain, used NFTs, etc. : this is what you have to pay to motivate someone to include your transaction in a block for validation.

The busier the Ethereum network, the higher the gas charges, and despite a massive reduction in the processing power needed to validate a block under PoS, the Ethereum organization says nothing has changed “that directly influences[s] network capacity or throughput. »

So for those hoping that Ethereum PoS would make transactions cheaper, sorry, those gas fees will still be much too high. Since the capacity and throughput of the Ethereum network are unchanged, don’t expect block processing times to be faster either.

“Historically, on proof of work, the goal was to have a new block every ~13.3 seconds. Under proof of stake, slots occur precisely every 12 seconds…that was a change quite insignificant and unlikely to be noticed by users,” the Ethereum organization said.

Your staked Ethereum has been Shanghaied

Perhaps the most notable, but least mentioned, issue with the PoS merger is that while those with at least 32 ETH in their wallet can place a bet, they cannot withdraw it or any of the winnings they accumulate by validating blocks. .

For this capacity, Ethereum’s 427,314 stakers (at the time of writing) will have to wait for the next update from Shanghai which, as of now, has no scheduled date.

By BloombergShanghai is at least six months away, and once live, withdrawals will still be capped so that too many digital coins aren’t withdrawn at once.

It remains to be seen if this news will cause a bit of hesitation from stakers, but since the proof-of-stake switch was flipped this morning, Ethereum has lost around 6% of its value, having rebounded from a larger drop.

But you know what they say: buy the hype and sell the news – so the plunge isn’t that surprising. ®