In the coming months, Ethereum is poised to make the biggest change in the cryptocurrency ecosystem's history in nearly a decade.
Ethereum is blockchain technology-based computer software that uses a digital ledger to record transactions. Over the years, Ethereum has become the most popular ecosystem for a growing array of commercial crypto assets and applications, including decentralized applications (dApps), NFTs, and DeFi.
Ethereum is a network that is constantly being improved and developed by the worldwide developer community, and is processed by validators, which we also call global miners. Miners verify transactions on the network and receive Ether as a reward in return. This mechanism is called "Proof of Work", which Bitcoin also uses.
As we mentioned above, developers working on developing the Ethereum software make periodic updates to the network, but this is the first time such a major update will occur this year.
This update, called “Merge”, will remove miners and replace them with stakers.
To confirm transactions on the network, miners use millions of powerful machines to solve complex calculations, which consumes a lot of energy. One of the biggest criticisms leveled at major cryptocurrencies like Bitcoin and Ethereum is this energy consumption. Now, with this transition, Ethereum will be getting rid of its energy-intensive structure.
On the other hand, stakers will be able to verify transactions simply by depositing Ether into the protocol, without the need to use any powerful devices. The test of this has been going on since December 2020 on the so-called Beacon Chain. Anyone who wishes can use their existing digital wallet to stake Ether in this test system called Beacon Chain. After the merger, these people will be randomly selected by the network and will start verifying transactions. This mechanism is called “Proof of Stake”. According to Beaconcha.in data, a total of over 350,000 validators have now staked Ether on the Beacon Chain.
What are the possible worst-case scenarios?
Ethereum's market cap of over $400 billion depends on this merger going smoothly. Not only that, but Ethereum and its thousands of business models and the fate of millions of users also depend on a smooth transition. According to DappRadar data, there is a TVL (total locked value) of $125 billion in protocols on Ethereum. Similarly, the billion-dollar NFT market is mostly built on Ethereum.
Analysts say that no major transition of this scale has ever occurred in the history of blockchain.
There is also the possibility of things going wrong in such a big transition. We have compiled possible worst-case scenarios for you below.
Bugs, attacks, and forking
There may be software bugs or attacks during the migration, or miners may create an alternative Ethereum network. For example, an error occurred during the network update in 2020 split Ethereum in two, causing great damage to the DeFi ecosystem.
Binance, Coinbase and most centralized crypto exchanges are expected to stop withdrawing and depositing Ether during the “merger” as a precaution. DeFi apps can also pause if something goes wrong.
Analysts state that such large chains should be very careful in their updates. At the end of the day, there is the possibility of serious damage to an entire ecosystem.
The segment that causes the most concern is MINERS. Many may leave the network just before the merger, thinking they can make more money by selling their equipment rather than waiting to receive the Final rewards. A very sharp drop in the network's mining power, or hash rate, could weaken Ethereum's security and spell disaster for the various applications that use the network. Ethereum's core developers have come up with a plan for this scenario. “If we see the hash rate drop, we can push the merger forward,” said computer scientist Tim Beiko, who coordinates Ethereum developers. We have such an emergency option,” he says.
Miners can also choose to fork Ethereum, taking existing proof-of-work software and continuing to maintain it. In such a scenario, two different versions of Ethereum will emerge running in parallel: one will continue to work with proof-of-work, and the other will switch to proof-of-stake. A similar fork has happened with Bitcoin in the past, resulting in a second chain called Bitcoin Cash.
Analysts believe that after the transition, POW and POS will coexist for some time.
In this scenario, crypto exchanges and users may be confused about which chain's Ether they are holding or trading. Such a situation means more work for application developers of both networks.
The managers of the famous cat breeding game CryptoKitties state that in case of a possible fork, they will leave the Ethereum ecosystem and switch to their own blockchain.
There are a large number of people who believe that there will be a fork in the market. This is because many Ethereum miners do not seem to know that the transition will happen. Another reason is that during the transition, too many critics may appear and fork the network.
Beiko says that Ethereum developers have informed about “Merge” in messaging applications Discord and Telegram, but also states that many miners do not use these applications.
Beiko states that he is more worried as he sees people still buying thousands of dollars worth of mining equipment without knowing the imminent transition.
Another point is that since the transition of Ethereum has been delayed many times in the past, most miners think that this transition will be delayed again and do not believe that the merger will happen.
“There is a lot of suspicion among miners because Ethereum promised to move to proof-of-stake for five years,” Beiko said. "It's hard to convince people that this one is real," he says.
Closing Ethereum's legacy chain will send shock waves to the crypto mining industry. Struggling to find other uses for their idle equipment, miners can move their machines to other similar chains such as Dogecoin, Litecoin, and Monero. The hash rate on other chains is likely to increase by 5 to 10 times overnight. The income of the miners who do this work may decrease up to 90% and many miners may be unemployed.
What will happen to the investors?
Investors can benefit from the merger. Beiko says that since the Proof-of-Stake chain will offer lower rewards, the number of newly minted Ethers awarded in Ethereum as rewards for verifications should drop between 50% and 90%.
According to staking services provider Stake, the amount of Ether used for staking will likely increase from 8% to 80% in the next two years. This will reduce circulating Ether and potentially increase its value.
Stakers will be able to use the Ether they receive as a reward for verifications, but will not be able to use the Ether they staked until at least another software update, which is expected six months after the merger.
Let's see how the expected big transition will be. Will there be a second fork of “Ether genuine Ethereum”, will the miners revolt, will the hackers attack.. We will see together.