The world’s second-most valuable blockchain has successfully completed a long-anticipated software shift.
At about 12:15 PM IST, Ethereum transitioned to a proof-of-stake system, which marks its move away from the energy-intensive proof-of-work protocol. Called ‘the merge’, the upgrade was in the making for about five years and is likely to be followed by others that help the blockchain increase its scalability and lower transaction costs.
“To me, the merge symbolises the difference between early-stage Ethereum and the Ethereum we have always wanted,” Vitalik Buterin, one of the co-founders of Ethereum, said during a livestreamed event for the merge. “We still have to scale, we still have to fix privacy,” he said.
While PoW requires miners to spend considerable resources in ‘mining’ coins, the PoS system allows ‘validators’ to clear transactions.
As opposed to PoW, Ethereum’s new protocol to validate transactions does not require participants to dedicate large amounts of computing power—and energy by extension. Instead, PoS is a mechanism where transactions are validated by entities pledging large amounts of pre-existing ether tokens.
The merge will bring down Ethereum’s energy consumption by over 99%, according to information released on the Ethereum website. According to data available on Digiconomist, the power usage on Ethereum was at about 77.77 terrawatt per hour on an annualised basis as on Sept. 14.
“Ethereum will eventually become a native yield-bearing asset after the merge,” Sharat Chandra, co-founder of the India Blockchain Forum and vice president of research and strategy at EarthID, said. Chandra was referring to the yield which holders can earn for staking—or locking up—their ether tokens after the merge. The yield is expected to be close to 5%.
Exchanges across the globe saw an increased amount of trading volume in Ether and associated derivatives as the merge neared. Three leading exchanges, Coinbase, Binance, and FTX, saw combined trading volumes of close to $6 billion in ether over the last 24 hours, according to data from CoinGecko.
Closer to home as well, exchanges saw an uptick of around 40-80% in Ether trading volumes, with overall trading volumes up about 25-30%, according to senior executives at two crypto exchanges. Although many exchanges have paused withdrawals of Ether from the exchange in anticipation of jitters that may arise out of the shift, they are likely to be resumed in the next 12 hours, one of the executives said.
One of the unintended consequences that could emerge out of Ethereum’s shift is a hard fork in the blockchain itself. That would occur if miners—participants involved in PoW validation—continue to operate on the blockchain and use the energy intensive consensus mechanism. This would lead to the creation of two separate Ethereum blockchains, an event that has occurred in the past Ethereum and Ethereum Classic as well.
Expressing a personal opinion, the executive mentioned earlier said that they see the occurrence of a hard fork as quite likely. Why would people who have invested millions in building PoW capacity—by buying GPU chips to mine tokens—suddenly throw that away, the executive said.
“I personally do not see any possibility of a hard fork,” Chandra said, noting that it’s anyway too early to speculate about the possibility of one. “The Ethereum community has been in sync over the merge and a contrarian stance such as forking the chain seems far-fetched,” he added.
In the two odd hours following the merge, Ether’s price rose by around 2% and is currently trading at $1,627 per token.