Last week, crypto giant Ethereum took a long-awaited step and moved its technology infrastructure to more environmentally sustainable software. The new infrastructure, called Merge, has reduced Ethereum’s power consumption by 99%. Although this is a highly anticipated change in the crypto market, it comes with risks.
What has Ethereum changed?
Before we talk about the merger, let’s review what has changed in the Ethereum mainnet.
A mainnet is the blockchain technology that is responsible for transmitting cryptocurrency from sender to receiver. Since the beginning of Ethereum, it has used proof-of-work mechanisms to validate transactions and mine new coins.
However, to mine new coins, proof-of-work transactions required computers to compete against each other to solve complex mathematical 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. Bitcoin mining is estimated to require the same amount of energy to power a small country, around 130 terawatt hours, according to Digitconomist’s Bitcoin Energy Consumption Index.
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 crypto validators are over.
Validators add newly validated transactions to a shared block, and a group of validators will vote and agree that the transaction is legitimate. Once this happens, the block is closed and validators will receive more coins in exchange.
The main difference between mining and validation is that crypto holders are rewarded for their participation in a proof-of-stake network, versus being rewarded for computing power in a proof-of-work network.
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What is Merger?
Merger refers to merging the original Ethereum mainnet with a separate, more energy efficient and environmentally friendly blockchain to create a chain. The Ethereum blockchain powers much of the crypto market, including NFTs.
Ethereum founder Vitalik Buterin had a vision to change Ethereum’s consensus layer into a proof-of-stake system as early as 2014, a year after he created Ethereum. The new infrastructure offers significant decreases in Ethereum’s power consumption, amid growing concerns and criticism from US officials and environmental advocates about the effect of crypto mining on the environment.
The merger is good news for would-be crypto investors who have been cold-eyed due to the effect of crypto on the environment. This is also good news for current investors, since the merger has no effect on current assets.
Just before the merger, Ethereum saw its price increase as investors and crypto enthusiasts were convinced that the new infrastructure would give Ethereum the edge to overtake Bitcoin. The hype surrounding the merger gave investors hope that all crypto coins would rise in price and boost the struggling market.
But that didn’t happen. Ethereum plunged, as did the rest of the crypto market.
What does the merger mean for the crypto market?
The merger was an impressive technological feat and a victory for green people. However, slight changes in verbiage 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 might have to share the sidewalk with a third wheel – the US government. Following the merger, the United States Securities and Exchange Commission introduced a new wrinkle to the plan to adopt a proof-of-stake infrastructure.
Blockchain is all about decentralization, which means the government should be involved as little as possible, if at all. But SEC Chairman Gary Gensler concluded that proof-of-stake transactions mean that tokens can be considered securities, not currencies.
Gensler spoke before a Senate Banking, Housing and Urban Affairs Committee last week and told reporters, “From the point of view of the play…that’s another clue that according to the Howey test , the investing public anticipates profits 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 be considered safe and could pass the Howey test. The Howey Test is a U.S. Supreme Court ruling that determines whether a transaction is an “investment contract” 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 include protections for investors that are not suitable for blockchain transactions. As a result, Ethereum fell by 11% and Bitcoin by 8%.
Overall, the crypto market fell well below its all-time high of $2.9 trillion in 2021 to sit just below $1 trillion in the first half of 2022. Market experts cryptocurrency claim that the drop is a consequence of changes 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 ticket to millionaire status as it was about to be, at least not yet.