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The long-awaited Ethereum (ETH) update could finally happen soon.
The Ethereum “merge,” which will switch the network from the intensive proof-of-work consensus mechanism to proof-of-stake, is expected to occur in mid-September. Developers at the leading altcoin suggested last month that the merge could happen as early as Sept. 19.
Amid the crypto winter, Ethereum managed to gain more than 59% last month in anticipation of its upcoming merge. But even with those gains, ETH is still down 58% year to date.
Ethereum co-founder Vitalik Buterin, told Bankless last week: “I basically expect that the merge is going to be kind of not priced in, by which I mean like not even just like market terms but even just kind of like psychological and narrative terms.”
While crypto experts’ opinions vary on whether ETH is underpriced, most see a bright road ahead of the second-largest crypto.
According to Kraken Intelligence’s latest Monthly Market Recap and Outlook report, there are several signs of rising investing confidence in Ethereum: volatility has decreased, and outflows of Ethereum were more than double the inflows in July.
“ETH is holding value during this crypto winter against [Bitcoin] BTC, a significant departure from the prior cycle. All eyes are on the merge, the most significant milestone to Ethereum’s scaling roadmap since the launch of the Beacon Chain in late 2020. If successful, the industry will have the clarity to take a longer-term outlook on Ethereum,” says Thomas Perfumo, head of business operations and strategy at Kraken.
What Is Ethereum 2.0?
Ethereum 2.0 is a new version of the Ethereum blockchain that will use a proof of stake consensus mechanism to verify transactions via staking.
Ethereum 2.0’s staking mechanism will replace the proof of work model where cryptocurrency miners use high-powered computers to complete complex mathematical functions known as hashes. The mining process requires an ever-increasing amount of electricity to verify Ethereum transactions before they are recorded on the public blockchain.
Proof-of work-systems devour a tremendous amount of electricity. Bitcoin mining, for example, currently consumes electricity at an annualized rate of 127 terawatt-hours (TWh). That’s currently higher than the power consumption of the entire country of Norway.
ETH currently has an annual power consumption roughly equal to Finland, producing a carbon footprint similar to Switzerland. Fortunately, the merge is expected to reduce Ethereum’s carbon footprint by up to 99.95%, addressing one of the major criticisms of the cryptocurrency.
Ethereum vs. Ethereum 2.0: What’s the Difference?
Since April 2022, Ethereum has been running two parallel blockchains, one that operates using proof of work, and a test chain that operates via proof of stake. The merge will combine the legacy Ethereum Mainnet blockchain (ETH1) and the new Beacon Chain (ETH2) into one unified blockchain.
The Beacon Chain is central to the merge, as it’s the important technology that has acted as a proof-of-stake ledger on the Mainnet since its launch in 2020.
S0me investors who own Ether, the native cryptocurrency of the Ethereum Network, may have been puzzled over what appears to be two versions of the coin on Coinbase and other popular cryptocurrency exchanges.
When users stake their Ether on Coinbase, it is converted from ETH to ETH2, and the prices of ETH and ETH2 are identical. Once the merge is completed, these two versions of Ether will be combined into a single token.
Ethereum Is Moving from Mining to Staking
Staking is the process that will replace mining to verify Ethereum transactions once the merge is completed.
Staking requires users to lock up a certain amount of cryptocurrency to participate in the transaction verification process. In a proof-of-stake model, an algorithm selects which validator gets to add the next block to a blockchain based on how much cryptocurrency the validator has staked.
Investors must stake at least 32 ETH to become an Ethereum validator. There are currently more than 300,0000 Ethereum validators. The more ETH each validator stakes, the more likely that validator is to produce blocks. Each time a validator produces blocks, the validator earns rewards in Ethereum for handling validation duties.
With Ethereum trading at roughly $1,600, the minimum requirement of 32 ETH is about $51,400, staking can be quite pricey for the average investor.
But individual investors can also join staking pools, which are collections of Ethereum stakers who combine their resources and split the rewards. Most large cryptocurrency exchanges also provide staking services for investors who are not willing or able to commit 32 ETH on their own.
The staking yield on Ethereum’s Beacon Chain currently runs around a 4 to 7% annual percentage rate (APR). Staked ETH (sETH) are locked up while the process leading up to the merge takes place.
Experts also say the ability to withdraw sETH after the merge won’t happen instantaneously.
“The merge isn’t synonymous with sETH withdrawals. That’s part of another Ethereum upgrade slated to occur after an estimated six to 12 months. There will also be a mechanism whereby the staked ETH can only be released over time, so it’s uncertain even once sETH is unstaked, how quickly someone can sell 100% of their holdings,” says Vinson Lee Leow, chief ecosystem officer at Partisia Blockchain.
Ethereum vs. Bitcoin
Bitcoin and Ethereum are the two most popular cryptocurrencies, accounting for 69% of global crypto market capitalization.
Ethereum’s price has soared 420% in the past five years. That’s almost on par with Bitcoin, which has gain more than 480% during the same period.
The merge will make Ethereum a more attractive investment than Bitcoin from an ESG perspective, but it doesn’t necessarily make Ethereum a threat to dethrone Bitcoin as the world’s top crypto.
Chris Kline, chief operating officer and co-founder of Bitcoin IRA, says Bitcoin and Ethereum are more complementary than they are competitive within the crypto market.
“Bitcoin and Ethereum serve different purposes. Bitcoin is a proof-of-work, limited asset, monetary crypto, while Ethereum’s utility is [as] a Web 3.0 backbone. Both serve as critical and distinct elements of the overall digital asset ecosystem underway,” Kline says.
Ethereum developers have just a few more tests before the merge of the main Ethereum network.
The date of the merge highly depends on the outcome of the merge of the Görli test, which will take place around Aug. 10.
“The merge date will only be determined when the client teams are confident that the software implementation has been thoroughly tested and free of bugs. If it goes well, we can expect the merge of the Ethereum Mainnet to happen about six weeks after around the 20th of September,” says Filip Siroky, research associate at Rockaway Blockchain Fund.