by Kevin Murcko, CEO and founder of Coinmetro
Last week, the world’s second largest open source blockchain, Ethereum, pulled off its biggest feat since it was created almost a decade ago.
The highly anticipated ‘Merge’ event, which has been years in the making, involved a change to the consensus algorithm that verifies transactions from proof-of-work (POW) to proof-of-stake (POS). Put simply, this new protocol means that Ethereum no longer relies on the computational power of miners to prove that a change to the blockchain is correct, and instead invites the community to stake their own cryptocurrency to verify that validity.
In making this switch, Ethereum will solve a number of headaches that have plagued the platform in recent years. Not least, reducing the overall electricity consumption of the Ethereum network by an estimated 99%, and assuaging many of the environmental criticisms levelled at the crypto industry.
The timing was no accident. COP27, the annual conference uniting Heads of State, environmental activists, international organisations and businesses to tackle the climate emergency, is taking place in November. And, with both US and UK elections creeping into view, political narratives are refocusing on sustainability and green finance, and in the context of a looming recession, now is as good a time as any to cross over to the right side of history.
In many ways the timing has been a PR masterclass. As one of the front runners of the cryptocurrency revolution, Ethereum has become an established part of mainstream media reporting, and coverage of the merge in recent weeks has fueled greater cryptocurrency adoption and given investors a brief respite from the crypto winter that has blustered the market this year.
Furthermore, unbeknownst to the POS developers when they set out on their mission, energy security has become the most pressing issue for people across Europe, so the dramatically reduced energy requirement comes at a time when new audiences hold energy efficiency in high regard.
However, smart as the timing, and the tech, has been, the new protocol comes with its own issues. Try as they might, POS mechanisms are not as secure as POW alternatives. At a time when global regulators are looking closely at the associated risk from using cryptocurrencies, this vulnerability could play a part in how Ethereum and other POS blockchains are viewed.
It’s not just regulators that are raising eyebrows, investors and market participants are also at odds. Certain corners of the crypto community have adopted a dim view of Ethereum’s new POS algorithm because it gives greatest control to traders with the biggest holdings.
Philosophically, inequality is one of the reasons many of crypto’s early adopters turned their back on the centralised financial system in the first place, so we may see some disenfranchisement from those that champion the democratising potential of digital assets above all else. Meanwhile, long-time Ethereum miners have also voiced discontent that their equipment has now become effectively, if not completely, obsolete.
But whichever way you look at it, yesterday’s merge was a significant milestone for the industry, and a positive sign that the blockchain sector’s entrepreneurial spirit marches on. We will surely see new consensus methodologies, new protocols and new applications, in the months to come, and some may even revert to using the POW standards previously established by Ethereum. Projects that offer miners an option, such as Ravencoin, Flux, THT have already seen an increase in their network hashrates.
The Ethereum Merge has looked outwards, to try to address the problems of wider society. In doing so, it will bring in a new environmentally-conscious customer base. But the news has not been welcomed to the same extent by the crypto community, and rightly so. The merge has done little to address their most pressing issues around security and technology. The event has largely been a PR move for external stakeholders, not a transition to benefit existing users. But the upside is, the crypto community knows how to innovate when it is most needed. We should expect to see much more disruption in crypto’s algorithms in the future.