Ethereum, the most popular crypto platform, is set to unveil a new technological infrastructure next month that is designed to reduce its energy consumption by more than 99 percent.
The upgrade, called the Merge, is one of the most eagerly anticipated events in crypto’s history. But the process is complicated and carries significant risks.
Here’s what to know about it.
What is ‘the Merge’?
At the most basic level, the Merge is an upgrade to Ethereum’s software. If all goes to plan, it will take place around Sept. 15, after more than eight years of study and debate.
The change would shift Ethereum from its current technological infrastructure, known as “proof of work,” to a more energy-efficient infrastructure called “proof of stake.”
Apart from reducing energy consumption, the upgrade is meant to provide benefits including eventual reductions to the hefty fees required to conduct transactions in Ether, the platform’s signature currency and the second-most valuable digital asset after Bitcoin.
The merge marks the culmination of a long-running debate involving many complex technical factors. Let’s unravel them.
What is Ethereum?
Ethereum is a blockchain — a publicly viewable ledger and shared database that stores and verifies information and transactions in a cryptographically secure way. Ether is the cryptocurrency that people exchange using the Ethereum blockchain.
Ethereum was founded in 2013 by Vitalik Buterin, a programmer who wanted to create a cryptocurrency infrastructure that was more flexible than Bitcoin. He envisioned a system that would allow complex forms of exchange, like borrowing and lending, to happen instantly.
Using Ethereum, crypto enthusiasts can conduct simple exchanges — such as Person A paying $100 worth of Ether to Person B — as well as more sophisticated financial engineering. These days, thousands of businesses and crypto applications have been built using Ethereum. And ownership of nonfungible tokens, the unique digital collectibles known as NFTs, can be recorded on the platform.
What is Ethereum’s current infrastructure?
Ethereum runs on a framework called “proof of work.” (So does Bitcoin, the original cryptocurrency.)
Under this system, crypto transactions are powered by a scattered network of computers. Anyone can plug a machine into this network and run software that solves complicated puzzles. That energy-guzzling process is designed to verify crypto transactions, ensuring that people who are sending money have the necessary funds to do so. The computers race one another for the privilege of verifying these transactions because they earn crypto coins as rewards. This activity is known in industry parlance as “mining.”
As crypto has grown more popular, proof-of-work mining has turned into a major industry. It is dominated by publicly traded companies that have built warehouses full of computers to accumulate as many digital coins as possible.
Energy costs have skyrocketed. Researchers estimate that Bitcoin mining may produce as much carbon dioxide per year as entire countries. Ethereum’s carbon footprint is roughly comparable to Finland’s.
This environmental impact has fueled an industrywide debate and helped drive a push to change Ethereum’s underlying infrastructure.
If Ethereum is upgraded, how will the new infrastructure work?
Mr. Buterin raised the possibility of switching Ethereum from proof of work to a new system — proof of stake — as early as 2014.
In a proof-of-stake system, crypto investors deposit — or “stake” — a certain number of digital coins in a shared network, which allows them to participate in a lottery. Then each time a transaction happens, a participant is selected from the lottery to verify the exchange and receive new coins.
This cuts energy costs by eliminating the powerful computers that race to solve puzzles, supporters of proof of stake say. They also argue that the system is more egalitarian than mining because it has a lower barrier to entry — in other words, a “staker” doesn’t have to own a fleet of expensive computers to get involved.
But the system has fierce critics. Bitcoin proponents say proof of stake perpetuates inequality because only people who have enough crypto to participate in a staking process can reap the benefits. After the Merge, Ethereum stakers will need to pony up 32 Ether (or about $54,000) to enter the lottery and earn rewards.
“Only those with a lot of money can get paid, and very few can participate,” said Cory Klippsten, the chief executive of Swan Bitcoin, a financial services firm focused on Bitcoin. “Every single time this has been tried throughout history, the end result is that the people in control give themselves more money and power, and the system inevitably collapses.”
Why did the merge take so long?
The process has taken so long partly because of the high stakes. A failed merge could cripple thousands of crypto projects and cause a market crash.
“Essentially, they’re changing the engines out in flight,” said Christopher Calicott, a crypto venture investor. “Nothing has ever been attempted at this scale.”
To avoid disaster, crypto engineers and researchers across a number of groups including the Ethereum Foundation — a nonprofit that helps oversee the platform — have conducted years of tests to prepare for the Merge. They have had to check for security bugs and build a new blockchain that uses proof of stake.
In late 2020, the engineers unveiled that blockchain, called the Beacon Chain. After many trial runs, the Beacon Chain is now set to combine with Ethereum next month. That moment of integration will mark the “merge.”