Now the industry is fixated on a potential saving grace: a long-awaited software update to the most popular cryptocurrency platform, ethereum, which provides the tech backbone for thousands of crypto projects. The update – known as the Merge – has acquired near-mythical status after years of delays that left some insiders wondering if it would ever happen.
But if all goes according to plan, the merger will take place around September 15, more than eight years after it was initially discussed. The change would shift ethereum to a more energy efficient infrastructure, addressing widespread criticism that the climate effect of cryptocurrencies outweighs its possible benefits. And it would lay the groundwork for future updates to reduce the hefty fees required to conduct transactions in Ether, the platform’s signature currency and the second most valuable digital asset after bitcoin.
“This transition is essentially charting a roadmap to a future that is much more scalable, much more energy efficient, and much more usable by the normal person,” said Joseph Ayoub, a Citi analyst who studied Merge. “It is laying the groundwork for adoption.”
But the risks are profound. Even by cryptographic standards, the process is almost ridiculously complicated.
For months, insiders engaged in frantic, jargon-heavy discussions about developments like Goerli Testnet Merge and Beacon Chain’s Bellatrix update, crucial software changes that led to the main event. A failed merger would endanger the thousands of crypto applications operating using ethereum, which collectively manage over $ 50 billion in user funds.
“He’s flying the jet and changing the engine in the sky,” said Chandler Guo, a veteran of the cryptocurrency industry who leads a group opposing the merger. “It’s very difficult. It’s very dangerous.”
Ethereum is a blockchain, a publicly visible ledger on which exchanges of digital coins are recorded. Transactions on the chain are conducted in Ether.
The platform was started in 2013 by a teenage programmer, Vitalik Buterin, who is now considered to be one of the oldest statesmen in the industry. Buterin wanted to create a cryptographic system that is more flexible than bitcoin and capable of instantly executing financial contracts and other complex forms of exchange.
Ethereum’s design allows it to support a wide range of financial engineering. Programmers can build applications using the software to perform more complicated tasks than simple money transfers. Thousands of companies and projects in the experimental world of decentralized finance now use the platform to offer loans, loans and other sophisticated investment options. Many non-fungible tokens – the unique digital collectibles known as NFTs – are built on ethereum.
At its core, the merge is a modification to Ethereum’s verification system. When someone sends money in a traditional transaction, a bank acts as an intermediary, verifying that a person has enough funds to pay someone else.
Crypto operates without that middleman. In this alternate financial system, transactions are verified by a sparse network of computers. Anyone can connect a machine to the network by running software that solves complex puzzles, an energy-intensive process for confirming transactions. In essence, the computers run around each other – when the puzzle is solved, winning participants are rewarded with new coins in the digital currency they are verifying.
This verification process is widely known as cryptocurrency mining and has the technical name “proof of work”. According to some estimates, the amount of energy consumed each year in the mining sector is comparable to the annual emissions of entire countries.
The merger is set to move ethereum into an alternative framework called “proof of stake”, which requires less energy. In a proof-of-stake system, computers don’t burn energy to verify transactions. Instead, cryptocurrency investors deposit a number of digital coins into a shared pool, which they put into a lottery. Each time a trade takes place, a participant is selected from the lottery to verify the transaction and win prizes.
The change is expected to reduce Ethereum’s power consumption by more than 99%, which crypto boosters hope will make the technology more popular.
“The difference in hardware and power consumption is so significant,” said Preston Van Loon, a developer working on Merge. “When the NFTs were exploding, people were saying, ‘I wish I had an NFT, but I feel like I am burning a forest.’ ”
The move to Proof of Stake could also help solve another of Ethereum’s biggest problems: the hefty fees required to use the network. Ethereum can only handle a certain amount of assets at a time, so when there is demand for the platform, the price to use it increases. Anyone who sends ether has to pay a “gas fee,” a transaction fee that has sometimes gone up to $ 200.
The Merge won’t immediately eliminate the problem, but the developers say it will lay the fundamental foundation for future updates designed to minimize fees.
But a change on this scale could also make Ethereum vulnerable to hacks or other disruptions, some cryptocurrency experts say. “Whenever changes are made to a complex system, unintended consequences must necessarily occur,” said Christopher Calicott, a cryptocurrency investor.
Much of the criticism is fueled at least in part by self-interest. Many of Merge’s most vocal opponents are companies that have built expensive data centers to extract the ether into the proof-of-work system.
Merge’s origins date back to the time of Ethereum’s creation. Buterin raised the possibility of passing the test of participation in 2014, but at that point the system was not tested. The most successful cryptocurrency has been bitcoin, which uses proof of work.
Since then, many newer cryptocurrencies have successfully used proof of stake. Ethereum programmers have been working hard on the switch for at least four years. The work is complex and progress has been slow. Engineers had to build a new blockchain and run tests to check for security holes or other technology bugs that could disrupt the transition.
A non-profit organization called the Ethereum Foundation helps oversee the platform. But in reality, ethereum is run by a group of engineers around the world; no top-down authority orchestrated the merger. Periodically, programmers gather in streaming public video calls to discuss the technical aspects of change.
At some point, the move to proof of participation was supposed to take place as early as 2016. As the merger met this year, cryptocurrency enthusiasts were expecting a launch date in June. So the merger was postponed to August. It is now set for next month.
In the cryptocurrency world, delays have become something of a joke. In the beginning, the engineers installed what is known as a “trouble bomb” in the Ethereum code. It was designed to keep them honest: after a set period of time, the bomb was supposed to explode, causing disruption in the Ethereum network unless it changed to Proof of stake. But every time the bomb was supposed to go off, the engineers created a new piece of code to defuse it, somehow nullifying the point.
“We are not doing this lightly,” said Danny Ryan, a researcher with the Ethereum Foundation who has worked on the platform since 2017. “There has been an endless amount of academic engineering, testing and verification.”
In December 2020, ethereum programmers took a big step towards merging by releasing a cryptographic platform called Beacon Chain, a proof-of-stake system designed to provide the foundation for an updated ethereum. After two years of testing, the Beacon Chain is finally ready to integrate with Ethereum in mid-September, the union that gives the process its name.
As the merger approaches, companies and entrepreneurs with a financial stake in ethereum mining are becoming increasingly concerned. Cryptocurrency mining has become a multi-billion dollar business dominated by publicly traded companies.
In a recent corporate report, Hive Blockchain, a cryptocurrency mining company that derives revenue from both bitcoin and ethereum, said the move to proof of stake “could make our mining less competitive or less profitable.” Hive did not respond to requests for comment.
Some Ethereum miners are fighting. Guo, who ran an ethereum mining operation in China, has mobilized a group of engineers who are working on an alternative currency to rival enhanced Ether.
Despite the push back, the merger seems almost complete. A final test, known as the Goerli merger, was successfully completed this month.
Ryan said he was planning to meet in person with some colleagues to celebrate the actual merger, the culmination of five years of his professional life.
Organizing the celebration is complicated. Although the developers have estimated a date of September 15, the precise timing of the merge is uncertain and subject to complex technical factors. Any technical problem could cause another delay.
“This could happen at 4 am. It could happen at 2 pm,” Ryan said. “But I’ll definitely be awake.”