Ethereum’s “The Merge”: The Crypto Revolution That Will “End The Controversies”

Cryptocurrency enthusiasts are holding their breath this week. In the coming hours, Ethereum, the second largest blockchain in the world, will switch to a radically different way of working. A high-flying operation that required years of painstaking work and testing. If this switchover dubbed “The Merge” goes smoothly, it will open up huge opportunities for Ethereum and certainly boost the whole sphere of cryptocurrencies, NFTs and decentralized finance (DeFi). Likewise, a failure would have consequences far beyond Ethereum’s already vast scope. Deciphering the problems with Alexandre Stachchenko, blockchain and crypto director at KPMG France.

L’Express: Why is “The Merge”, this change in the functioning of the Ethereum blockchain, such a significant event in the crypto sphere?

Alexander Stachchenko: There are several reasons for this. First, it is the second blockchain in terms of market capitalization (nearly $200 billion). A trompe-l’oeil figure by the way, as there is also an entire economy of NFTs and decentralized finance (DeFi) backed by the Ethereum blockchain. Taking that into account, we arrive at just over $400 billion and are currently outpacing the Bitcoin ecosystem. Moreover, “The Merge” is not a simple update, it is an engine change, so a big shift. A real leap into the unknown.

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This switch should drastically reduce Ethereum’s power consumption. Is the aforementioned reduction – approximately -99% – feasible?

Yes, the current way of working (the proof of work or “proof of work”) means that you have a lot of computing power and therefore many machines have a reasonable chance of being the first to solve the math test that then gives the right gives a “block” of operations to mine and earn the corresponding reward. In Ethereum’s proof-of-stake system, this mining process is no longer used, and therefore all this computing power, which concentrated almost all of the energy consumption, will no longer be mobilized. We can in theory participate in the Proof of Stake with a simple Raspberry Pi (note: a mini computer at a discounted price and the size of a credit card). Electricity consumption has become a sticking point for some players, but it’s a debate that, in my opinion, was poorly framed. It is the result of a deep misunderstanding about the functioning of the crypto sector. “The Merge” puts an end to these sterile controversies and provides companies with a blockchain to work on while preserving their image. However, this does not affect the value proposition of, for example, Bitcoin.

What other factors do you think should be taken into account to accurately analyze the environmental impact of blockchains?

In 2017, a study by the World Economic Forum confirmed that Bitcoin would consume as much as the rest of the planet by 2020. Obviously, these projections were incorrect! The problem is, this is essentially a usability debate, but many people still don’t understand what cryptos are for. Therefore, they necessarily find that it consumes too much. But we cannot talk about the environmental impact of Bitcoin without recalling all that the instrument brings in terms of financial inclusion for people living in countries with few banking services and without understanding that it will draw a financial network of the future .

We are offended that Bitcoin consumes more than some countries like Denmark, but it is no surprise that we use more energy to dry clothes in the United States alone. On the one hand, we have machines that dry clothes a little faster, and on the other, we have a new form of financial network that is very useful for people in underdeveloped and poor countries. In the game of equations, it is also important to remember that Bitcoin is a complete system. Conversely, classic payment systems will not work if there are no banks, euros, etc. Bitcoin is self-sufficient. It therefore makes no sense to compare the energy consumption per transaction with that of a traditional payment system.

The crypto sector often emphasizes the fact that blockchains can aid the development of renewable energy sources. How?

Electricity is one of the most important items of expenditure for miners, but they have the rare advantage of being geo-independent, that is, their viability does not depend on any geographic constraint. Conversely, for example, you can only mine gold where there are veins and you are not going to set up a shopping center in the middle of Siberia because there are no customers. Crypto miners have no such restrictions: they just need a satellite connection. In addition, minors can quickly interrupt their activity if necessary. While you cannot stop a steel mill in an instant, not even a data center, which must always be available for its customers.

All these factors put miners in the ideal position to get the cheapest energy, the energy nobody wants. I am of course thinking of overproduction from renewable sources, such as wind or solar. In Texas, which has made a rather crazy energy transition to renewables in recent years, electricity transmission infrastructure has not kept up with generating capacities. As a result, energy production often exceeds demand and electricity prices in certain regions of Texas are negative almost 20% of the time. The miners can therefore use these surpluses, which are by no means an extra burden on the network, since the energy was produced anyway. We can also envision synergies to exploit unexploited gas discharges instead of burning them as is now happening with flares.

Is Ethereum’s move to a radically different operation technically dangerous?

The purely technical part has been tested about 15 times on test networks, so the chances of “The Merge” becoming a technical glitch in the coming days are relatively slim, even if there is one. If there were a problem, it would theoretically be possible to revert to the old blockchain, but that would send a very bad message to the market about Ethereum, and possibly some of its competitors. Indeed, the market could infer that a failure of Ethereum will open up a space for its competitors, or conversely, that if it fails, the others will fail as well.

Could “The Merge” jeopardize some of the fundamentals of how Ethereum works?

Some faults may remain invisible or at least take a long time to detect. The great importance of blockchains is what is called “uncensorability”. Cryptocurrencies are like cash, you can do whatever you want with them without asking for special permission. In the physical world you don’t need anyone’s permission to, for example, pay for a baguette at the bakery in cash. Cryptos make this possible in the digital world, a radical departure from the traditional financial system, which does not carry out any operation without establishing the identity of the parties involved, or gathering information about the nature and motives of the transaction. There is no actor that can prevent you from accessing your cryptos and using them the way you want.

The proof-of-work system used by Bitcoin and so far by Ethereum has proven strong at this level. This way of working means that even the big players in mining will find it difficult to cheat and take reckless risks to do so as they would be very easy to detect and not much to gain from cheating. The big question will be whether the evidence of Ethereum’s deployment proves itself in this area. If we realize in the coming years that a flaw in the system has allowed an actor to gain some control over the blockchain, this would obviously be a big deal. And the problem with censorship is that we risk realizing that there is a problem when a transaction is actually censored, i.e. when it’s too late.

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What new perspectives does this massive switch open for Ethereum?

While discussions of blockchain power consumption are often misguided, they are central and hinder the adoption of cryptocurrencies. This transition will solve the problem and facilitate the adoption of Ethereum by institutions and the general public. It will also deprive Ethereum’s competitors, such as Avalanche or Tezos, of an argument that allowed them to differentiate themselves. Many competitors propose a less energy-consuming operation than Ethereum. They can no longer rely on that. Ethereum, which had seen its market shares nibbled a bit by these opponents – although it remained ultra-dominant – could therefore regain them in part in the future, especially as the rest of Ethereum’s roadmap should allow for more trades to be processed and their reduce costs.



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