Tonight marks one of the most significant events in cryptocurrency history; the long-awaited Ethereum merge. The merge has the potential to change how cryptocurrency blockchains operate in dramatic ways.
The merge could revolutionize Ethereum, making it both larger and significantly greener overnight. Or it could crash the network and plunge it into a lengthy quagmire of scrabbling and infighting from which it never recovers.
Given that Ethereum has a market cap of nearly $200 billion as I write this, the impact of the merge will be significant no matter what happens.
What is the Merge?
Since its inception, Ethereum has used a Proof of Work blockchain that is similar to the blockchain used for Bitcoin, the most prominent and well-known coin. Proof of work essentially uses computing power and massive amounts of electricity to secure the blockchain and lend value to cryptocurrency tokens.
The developers behind Ethereum–who work as a decentralized collective–have increasingly felt that Proof of Work isn’t sustainable. Proof of Work blockchains use massive amounts of electrical power and billions of dollars worth of equipment.
Especially with much of Europe facing massive natural gas shortages and electrical supply issues following the war in Ukraine, sucking down huge amounts of energy to run a digital token system feels increasingly wrong and untenable.
For that reason–as well as some more technical ones–Ethereum has long run a separate Ethereum 2 blockchain based on Proof of Stake instead of Proof of Work. Under this model, Ethereum transactions are verified by having people hold and “stake” the network’s Ether coin instead of having them use massive amounts of computing power.
Tonight–after many delays and false starts–Ethereum’s developers plan to merge the two blockchains together, moving the whole network to the less power-hungry Proof of Stake model.
When Does the Merge Happen?
The exact moment of the merge is determined by technical factors that were decided in advance. Since Ethereum is decentralized, no one person or group controls the entire process.
Based on how the network is operating at the moment, though, the merge will likely take place sometime on the evening of September 14. Already, many groups are getting together to hold watch parties and celebrate this long-anticipated event.
What Could Go Wrong?
Although the merge is exciting, lots of things could go wrong. In a recent report, the Economist likened the merge itself to changing out the engine of an airplane while it’s in flight. The overall goal of the merge is to have no downtime on the network. Pulling that off will be an impressive technical feat.
Beyond that, though, there’s the bigger issue of adoption. Because Ethereum is decentralized, not every member (or “node”) of the network needs to agree to the merge. Nodes can opt to remain on the old Proof of Work blockchain, creating what’s called a “fork” of the network.
Some will undoubtedly do so. Many miners have invested millions of dollars into equipment to verify transactions under the old Proof of Work model, so they’ll likely be loath to give up the model entirely.
That said, many exchanges and decentralized finance apps will likely make the switch to the new Ethereum blockchain. If enough people do, the old chain will be a bit like a dying shopping mall; you can still have a store there, but with no big anchor stores and no foot traffic, you’re probably not going to sell much.
Longer term, the move to Ethereum 2 is a massive experiment in the success of a Proof of Stake model. It’s a bit like America’s transition from the gold standard to today’s currency. Previously, money was backed by a real asset: gold. Today, it’s not backed by anything other than the fact that lots of people use it and the government says it’s legal tender.
The merge is similar. Whereas Ether was previously backed at least in part by the massive expense associated with mining coins, a coin likely had some intrinsic value. After the merge, the value will be based essentially on how many people choose to hold the coins.
People could refuse the merge, splintering Ethereum into multiple concurrent blockchains operating under different models, destroying its value. The merge could also demonstrate that Proof of Stake doesn’t work at scale and that the whole experiment of moving away from energy-intensive blockchains was only a utopian dream.
What Could Go Right with the Merge?
At the same time, a large number of things could go right with the Ethereum merge. If the network’s developers pull off the technical wizardry of moving the network to a new model while it remains in operation, that will be a big feather in the cap of people who feel that the Internet should be decentralized and open (a concept currently known as Web3.)
Previously, we relied on huge companies to keep our services running. If Ethereum’s decentralized and motley crew of developers can pull off the same kind of process with radically fewer resources, that will be a big step towards validating blockchains and their decentralized models.
The biggest advantage of the merge, though, is that it will likely radically reduce the amount of electrical power consumed by cryptocurrency mining, literally overnight. Because Proof of Stake requires only a tiny fraction of the power used by Proof of Work, the move to Ethereum 2 will be like removing an entire country from the electrical grid.
No one knows exactly how this will play out, in part because no one knows exactly where and how Ether is currently being mined. If mining is taking place in a few locations, electricity prices in those locations could drop quickly as a big source of demand comes offline. There could even be grid instability in some locations–hopefully, grid operators are anticipating the effects of the merge and are ready.
Longer term, if Proof of Stake works, other blockchains could move to this model as well. That would cement the long-term sustainability of blockchains and eliminate their most costly issue–the massive amounts of electrical power and computing hardware they consume.
Whatever happens, the merge is a huge deal for the world of cryptocurrency. It could validate the importance of blockchains, destroy billions of dollars of value overnight, or achieve some middling outcome between those two extremes.
Either way, it’s happening. Get out your popcorn, keep an eye on your coins, and let’s see what goes down tonight.
This article is for informational purposes only and should not be construed as investment, tax or legal advice. Always consult a professional advisor for advice specific to your situation before making any major financial decisions, and never invest more than you can afford to lose. Thomas Smith holds a diversified investment portfolio that includes a variety of securities and cryptocurrencies.