Ethereum Merge is Complete — Here’s What It Means for Investors

The merge changed how transactions are validated and cuts energy use by over 99%.
Kurt Woock
By Kurt Woock 
Updated
Edited by Andy Rosen

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On Sept. 15, a few minutes before 3 a.m. Eastern time, Ethereum switched from using energy-intensive technology to a more sustainable system in a major update called "the merge." In the hours following the merge, the price of Ether, or ETH — the platform's native cryptocurrency — held relatively steady. Nine hours following the merge, it was down just 5% compared with the price at the time of the transition.

This technological overhaul of the world's second-most valuable cryptocurrency by market cap was years in the making.

With the implementation, blocks of new transactions went from being verified by computers solving massively difficult math problems to a system that uses financial incentives and penalties to accomplish the same task. This change could reduce the network's power consumption by more than 99.95%.

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The merge: an overview

To explain this transition, the Ethereum Foundation used an analogy comparing Ethereum to a spaceship in mid-flight: “The community has built a new engine and a hardened hull. After significant testing, it's almost time to hot-swap the new engine for the old mid-flight. This will merge the new, more efficient engine into the existing ship.”

So what was wrong with the old engine? Mainnet, the blockchain used since Ethereum’s inception in 2015, used a system called proof-of-work to securely add new transactions and other information. Proof-of-work requires user computers to solve increasingly difficult computations before being allowed to add a new block — and earn crypto rewards.

This method, known as mining, is used by many cryptocurrencies including Bitcoin. Mining is secure, but it’s also energy-intensive. The Ethereum network consumed the same amount of energy on a yearly basis as some entire countries consume in the same time frame.

Proof-of-stake is an alternative that consumes less energy. Instead of devoting electricity, which fuels computing power, users who want to be part of the verification process put their personal cryptocurrency on the line in a process called staking.

These users, called validators, are randomly selected to verify new information to be added to a block. They receive cryptocurrency if they confirm accurate information. If they act dishonestly, they stand to lose their stake.

The technology behind the merge was tested for nearly two years on a blockchain called the Beacon chain that ran alongside Ethereum’s original Mainnet network. When the merge occurred, the information stored on Mainnet transferred to the Beacon chain — the mid-flight-rocket-engine swap in Ethereum’s parlance.

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What should investors know about the merge?

It’s impossible to know exactly how the merge will play out in the long term, but investors may want to consider the following factors:

No action is needed. If you owned ETH before the merge, you don’t need to do anything, according to the network’s website.

Scams could be on the rise, so watch out. Ethereum warns against scammers who suggest you need to upgrade or transfer to a new token, like “ETH2.” No such token exists.

The flow of new coins has slowed. The rate at which new ETH tokens enter circulation went down about 90% because mining rewards, which are larger than staking rewards, are no longer paid out.

Gas fees and transaction speeds are the same. Congestion and high transaction costs, including gas fees, have been a sore spot for Ethereum in general. The merge did not immediately change either of these issues.

Sharding will become possible. Sharding splits validation work into smaller amounts and allows the network to handle more transactions. This could increase the number of participants in the Ethereum network by allowing devices such as phones to become nodes, all of which might address the congestion described in the point above. But here’s the kicker — sharding only becomes a possibility after the merge. It doesn’t exist yet on the Ethereum network, though developers expect to introduce it next year.

Possible greater concentration of power. After the merge, the wealth of stakers — not computing power — will drive the network forward. As a result, the biggest owners, including custodians, could gain outsize sway in the Ethereum ecosystem, a move away from the decentralized ethos that so many cryptocurrency proponents value.

The editor owned Ethereum at the time of publication.

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