Ethereum is moving towards a new blockchain infrastructure: what changes?

Last week, cryptocurrency giant Ethereum took a long-awaited step and changed its technology infrastructure into more environmentally sustainable software. The new infrastructure, called “The Merge”, has reduced Ethereum’s energy consumption by 99%.

While this is a highly anticipated shift in the cryptocurrency market, it comes with risks.

What has changed Ethereum?

Before we talk about The Merge, let’s take a look at what has changed in the Ethereum mainnet.

The mainnet (short for “main network”) is the blockchain technology responsible for transmitting cryptocurrency from the sender to the recipient. Since its inception, Ethereum has used Proof of Work mechanisms to validate transactions and mine new coins.

However, to mine new coins, proof-of-work transactions required computers to compete with each other to solve complicated mathematical problems. Bitcoin also uses proof-of-work systems to validate transactions.

This process consumes terawatts of energy and releases megatons of carbon dioxide into the environment. Bitcoin mining is estimated to require the same amount of energy needed to power a small country, around 130 terawatt hours, according to Digitconomist’s Bitcoin Energy Consumption Index.

Proof of Stake mechanisms protect bulk transactions by requiring cryptocurrency holders to use the ether guarantee to validate new transactions. So, for Ethereum, the era of cryptocurrency miners is over and cryptocurrency validators are emerging.

Validators add newly validated transactions to a shared block and a group of validators will vote and approve the legality of the transaction. Once this happens, the block is closed and the validators receive more coins in return.

The main difference between mining and validation is that, in a proof-of-work network, miners are rewarded for their computing power, while in a proof-of-stake network, cryptocurrency holders are rewarded for their stake. .

What is union?

Merger refers to merging the original Ethereum mainnet with a separate, more energy efficient and environmentally friendly blockchain to create a single chain. The Ethereum blockchain powers a large part of the cryptocurrency market, including NFTs.

Ethereum founder Vitalik Buterin envisioned turning Ethereum’s consensus level into a proof-of-stake system as early as 2014, a year after Ethereum’s inception. The new infrastructure helps to significantly reduce Ethereum’s energy consumption, amid growing concerns and criticisms from national authorities and environmental advocates.

This strategy is good news for potential cryptocurrency investors who were hesitant due to the effect of cryptocurrency on the environment. This is also good news for current investors, as this merger has no effect on current assets.

Shortly before The Merge, the price of Ether rose as investors and cryptocurrency enthusiasts became convinced that the new infrastructure would allow Ethereum to overtake Bitcoin. The hype surrounding the merger gave investors hope that the price of all cryptocurrencies would rise and revive the struggling market.

But it didn’t happen. Ethereum plummeted, as did the rest of the cryptocurrency market.

What does The Merge mean for the cryptocurrency market?

The merger was an impressive tech feat and a win for green people. However, major changes in Ethereum’s infrastructure are changing the meaning of cryptocurrency investment.

Contrary to the blockchain dogma, proof-of-stake networks and cryptocurrency investors may have to deal with a third party: the US government. Following the merger, the US Securities and Exchange Commission introduced a new element in the proof-of-stake infrastructure adoption plan.

Blockchain is all about decentralization, which means that the government should be involved as little as possible, if at all. But SEC President Gary Gensler concluded that proof-of-stake transactions mean that tokens could be considered securities and not currencies.

Gary Gensler suggested that any cryptocurrency using a proof-of-stake infrastructure, not just Ethereum, could be considered a security and pass the Howey test. The Howey Test is a US Supreme Court ruling that determines whether a transaction is an “investment contract” and therefore requires government regulation, which cryptocurrency investors avoid like the plague.

This statement means that staking coins in a proof-of-stake system must include protections for investors that are not suitable for blockchain transactions. As a result, ether fell by 11% and bitcoin by 8%.

Overall, the cryptocurrency market has fallen well below its all-time high of $ 2.9 trillion in 2021, to just under $ 1 trillion in the first half of 2022. Cryptocurrency market experts say this drop is the consequence of the changing economic situation in the United States, rising inflation and, now, concerns about the legality of cryptocurrency trading.

Cryptocurrency trading may no longer be a one-way ticket to millionaire status. At least for now.


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