How a significant change to Ethereum might fundamentally alter cryptocurrencies

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The news that Ethereum is shutting down its mining equipment and reducing its carbon emissions is positive, according to this week's newsletter. But not everybody concurs.

The Ethereum network intends to turn down its mining equipment on September 15. If this occurs, the whole ethereum ecosystem's carbon emissions should drop dramatically over night, leaving only bitcoin as the sole significant cryptocurrency based on the destructive proof-of-work model. However, the transition might potentially destabilize some of the biggest institutions in the industry, and it appears likely that a cold war will develop between supporters of the new version of ethereum and ardent supporters of the old. If it occurs at all, that is.

Market cryptocurrencies

An overview of cryptocurrency. The two most popular in the world, bitcoin and ethereum, are built on a concept known as proof of work. This includes the networks, and I'm simplifying here, outsourcing their security to a decentralized network of miners who compete to burn absurdly high amounts of electricity to produce lottery tickets. Every time a winning lottery ticket is generated, the miner who generated it receives a reward (currently 6.25BTC, or about £110,000 in bitcoin), and they also get to verify all the transactions that have occurred since the last winner, package them up into a tidy block, and add them to the chain made up of all previous blocks. They affix their lottery number on the block, and the procedure starts over.

Read also how to play crypto for beginners

Please refrain from writing to me because the aforementioned paragraph is largely untrue. It is accurate enough for what follows because the proof-of-work paradigm is the foundation of all the information you've heard about how cryptocurrencies affect the environment. And Ethereum intends to remove it.

The substitute is referred to as proof of stake. Conceptually, it is more complicated, but using the same broad strokes, we can explain it as follows: rather than using electricity to create lottery tickets, you use your ethereum to purchase premium bonds, and the system selects a winner based on how many bonds they have purchased. The selected winner then performs all the usual validation tasks. Your premium bonds can be cashed out, but the procedure takes time, so you are encouraged not to misuse your validation rights.

Minig cryptocurrencies

These ideas have formed the foundation of a version of ethereum for some time. Over the years, it has gone by various names, including testnet and Eth2, but starting on September 15, it will be known as just "ethereum." This transition, known as "the merge" since the old and new networks will be combined, may turn out to be the biggest technological advancement in the history of the cryptocurrency industry. Therefore, there is a significant chance that it will be incredibly dirty.

There is the date to begin with. I have been burned before, so if you sensed even a hint of doubt. In May 2021, I wrote on the impending merger being "months away":

The transition to proof of stake has been planned for a while, but a number of organizational and technological issues have prevented execution. The modification will now be finished "in the future months," said Carl Beekhuizen, a research and development employee at the Ethereum Foundation.

Not at all.

However, the changeover is a little more permanent this time. There is a concrete timetable for the merge, for starters, and the ethereum network's programming has already begun to prepare for it. Although it could still be postponed, if no further action is made, the merge will proceed as scheduled by default.

This does not guarantee a seamless merger. The forks, which are copies of the previous iteration of Ethereum created to maintain the proof-of-work mechanism, will present the first obstacle.

This will not be the first time it occurs. Numerous Bitcoin forks have existed, with names like bitcoin cash, bitcoin satoshi vision, bitcoin classic, and bitcoin gold; however, none has ever managed to unseat the original's position of dominance.

So why do you think the Ethereum fork could have a better chance? Because ethereum miners, a significant constituency, will most likely support it. Many of the miners are unhappy with the idea of having their sector abruptly shut down after years at the center of the Ethereum infrastructure. They have invested real, tangible assets in the survival of a proof-of-work cryptocurrency, such as pricey graphics cards and electricity connections, and it would be difficult to use those assets for something else.

Since cryptocurrencies are open-source, it would be simple for the miners to pick up where they left off and continue operating Nu-thereum, or whatever it ends up being called, on September 16 as if the merge had never taken place. What happens next is the crucial question.

Everyone who has ETH in their account will discover that they now have two accounts, one on each blockchain. There will be the proof-of-work version of the Bored Ape NFTs, the proof-of-stake version, and so on for everyone who currently has a smart contract operating on Ethereum.

Some of those duplicates might coexist contentedly. How much would someone who wants to possess a killer NFT pay for a "unofficial" version on the forked chain, despite others' best efforts to talk down the forked version and never completely kill it? Even if the Apes' creators reject the forks, if it is not zero, the transaction might carry on for a while.

But there can only be one for some tasks. Each USDC token is supported by $1 in tangible assets held by Circle, the stablecoin's developer. Circle won't have twice as much money if there are suddenly twice as many USDCs as a result of the fork, therefore it will have to decide which network to support and which to reject.

The major stablecoins, including USDC and Tether, don't appear inclined to support the rebel chain. And as forked projects fail one after another, the resultant slow-motion collapse of the entire rebel ecology will occur. However, it will continue to serve as a foundation for new development that will ultimately be more comparable to the Ethereum that developers now know and love than the more ecologically friendly version it is set to become.

Next steps

The new miners aren't just acting for their own benefit. The decentralization that supports the crypto economy is another fundamental issue that is in play. A centralised conventional database is faster, cheaper, and safer to run, but it requires you to trust whoever is operating it, which is why decentralization is fundamentally the only real reason for cryptocurrencies to exist.

A decentralized cryptocurrency is one that neither big business nor big government can influence, which makes them ideal for, in general, crime and evading the law as well as loftier ideals like "permissionless innovation" and "uncensorable expression."

Some supporters of the proof-of-work (PoW) idea are concerned that proof of stake (PoS) will ultimately lead to Dino: decentralization in name only. These supporters include the bitcoin "maximalists," who look down even on upstarts like ethereum. The system's design entails giving network authority to people who have the most money invested there. Worse yet, it gives more authority to individuals who manage other people's funds, including centralized exchanges like Coinbase or Binance and centralized notbanks like Celsius or Voyager, if they had endured that long. These exchanges are able to provide "staking" services, whereby they handle the challenging technical aspects of implementing proof of stake (i.e., purchasing the premium bonds in my great analogy) while giving their consumers the benefits.

It is more than just a theoretical worry that the dinosaurs are on the rise. It's unclear whether a "validator," the PoS replacement for miners, can approve a block that contains a transaction to or from a sanctioned address under US law in the post-Tornado Cash world, which is still dealing with the fallout of North Korea's favorite decentralized app being accused of money laundering and sanctioned by the US Office of Foreign Assets Control (OFAC).

cryptocurrencies

The creators of Ethereum are attempting to force the issue by calling for a "credible commitment to punish censors." The hope is that it need not be clear what that means because of the credible commitment, which means that organizations that must abide by OFAC simply do not stake ethereum in the first place.

It is unclear what an ethereum without validators that is attempting to abide by US sanctions will resemble. However, it is the world we are moving toward.

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