Ethereum merge
Note: This article is not financial advice and should not be considered a substitute for professional advice.
Popular cryptocurrency blockchain and second largest token by value, Ethereum, has completed its long-awaited switch to proof-of-stake (PoS). The upgrade process, better known as “The Merge”, has been years in the making. The research for the merge began before the Ethereum network launched and has always been a significant milestone for the creator of Ethereum. According to the Ethereum Foundation, today’s transition reduces Ethereum’s energy consumption by 99.9%.
Previously, Ethereum relied on the blockchain model Proof-Of-Work (PoW) which led the miners to validate the blockchain and make it secure. This gave the miners a per-centage of the fees collected on the Ethereum blockchain. The Merge refers to Ethereum Mainnet merging with a PoS blockchain called the Beacon Chain. This lets Ethereum use the PoS validation model without changing the Mainnet.
The Beacon Chain was launched back in December 2020 where the PoS was tested in production for a period without having a direct connection to the Ethereum blockchain PoW model. They did that to continue the promise, that Ethereum was a secure and always available blockchain, that transfers billions of dollars daily, in the ETH token and other dig-ital assets, like NFTs. Another important reason for launching The Beacon Chain earlier was to give enough time to stakers, so the amount of staked ETH Tokens would be suffi-ciently large to secure the network at the time of the Merge.
Decentralized?
The Merge is said to make the Ethereum blockchain more decentralized, due to the re-duced entry cost. Before the merge you could invest in software and ETH miners to be a part of the PoW validation model. Now (after the Merge) you only need to stake 32 ETH tokens (worth approximately $42.000) to be a validator in the Ethereum PoS model, and you will still have to own software and hardware to run the Ethereum nodes that keep the blockchain moving. This is a high entry level cost for the average investor. Therefore, many average investors choose to stake their 32 ETH tokens on a centralized platform like Coin-base. Then Coinbase will run the Blockchain nodes for you; in return, they take a cut of the reward. This entry-level contributes to two-thirds of the staked ETH tokens owned by one DeFi pool and two Centralized Crypto exchanges. This means that most of the validators on the Ethereum blockchain are centralized, which many argue could be a solution to make Ethereum centralized.
Indeed, the creator knew that the Merge would have consequences for Ethereum and the decentralized aspect of the blockchain. This leaves the question:
Does Vitalik Buterin (creator of Ethereum) want a centralized Ethereum?
Why is this great?
The ETH have a coin market capital of $155 billion. Around 42% of Bitcoins coin market capital of $367 billion. Many have done an Ethereum price prediction after the merge. Coinbase is the larg-est holder of staked ETH tokens to date. Coinbase is also a US base exchange, which means they are answerable to the US. Coinbase holds approximately 15% of the total staked ETH. This means that 15% of the validators of the Ethereum blockchain are regulated because Coinbase is regulat-ed.
Lido Finance is a DAO (Decentralized Autonomous Organization) which is not based in the US but most of the VCs that hold the LDO token (Lido Finances Owned token) are found in the US. This means that most of the voting rights in the DAO are regulated by the US. Therefore, Lido Finance also must answer to the US. Lido Finance holds approximately 30% of the staked ETH token. To-gether with some of the other large US-based exchanges a total of 60% of the staked ETH tokens are regulated by the United States.
This helps Ethereum overcome the problems that come with total decentralization which is a huge indicator that the Crypto market is moving toward regulation and centralization. This means that the United States will be able to control the transactions and the smart contracts on the Ethereum blockchain so that it can be used with regulation. With the influence of the government, it will help the crypto market be safer for investors. Let us hope ETH is not the last Cryptocurrency to move in this direction.
