Ethereum’s biggest software update is live – here’s what it does

Ethereum’s biggest upgrade has come to fruition, in what industry experts are calling a game changer for the entire crypto industry. So far, all signs point to the so-called merger — which is designed to reduce the cryptocurrency’s energy consumption by more than 99% — to have been successful.

The first proof-of-stake block of transactions has been finalized with almost 100% client participation rate. It was, by far, the best scenario.

Overhauling the Ethereum network fundamentally changes the way the blockchain secures its network and verifies transactions. Most of these changes happen under the hood, and the hallmark of a successful upgrade is if the end user doesn’t notice the difference for hours and days to come.

Cryptocurrencies like ethereum And Bitcoin Often criticized for the mining process of creating new coins. Before merging, the two blockchains had their own network of miners across the planet, running highly specialized computers that crunched mathematical equations in order to verify transactions. Proof of work consumes a lot of energy and is one of the industry’s biggest targets for criticism.

But with the update, Ethereum migrated to a system called proof-of-stake, which replaces miners with validators. Instead of running large banks of computers, validators use an existing cache of Ether to verify transactions and generate new tokens. It requires far less energy than mining, and experts say it makes the protocol more secure and sustainable.

The price of Ether skyrocketed after the merger. It is trading at around $1,640, up 3% in the last hour.

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Nine teams and more than 100 developers worked on the merger over the years. Over the next few hours, this decentralized network of programmers spread across the planet will monitor the rollout and, if necessary, debug as quickly as possible.

Danny Ryan, a key developer based in Denver who has been working on the merger for five years, tells CNBC that they will look for any irregularities through automated and manual monitoring systems. If problems occur, the relevant team will fix the bug and release a patch to users, but Ryan says they’re pretty confident in the patch given everything. Successful dry runs In Last few months.

“Some kind of small fire can be put out very quickly,” Ryan said. “But the network as a whole — because of the redundancy across this disparate software — will be more stable and better.”

What changes

Why connectivity is such a big deal has to do with optics.

Last weekReleased by the White House A statement Proof of Work warns that mining operations can hinder efforts to mitigate climate change. Reducing energy consumption by approximately 99.95% would not only establish greater sustainability for the network, but would also go a long way to lowering the barrier to entry for institutional investors who have struggled with optics contributing to the climate crisis.

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Bank of America said in a note on September 9 The reduction in post-merger energy consumption “will enable some institutional investors to buy tokens that were previously restricted, improving the proof-of-work (PoW) consensus mechanisms that run on blockchains.”

Institutional money entering the digital asset space is critical to the future of the asset class, analysts said.

The update changes the tokenometrics around Ethereum’s own currency, Ether.

“Ether is becoming a productive asset,” Ryan said. “It’s not something you can speculate on, but it’s something that can generate income.”

In this post-merger era, Ether takes on some of the characteristics common to a traditional financial asset, such as a certificate of deposit, which pays interest to its holders.

“It’s the lowest risk return inside the ethereum ecosystem,” explained Ryan, who takes yield, smart contract risks and other types of counterparty risks in other corners of decentralized finance or DeFi.

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The upgrade will significantly reduce the supply of Ether tokens in circulation, paving the way for Ether to become a deflationary currency in the weeks and months ahead. Some investors say this will help boost the token’s price.

That reduced supply is the result of a new validation model that replaces miners with “validators.” Rewards for validators are much smaller than those that went to proof-of-work miners, meaning less ether will be printed as a result of this upgrade. Validators must lock their tokens for long periods of time, forcing Ether out of circulation.

Additionally, as part of the upgrade Effective from August 2021The network is already “burning” or permanently destroying a portion of the digital currency that would otherwise be recycled back into circulation.

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Developers claim that improved network security is another important feature of the update.

“There are changes in the safety guarantees of the chain,” said Sean Anderson of Sigma Prime.

Take a 51% attack, in which someone or a consortium of people controls 51% or more of a cryptocurrency and then weaponizes that control to make changes to the blockchain.

Andersen says it’s relatively easy to recover from a 51% attack on a proof-of-stake network because there are built-in mechanisms to financially punish malicious actors by reducing their stake.

“Because the economic asset is inside the protocol, you get a better recovery mode, so you end up with a better kind of security profile,” Ryan told CNBC.

The next few hours and days are crucial

The next few hours and days will be key to gauge the health of the Ethereum network post-upgrade. Behind the scenes, developers monitor metrics like the participation rate of validators to determine how things are going. But coders tell CNBC that in an ideal world, users would forget about upgrading altogether.

“If everything goes right, an end user won’t notice the difference,” Anderson said. “If anyone trying to transact on Ethereum didn’t realize it, it was soft.”

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The upgrade will not immediately make ethereum faster, cheaper, or more scalable. But those features come with future upgrades, which are now possible after being patched.

Scalability, in particular, is what Ryan says the network needs most moving forward.

At the moment, layer two technologies like sharding and roll-ups are working to address that.

“Higher scalability, greater capacity to process user transactions, is parallelized online through layer two architectures called roll-ups, but the core protocol itself is not scaled up,” Ryan continued. Instead it comes in subsequent updates.

Katie TalatiThe head of research at asset management firm Arca says his team is keeping a close eye on anything in the tier two space, especially projects that try to deliver scalability.

“The biggest issue now is that it’s very fragmented,” Dalati said. “Now you end up with these people who are on ethereum, but they’re silencing each other because L2s don’t talk to each other very easily. So it’s not a seamless experience,” he said.

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