Ethereum (ETH) is the second-biggest cryptocurrency by market capitalization, only surpassed by Bitcoin (BTC). It has the largest ecosystem of developers building different types of decentralized apps (Dapps), e.g., exchanges, lending protocols, games, etc.
Ethereum was founded in 2013 as a “proof-of-work” blockchain that people could mine by solving cryptographic puzzles. However, its founders proposed moving to a “proof-of-stake” system, and the majority of token holders voted in approval. The upgrade was termed “The Merge” and was finally completed in September 2022.
This article will explain why The Merge happened and its effects on the Ethereum ecosystem.
What Was The Merge?
It was the upgrade intended to migrate Ethereum from its original proof-of-work consensus mechanism to proof-of-stake. Technically, it entailed merging Ethereum’s original execution layer with a new proof-of-stake consensus layer called the Beacon Chain.
Under the proof-of-work consensus mechanism, miners generated new ETH tokens by using powerful, energy-guzzling computers to solve cryptographic puzzles. At some point, Ethereum mining used as much electricity as Chile, a South American country with over 19 million people.
Many people criticized Ethereum for being wasteful and consuming enormous electricity that could be used for more important activities. The ETH founding team heeded the concerns and proposed migrating to a proof-of-stake consensus mechanism to reduce the blockchain’s energy usage.
Ethereum is a decentralized blockchain, so token holders had to vote to approve such an upgrade. Fortunately, it was approved, and the team began working on the upgrade.
When Did It Occur?
The Merge was formally executed on September 15, 2022. That day, the transition to a proof-of-stake consensus was completed, cutting the Ethereum blockchain’s energy consumption by 99%.
No history was lost with the combination of the Ethereum Mainnet, the original execution layer, and the new Beacon Chain. Transactional history remained intact, allowing users to continue interacting with the blockchain like before.
How Did It Help?
The primary aim was to cut down the Ethereum blockchain’s energy usage, and the upgrade did that exceedingly well. Gone are the days when you needed excessive computing power to mint ETH tokens. Instead, you can now obtain tokens through “staking.”
Staking means depositing tokens into a blockchain to help process and verify transactions. In return, you receive a percentage of fees paid to the blockchain. It can be lucrative for ETH holders because of the significant gas fees paid to the blockchain.
You can set up a staking node (computer) directly or stake your tokens via an exchange. Rewards vary, but you can expect between 1 and 7% yearly returns from staking ETH tokens, more than you’ll get with savings accounts or some government bonds.
Did It Affect ETH Price?
Ethereum price dropped over 50% in the months leading up to The Merge. Investors were uncertain about how the upgrade will affect the network and fled to other assets in the meantime.
After The Merge, ETH dropped slightly again. However, it has remained relatively stable since that time. The event had little effect on the value of ETH. Instead, ETH is reeling more from the global economic downturn that has affected the prices of virtually all assets.
Many people heard of The Merge but wondered what it actually meant. We’ve explained the event in detail and the effects it had on the Ethereum market. At this point, you should understand the technicalities enough to explain them to someone else.