It appears that Ethereum’s mega-upgrade is underway. At last.
Following delayed efforts for years, the “Merge” appears to be on track for September, with the blockchain’s encryption undergoing a fundamental transformation to a system in which the generation of new ether tokens becomes significantly less energy-intensive.
“It’s an exciting time for the ethereum ecosystem,” said Omar Syed, co-founder of smart contract platform Shardeum. “I think there will be drama surrounding the Merge, but I don’t think there will be any technical hiccups.”
Investors appear to concur, with ether outperforming big brother bitcoin.
Ether has gained for six weeks in a row, taking it from a 1-1/2-year low of $880 in mid-June to levels above $2,000, albeit being far from its November 2021 record of $4,868.79.
In comparison, Bitcoin has recovered 37% from its June low to $24,116.
Ether is eating away at bitcoin’s market share: according to CoinMarketCap, it now accounts for over a fifth of the total crypto market value of $1.14 trillion, up from less than 14.9% two months ago. Bitcoin’s market share has fallen to 40.2% from 44.9% throughout the same period.
“Crypto is still very tightly coupled, I think when the Merge successfully completes it could drive up the price of bitcoin as well,” said Alex Miller, CEO of Hiro, which builds developer tools to create applications for bitcoin.
If the designers of Ethereum succeed, as is widely expected, it may be a game changer for the blockchain, making it cheaper to mine and easier to adopt for banking and other crypto businesses.
Of course, little is certain about the elusive shift, which has been postponed multiple times, with developers most recently canceling plans to press the button in June, frightening investors who began to think it would never happen.
The Merge is extremely risky, and the fortunes of the roughly 122 million ether in circulation, worth approximately $232 billion, could be jeopardized if it fails.
If the upgrade fails, it will “put the entire crypto industry back five or ten years,” according to Hiro’s Miller.
The ethereum blockchain presently validates blocks using the energy-intensive proof-of-work (PoW) method, in which miners employ large amounts of electricity to swiftly solve challenging computational challenges in order to win newly generated currency.
On a separate chain, Ethereum has been testing a proof-of-stake (PoS) system in which miners only “stake” their currency in order to confirm transactions and create new blocks. It promises to reduce the blockhain’s energy consumption by 99.95% while also preparing it for speedier transactions.
Not everyone is thrilled about the impending merging of the two systems, particularly ether miners, whose pricey mining rigs will be deemed outdated and unable to be utilized to mine bitcoin.
Ether mining has hitherto been more profitable than bitcoin mining. Ether miners made $18 billion in 2021 versus $17 billion for bitcoin miners, according to Arcane Research.
Several miners have elected to mine the next best choice, such as ethereum classic or ravencoin tokens.
At least one miner has stated his intention to fight and continue mining Ethereum, raising the possibility that some people would keep the PoW chain running in its current form even after the merging, potentially competing with the upgraded blockchain.
That option, however, has drawbacks.
To dissuade the PoW parallel chain following the Merge, Ethereum designers created a “difficulty bomb” to dramatically increase mining difficulty.
Furthermore, both Tether and USDC, the two largest stablecoins, have backed the Merge, lowering the chance of widespread adoption of the rival PoW chain.
“The likelihood of a long-lasting chain split of Ethereum following the Merge remains slim,” said Alex Thorn, head of firmwide research at Galaxy Digital.
Still, derivatives market positioning suggests that at least some investors are planning for a hard fork, or a parallel PoW chain.
On the CME platform, ether futures were also trading at a premium of $1,905, “indicating predictions surrounding a proof of work fork,” according to Matthew Sigel, head of digital assets research at investment manager VanEck.
“But that gap is not so huge so as to think there is extreme froth,” he added.