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By Mary Devereux, Senior Advisor, SEC Newgate Greater China
Last week, the long anticipated Ethereum Merge took place. The merge was a hyped upgrade to the Ethereum blockchain which powers part of the crypto ecosystem.
Why was there so much anticipation of this event? Why is it so important? To understand its implications, we need to go back to basics and understand what Ethereum does and how it works.
So, what is Ethereum?
Ethereum is a decentralised global software platform powered by blockchain technology. It is most commonly known for its native cryptocurrency, “ether” or “ETH.”
Like other blockchains, Ethereum is essentially a digital database shared across a network of computers. It records ownership of its cryptocurrency and other Ethereum-based digital assets such as non-fungible tokens (NFTs). Fans of Ethereum predict it will form the backbone of the vision of “Web 3.0" which incorporates decentralisation, blockchain technologies, and token-based economics.
Now, it is getting confusing. I have heard a lot about blockchain, but what is it exactly?
A blockchain is a distributed database or ledger that is shared by a computer network. It is exactly the same as a set of paper-based financial records distributed around several offices with, perhaps, a central excel spreadsheet shared by all the offices on a server. However, in this case, instead of having a massive pile of excel spreadsheets piling up on desk, a blockchain stores information electronically in digital format, among many computer networks.
A blockchain collects information in groups, known as blocks. These blocks have a set storage capacity and, when full, are closed and linked to the previously filled block, forming a chain of data known as the blockchain. When a block is filled, it is set in stone and becomes a part of the timeline. Nothing can be added or subtracted from the information in that block. Each block in the chain is given an exact timestamp when it is added to the chain. So, when the next bit of data comes along, it is stored in a brand-new block which is linked to the already formed block chain.
This security factor is why blockchain technology has become so important for the financial industry. Blockchain provides a way to create a tamper-proof log of sensitive activity securely and efficiently. This makes it excellent for international payments and money transfers. For example, in April 2018, Banco Santander launched the world's first blockchain-based money transfer service.
Blockchains are best known for their storage of financial data and crypto currencies. However, they can store just about anything, such as health related data, shipping information, and manufacturing plant operations data.
Now, let’s get back to Ethereum
Previously, the Ethereum blockchain, like the Bitcoin blockchain, ran on a 'proof of work' model, which involves nodes — aka, computers, laptops, smartphones - that are part of a large network, competing with one another to deal with complex mathematical problems to create the next block in the chain. These computers and their owners are called miners, and in return for contributing their processing power to create new blocks, they are rewarded with new coins.
The proof of work model certainly keeps the system safe but, at the same time, eats up an enormous amount of energy. According to estimates from Digiconomist, a platform that is dedicated to exposing the unintended consequences of digital trends, Ethereum’s network used up as much electrical energy as the country of Chile in a given year and had a carbon footprint comparable to all of Hong Kong.
The big merge and its energy saving impact
And this is why Ethereum has made the merge. Ethereum upgraded its system to a ‘proof-of-stake’ model, which is a more energy-efficient and environmentally friendly system. Essentially, instead of automatically choosing the quickest computer system to build its next block, it uses an algorithm that has a preference for nodes that hold more of Ethereum’s currency. In other words, it is rewarding loyal ‘customers’ of its currency.
According to Ethereum’s website, by changing to the proof of stake model, it has, overnight, reduced its energy consumption by approximately 99.95%, Yes, you read that right.
It is a change that is sure to have considerable implications for Ethereum and the crypto industry as a whole, including NFTs and the next iteration of the web. No more miners, high-powered computers and ETH mining farms.
What are people saying about the merge?
How are communication and ESG executives at other crypto companies reacting? The response has been muted so far. There is talk of the new system not being as secure as the former. Shares of Ethereum and Bitcoin both fell immediately after the merge took place. However, that could have been equally due to jitters over the much anticipated Fed move of 75 basis points, which took place just a few days later.
Whatever the initial expense and teething troubles, the merge has put Ethereum at the forefront of environmentally friendly blockchain technology. Against the background of world leaders gathered at the United National General Assembly to talk about the Sustainable Development Goals, and with growing numbers of investors and consumers choosing companies that put ESG high on their agendas, it is bound to have a positive effect. Hopefully, its overall effect will be to move the whole industry to follow suit.