Ethereum, invented and incubated in Canada, the second largest cryptocurrency by market cap and the foundation of the most innovative development in the industry, has just completed a software upgrade called The Merge.
Around the world, computer programmers, blockchain enthusiasts, and even some skeptics threw virtual streaming parties to witness the event in real-time. It was one of the biggest events in cryptocurrency history, but many people outside of the industry probably didn’t notice, perhaps thinking it was just more crypto kids spouting more technical nonsense.
Still, it’s important to understand what this software upgrade was all about. At its core, blockchains are about recording information. Bitcoin secured and ordered these transactions through a process called Proof-of-Work (PoW), better known as mining when it launched in 2009.
The dream of Satoshi Nakamoto, the anonymous inventor of Bitcoin, was for ordinary people to use their home computers to help secure a ledger and receive the native token Bitcoin as a reward for their efforts. Within a few years, application-specific integrated chips (ASICs) were appearing, making participation in home computer mining no longer viable. The original hardware was replaced by data centers and specialized computers that used excessive amounts of energy.
Ethereum entered the arena a few years later with its novel smart contract platform (and ability to program assets), following in Bitcoin’s footsteps by also leveraging PoW.
But in the beginning there was another idea called staking, which could theoretically one day replace the energy-intensive PoW mining process while maintaining network integrity. Not only would this new solution significantly reduce energy consumption, but it would also democratize the validation process by giving token holders the ability to approve transactions with fewer hardware requirements.
With Ethereum Proof-of-Stake (PoS), users can become validators and lock (stake) their Ether, similar to entering into a bond with the protocol. They then take turns approving transactions and receiving newly created Ether (staking rewards) in exchange for helping to secure the network. With this new system design, access to specialized computer chips or electricity would no longer be required, meaning more involvement from everyday users and less impact on the environment.
Since its inception, Ethereum has grown from a novelty toy to a $200 billion platform, with an additional $300 billion in assets and applications based on its availability and functionality. For the past seven years, researchers and developers have tried to fulfill this early promise.
Various suggestions were made for the right technical implementation, but the developers found themselves at the drawing board and constantly delaying the upgrade. Investors and members of the community even began to doubt that it would ever come to fruition.
In 2020, a consensus began to form on the technical standards that would make it appropriate to launch this new and improved version of Ethereum. Given the high stakes of how large the project had grown, the new platform launched in pseudo-incognito mode with limited functionality.
A year and a half later, it was time to merge the two networks and transfer the combined $500 billion worth to this new implementation. Everything leading up to that moment would happen within 12 seconds and with no visible changes to the end user. No disruption to regular activities, downtime, or broken interfaces.
Some have described the event as driving a car at 100 km/h and swapping the internal combustion engine for an electric battery, without ever slowing down or the driver noticing that anything has changed.
Fortunately, the merge went smoothly. Just before 3 a.m. Eastern on September 15th, we said goodbye to Ethereum mining and welcomed a new era, one without the specialized computing hardware and power requirements of small countries.
The merger marks one of the major turning points for Ethereum and the internet, setting the stage for the next iteration of the internet. If we are to believe in a future where trillions of dollars worth of assets and activities will exist on a blockchain, it will require a system like proof-of-stake to remain stable and secure.
This new system also opens up new possibilities. There is now an incentive for retail and institutional investors to lean into an asset that is consistent with environmental, social and corporate governance (ESG) mandates.
To top it off, any size of capital employed can yield the same return, and economies of scale have been made irrelevant. This could be the catalyst our pension funds need to get into the sector and have confidence that this innovation will last.
New business areas have also started to develop. Local digital asset exchanges will offer new product lines to their customers, and to support this, specialized staking infrastructure companies will form. Figment Networks Inc., a Toronto-based company, has grown to become one of the largest and most globally recognized staking providers for both institutional clients and retail platforms. Companies like Figment were not possible just a few years ago.
But Ethereum’s upgrade is not complete yet. Various technical upgrades will be rolled out in the coming years, significantly reducing transaction fees that have historically reached as high as $50 per transaction, pricing out users and lowering the value of the activity. This activity has felt stranded, without another blockchain to switch to without serious security compromises.
In addition, the network will be able to process 1,000 times more transactions per second. A successful blockchain of the future will need to handle diverse spectrums of activity in terms of value and throughput in order to truly become a global settlement layer.
One of the most impressive feats in computer science to date, the Proof-of-Stake launch was developed by a decentralized group of participants. This is the start of the next frontier for blockchains and the right decision for a tech company that is aware of the ongoing climate crisis and can envision a world where people have transparency and autonomy over their finances.
Brian Mosoff is CEO of Ether Capital.
