Now the industry is obsessed with a potential saving grace: a long-awaited software upgrade to the most popular cryptocurrency platform, Ethereum, which provides the technological backbone for thousands of crypto projects. The upgrade – known as Merge – has achieved near-legendary status after years of delays that have left some insiders wondering if it will ever happen.
But if all goes as planned, the merger will take place around September 15, more than eight years after it was first discussed. The change would shift Ethereum to a more energy-efficient infrastructure, addressing widespread criticism that the weather effect of crypto outweighs its possible benefits. And it would lay the groundwork for future upgrades to reduce the high fees needed to transact in Ether, the platform’s signature currency and the second most valuable digital asset after bitcoin.
“This transition is basically laying out a roadmap to a much more scalable, much more energy-efficient and much more usable future for the normal person,” said Joseph Ayoub, an analyst at Citi who studied the merger. “It lays the groundwork for adoption.”
But the risks are profound. Even by cryptography standards, the process is almost ridiculously complicated.
For months, insiders engaged in frantic, jargon-laden discussions about developments like the Goerli Testnet merger and Beacon Chain’s Bellatrix upgrade, crucial software changes leading up to the main event. A botched merger would jeopardize the thousands of crypto apps that run on Ethereum, which collectively manage over $50 billion in user funds.
“It’s flying the jet and changing the engine in the sky,” said Chandler Guo, a crypto industry veteran who leads a group opposed to the merger. “It’s very difficult. It’s very dangerous.”
Ethereum is a blockchain, a publicly visible ledger on which exchanges of digital coins are recorded. Transactions on the chain are carried out in Ether.
The platform was started in 2013 by a teenage programmer, Vitalik Buterin, who is now considered one of the oldest statesmen in the industry. Buterin wanted to create a cryptographic system that was more flexible than bitcoin and capable of instantly executing financial contracts and other complex forms of exchange.
Ethereum’s design allows it to support a range of financial engineering. Programmers can create applications using the software to perform more complicated tasks than simple money transfers. Thousands of companies and projects in the experimental world of decentralized finance now use the platform to offer loans, borrowings and other sophisticated investment options. Many non-fungible tokens – the unique digital collectibles known as NFTs – are built on Ethereum.
At its core, the merger is a modification of Ethereum’s verification system. When someone sends money in a traditional transaction, a bank acts as an intermediary, verifying that a person has sufficient funds to pay someone else.
Crypto works without this intermediary. In this alternative financial system, transactions are verified by a dispersed network of computers. Anyone can plug a machine into the network running software that solves complex puzzles, an energy-intensive process to confirm transactions. Essentially, the computers compete against each other: when the puzzle is solved, the winning participants are rewarded with new coins in the digital currency they verify.
This verification process is widely known as crypto mining and goes by the technical name “proof of work”. According to some estimates, the amount of energy consumed each year in mining is comparable to the annual emissions of entire countries.
The merger is about to move Ethereum to an alternative framework called “proof of stake”, which requires less energy. In a proof-of-stake system, computers do not burn power to verify transactions. Instead, crypto investors deposit a number of digital coins into a shared pool, which enters them into a lottery. Each time a trade takes place, a participant is selected in the lottery to verify the transaction and win the rewards.
The change is expected to reduce Ethereum’s power consumption by more than 99%, which crypto boosters hope will make the technology more popular.
“The difference in hardware and power consumption is so significant,” said Preston Van Loon, a developer working on fusion. “When NFTs exploded, people were like, ‘I would love to have an NFT, but I feel like I’m burning down a forest. ”
Switching to proof-of-stake could also help solve another of Ethereum’s biggest problems: the substantial fees required to use the network. Ethereum can only handle a certain amount of activity at a time, so when there is demand for the platform, the price for using it increases. Anyone sending Ether has to pay a “gas fee” – a transaction fee that has sometimes reached $200.
The merge won’t eliminate this problem immediately, but the developers say it will lay the essential foundation for future upgrades designed to minimize fees.
But a change on this scale could also leave Ethereum vulnerable to hacks or other disruptions, some crypto experts say. “Whenever you make changes to a complex system, unintended consequences are bound to arise,” said venture capitalist Christopher Calicott.
Much of the criticism is fueled at least in part by self-interest. Many of the most vocal opponents of the merger are companies that have built expensive data centers to mine ether in the proof-of-work system.
The origins of the merger go back to the time of the creation of Ethereum. Buterin raised the possibility of moving to proof-of-stake in 2014, but at that time the system had not been tested. The most successful cryptocurrency was bitcoin, which uses proof of work.
Since then, many new cryptocurrencies have successfully used proof-of-stake. Ethereum programmers have been working hard on the switch for at least four years. The work is complex and progress has been slow. Engineers had to build a new blockchain and run tests to check for security flaws or other technology bugs that could disrupt the transition.
A non-profit organization called the Ethereum Foundation helps oversee the platform. But in reality, Ethereum is run by a group of engineers around the world; no descending authority orchestrated the merger. Periodically, programmers meet in publicly broadcast video calls to discuss the technical aspects of the change.
At one point, the move to proof-of-stake was expected to happen as early as 2016. As the merger materialized this year, crypto enthusiasts were expecting a June launch date. Then the merger was pushed back to August. Now it’s scheduled for next month.
In the crypto world, delays have become something of a joke. Early on, engineers installed what’s called a “difficulty bomb” in Ethereum’s code. It was designed to keep them honest: after a while, the bomb would go off causing disruptions in the Ethereum network unless it was switched to proof of stake. But each time the bomb was supposed to go off, the engineers created a new piece of code to defuse it, somewhat defeating the purpose.
“We don’t do this lightly,” said Danny Ryan, an Ethereum Foundation researcher who has worked on the platform since 2017. “There has been countless engineering, testing, and verification academics.”
In December 2020, Ethereum programmers took a big step towards merging by releasing a crypto platform called Beacon Chain, a proof-of-stake system designed to provide the foundation for an improved Ethereum. After two years of testing, the Beacon Chain is expected to finally integrate with Ethereum in mid-September – the merger that gives the process its name.
As the merger approaches, companies and entrepreneurs with a financial interest in Ethereum mining are growing increasingly concerned. Crypto mining has become a multi-billion dollar business, dominated by publicly traded companies.
In a recent corporate report, Hive Blockchain, a crypto-mining company that derives revenue from both bitcoin and ethereum, said a move to proof-of-stake “could make our mining business less competitive or less profitable”. Hive did not respond to requests for comment.
Some Ethereum miners are fighting back. Guo, who ran an Ethereum mining operation in China, mobilized a group of engineers who are working on an alternative currency to compete with the upgraded Ether.
Despite the setback, the merger seems almost complete. A final test, known as the Goerli fusion, was successfully completed this month.
Ryan said he plans to reunite in person with colleagues to mark the real merger, the culmination of five years of his professional life.
Planning the celebration is complicated. While the developers have estimated the date for September 15, the precise timing of the merger is uncertain and subject to complex technical factors. Any problem could cause another delay.
“It could happen at 4 a.m. It could happen at 2 p.m.,” Ryan said. “But I will certainly be awake.”