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The long-awaited Ethereum (ETH) update, known as “the merge,” is finally here.
“And we finalized! Happy merge, all. This is a big moment for the Ethereum ecosystem,” Vitalik Buterin, co-founder of Ethereum, said on Twitter on Sept. 15.
Google Search celebrated the “Ethereum merge” by depicting two bears, one white representing the consensus layer, and the other a brownish black, combining to make the ultimate Ethereum panda bear, a metaphor for post-merge Ethereum.
The merge switches the Ethereum network from an energy-intensive proof-of-work consensus mechanism to proof of stake.
But even with the merge, Ethereum still suffers from the ongoing crypto winter, losing nearly 17% last month. This is on par with the 16% loss faced by the world’s leading cryptocurrency, Bitcoin (BTC). ETH is now down around 58% year to date.
Thomas Perfumo, head of business operations and strategy at Kraken, says, “The merge supports Ethereum’s future roadmap,” Perfumo says. “I expect (this) will allow Ethereum to scale its transaction throughput, further reduce cost and enable new applications to drive greater utility on-chain.”
Scaling, reducing costs and enabling new applications could also benefit Ethereum and its investors.
Originally referred to as Ethereum 2.0, the merge is an upgraded version of the Ethereum blockchain that uses a proof-of-stake consensus mechanism to verify transactions via staking.
The staking mechanism Ethereum replaces the proof-of-work model where cryptocurrency miners use high-powered computers to complete complex mathematical functions known as hashes. The mining process requires an ever-increasing amount of electricity to verify Ethereum transactions before they are recorded on the public blockchain.
Proof-of work-systems devour a tremendous amount of electricity. Bitcoin mining, for example, currently consumes electricity at an annualized rate of 127 terawatt-hours (TWh). That’s now higher than the power consumption of the entire country of Norway.
With proof of work, Ethereum had an annual power consumption roughly equal to Finland, producing a carbon footprint similar to Switzerland. Post-merge, Ethereum is expected to reduce its carbon footprint by up to 99.95%, addressing one of the major criticisms of the cryptocurrency.
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In December 2020, Ethereum began running on two parallel blockchains, a legacy one that operates using proof of work (Ethereum Mainnet) and a new chain for proof of stake (Beacon Chain). The merge combined Ethereum’s Mainnet and Beacon Chain into one unified blockchain operating on a proof of stake protocol.
The Beacon Chain has acted as a proof-of-stake ledger on the Mainnet since its launch in 2020.
The Ethereum Mainnet and Beacon Chain were originally referred to as ETH1 and ETH2, respectively. Their eventual merge was expected to be called Ethereum 2.0.
However, in January, the Ethereum Foundation asked users to start phasing out the term Ethereum 2.0. The Foundation decided that language no longer accurately represented their roadmap. They believed Ethereum 2.0 sounded too much like a different operating system, which is not at all what the merge is intended to implement.
With Ethereum 2.0 no longer in the official vocabulary, the Ethereum Foundation also asked users to refer to the Ethereum Mainnet as the “execution layer” rather than ETH1 and the Beacon Chain as the “consensus layer,” rather than ETH2. This terminology, they believe, better reflected their goals for the platform.
However, many crypto investors and enthusiasts still refer to post-merge Ethereum as Ethereum 2.0.
With the completion of Ethereum’s merge, the staking process replaces the mining one for verifying transactions.
Staking requires users to lock up a certain amount of cryptocurrency to participate in the transaction verification process. In a proof-of-stake model, an algorithm selects which validator gets to add the next block to a blockchain-based on how much cryptocurrency the validator has staked.
Investors must stake at least 32 ETH to become an Ethereum validator. There are currently more than 300,0000 Ethereum validators. The more ETH each validator stakes, the more likely that validator is to produce blocks. Each time a validator produces blocks, the validator earns rewards in Ethereum for handling validation duties.
With Ethereum trading at nearly $1,600, the minimum requirement of 32 ETH is more than $50,000; staking can be quite pricey for the average investor.
But individual investors can also join staking pools, which are collections of Ethereum stakers who combine their resources and split the rewards. Most large cryptocurrency exchanges also provide staking services for investors who are not willing or able to commit 32 ETH on their own.
The staking yield on Ethereum currently carries a 4% to 7% annual percentage rate (APR). Staked ETH (stETH) have been locked up in the process leading up to the merge.
But experts also say the ability to withdraw stETH isn’t instantaneous.
“The merge isn’t synonymous with (stETH) withdrawals. That’s part of another Ethereum upgrade slated to occur after an estimated six to 12 months. There will also be a mechanism whereby the staked ETH can only be released over time, so it’s uncertain even once (stETH) is unstaked, how quickly someone can sell 100% of their holdings,” says Vinson Lee Leow, chief ecosystem officer at Partisia Blockchain.
Bitcoin and Ethereum are the two most popular cryptocurrencies, accounting for about 60% of global crypto market capitalization.
Ethereum’s price has soared 453% in the past five years. That’s even more than Bitcoin, which has gained more than 431% during the same period.
The merge makes Ethereum a more attractive investment than Bitcoin from an environmental, social and corporate governance (ESG) perspective, but it doesn’t necessarily make Ethereum a threat to dethrone Bitcoin as the world’s top crypto.
Chris Kline, chief operating officer and co-founder of Bitcoin IRA, says Bitcoin and Ethereum are more complementary than competitive within the crypto market.
“Bitcoin and Ethereum serve different purposes. Bitcoin is a proof-of-work, limited asset, monetary crypto, while Ethereum’s utility is [as] a Web 3.0 backbone. Both serve as critical and distinct elements of the overall digital asset ecosystem underway,” Kline says.