The Ethereum Merge

Ethereum (ETH) has changed the way it validates transactions on its decentralised ledger. The market has been left puzzled, with the crypto trading down after this news. While 'The Merge' has captured public attention, what it exactly is, and its far-reaching flow on effects in the FinTech space, are unknown.


What is 'The Merge'?


Ethereum has merged its blockchain system. Originally, ETH used a "proof of work" system to determine the validity of transactions in the blockchain to ensure everyone in the cryptocurrency community had a consensus about the holders of specific cryptocurrencies. Despite the viability of this original blockchain system, Ethereum has been testing a "proof of stake" system in the background of the original blockchain.


The implication of this merge is large on the environmental front. The footprint of Ethereum should fall from 8.5GW to less than 85MW, suffice it to say that this is an enormous reduction and ecologically advantageous image for ETH.


What prompted this change?


The "proof of work" infrastructure originally used by Ethereum burnt a lot of electricity and computing power. Under the original system a malicious miner seeking to attack the system would have to buy more energy than the entire rest of the system combined.


Contrarily, "proof of stake" awards the right of valid transactions based on the Ethereum staked - that which is locked up on the system (Hern, 2022). In the event of an attack, a successful miner would therefore have to buy more Ethereum than the rest of the holders combined. This shifts the protection mechanism by Ethereum from one based on the consumption of energy to one based on an individual's holding.


What does this mean for the market?


It does present an ecologically positive image for Ethereum; however, the market appears not to be interested, seeing as ETH is down 10% as of 16th September. However, the recent spike in selling is more aptly revealed through the news that Ethereum's new blockchain model could make it, legally speaking, a security.  Understood through the Howey Test, ETH could be susceptible to the SEC regulations which could be antithetical to the wishes of many crypto holders, many of whom, feel disenfranchised by the state of government.



Graph showing Ethereum (ETH) trend over time

Source: Trading View


Future direction


Ethereum's future is very much uncertain. While being seen as an ecological warrior besides its cryptocurrency competitors, it is subject to future image changes with the news of it being a security. It is unclear whether other cryptocurrencies like Bitcoin (BTC) will follow Ethereum's lead or stick to their current ways. In any case, BTC was also trading up by 0.42% as of 16th September. There is evidently noise surrounding Ethereum, yet rationalism and introspection are always swords to combat the market.

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Disclaimer: This article does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.

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