Ethereum: environmentally friendly ‘Merge’ update is just the first step

Ethereum’s upgrade was years in the making. The blockchain platform has successfully switched from approving transactions via maths problems to crypto holdings, a change known as the Merge. The new “proof of stake” model should reduce energy use by more than 99 per cent.

Hailed as a make or break moment for crypto, the Merge has helped to lift ether tokens nearly 50 per cent from their June low point. But prices remain well below last year’s high point. The crypto winter has not broken.

Ethereum’s Ether is the second best known digital token after bitcoin. Merging the main network with an ethereum network that already uses proof-of-stake transactions could help to overhaul crypto’s reputation as an environmental disaster.

But while the Merge was technically difficult it has not changed much for most ether holders. Energy requirements for the blockchain have been cut but fees have not fallen. Transaction times have not improved. It is possible that the switch to proof of stake will encourage more decentralised-finance applications to run on the ethereum blockchain. Then again, they may wait for future updates designed to expand capacity. Investors remain more fixated on inflation and removing risk from their portfolios.

The change could also give more power to validators with a large pool of ether they can put to work, earning a return for “staking” their tokens. Just as proof of work mining benefited groups with access to major computer power, proof of stake will benefit those with an existing haul of tokens. The minimum required stake is 32 ether — equal to just under $48,000.

There are risks. Tokens may be confiscated if transactions are invalid and stakes cannot be withdrawn until the next software change, which could be a year away.

The really transformative news this week came from Fidelity, Citadel Securities, Schwab and others, who are creating a crypto exchange called EDX Markets. Wall Street’s ongoing interest in crypto could have a bigger near-term effect on prices than the Merge.