Representatives of the cryptocurrencies Bitcoin, Ethereum and Dash are immersed in water in this May 23, 2022 image. REUTERS/Dado Ruvic/Illustration
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Aug 16 (Reuters) – Ethereum seems to be in for a mega-upgrade. Finally.
After years of delays, “The Consolidation” will take place in September, the cryptography underlying the blockchain undergoing a radical transition to a system where the creation of new ether tokens is less energy intensive.
“It’s an exciting time for the Ethereum ecosystem,” said Omar Syed, co-founder of smart contract platform Shardeum. “I think there will be drama with the Merger, but I don’t think there will be technical hiccups.”
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Investors agree that ether is outperforming its big brother bitcoin.
While far from its November 2021 peak of $4,868.79, Ether has seen six consecutive weeks of gains, rising from a 1-1/2-year low of $880 in mid-June to levels approaching $2,000.
Bitcoin fell by comparison, rising 37% from its June lows to $24,116.
Ether dwarfs behemoth bitcoin’s market share: It now accounts for about a fifth of the total market capitalization of the $1.14 trillion cryptocurrency market – 19.7%, down from 14.9% two months ago, according to CoinMarketCap . Bitcoin’s share fell from 44.9% in the same period to 40.2%.
“Crypto is still very tightly coupled, and I think that if the Merge is successful, it could also increase the price of bitcoin,” said Alex Miller, CEO of Hiro, which makes developer tools for building applications for bitcoin.
If Ethereum’s creators succeed, as is largely expected, it could be a game changer for blockchain, making it cheaper to adopt and easier for fintech and other cryptocurrencies to adopt.
Of course, little is guaranteed about the difficult transition, which has been delayed several times, with developers shelving plans to push the button most recently in June, worrying investors who are beginning to fear it will never see the light of day.
The merger is also fraught with risk, and the fortune of about 122 million ether worth about $232 billion in circulation could be at risk if it fails.
If the upgrade doesn’t go well, it will “set the entire cryptocurrency world back by five or 10 years,” Hiro Miller said.
‘DIFFICULTY BOMB’
The Ethereum blockchain currently uses a power-intensive proof-of-work (PoW) method to validate blocks, where miners use massive amounts of power to quickly solve complex computational problems to earn newly minted coins.
On a parallel chain, ethereum is testing a proof-of-stake (PoS) system that only requires miners to “stake” their coins to confirm transactions and create new blocks. It promises a 99.95% reduction in blockchain’s energy consumption, making it ready for faster transactions.
Not everyone is happy about the convergence of the two systems – especially ethereum miners, whose expensive mining rigs will become obsolete and cannot be used for bitcoin mining.
Ether mining has so far been more profitable than bitcoin mining. According to Arcane Research, Ether miners earned $18 billion in 2021, compared to $17 billion for bitcoin miners.
Some miners have decided to switch to mining the next best option, such as ethereum classic or ravencoin tokens.
At least one miner has announced plans to fight back and continue mining ethereum, raising the specter of some people keeping the PoW chain in its current form even after the merger, possibly competing with an improved blockchain.
However, this option has its dangers.
The creators of Ethereum developed a “difficulty bomb” to exponentially increase the difficulty of mining in order to prevent the PoW parallel chain after the Merger.
Moreover, both Tether and USDC – the largest stablecoins – have thrown their weight behind Merge, reducing the likelihood of wider adoption of the parallel PoW chain.
THEY WILL COME WITH FOAM
“The likelihood of a long-term Ethereum chain split after the merger remains weak,” said Alex Thorn, head of large-scale research at Galaxy Digital.
Nevertheless, at least some investors are gearing up for a hard fork or parallel PoW chain, the derivatives market shows.
Ether futures also traded at $1,905 on the CME exchange, “reflecting expectations around the proof of work fork,” said Matthew Siegel, head of digital asset research at fund manager VanEck.
“But the gap isn’t big enough to think there’s too much foam,” he said.
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Reporting by Medha Singh and Lisa Pauline Mattackal in Bengaluru Editing by Vidya Ranganathan and Pravin Char
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