Ethereum is on the cusp of a radical change. Critics say blockchain technology and cryptocurrencies are too energy-intensive to play a role in finance. The riposte of ethereum developers is The Merge. They aim to combine the main ethereum blockchain network with another system to slash power consumption.
The Merge promises to edge digital assets, whose prices have taken a battering, closer to the financial mainstream. A successful dress rehearsal in August means the change could take place in coming weeks.
Like bitcoin, ethereum uses a proof-of-work model in which complicated equations must be solved in order to unlock new digital tokens or validate transactions. This drains a great deal of computer power.
Estimates of energy consumption vary. But bitcoin is reckoned to use as much as 150 terawatt hours yearly, 0.65 per cent of the global energy supply. Ethereum would burn up about 75 Twh annually.
The Merge means ethereum will shift to proof-of-stake in which users verify transactions using their existing assets. This requires less power — 99.95 per cent less according to community-created information site ethereum.org. Token owners can invest their capital via staking, loaning out digital assets to validate transactions.
The annual return for staking is about 3.85 per cent on proof-of-stake blockchain network Solana, according to estimates from Coinbase, a crypto platform. Ethereum, a larger network with more transactions, could provide higher returns. Ethereum.org predicts 7 per cent.
Ethereum’s digital token ether is the second-largest cryptocurrency after bitcoin. However, the gap is substantial. Ether’s market value is about half of bitcoin’s, according to data from CoinGecko.
Like all cryptocurrencies, the price has retreated from a record high last year as interest rate rises reduce demand for risky assets. It is down 60 per cent from its high point, just below bitcoin’s 65 per cent drop.
The Merge could reduce the gap by propelling ether’s price. It jumped more than a tenth after a test network completed a simulation of the switch planned for the main network.
The update has been delayed before. Even if it occurs, not everyone plans to adopt it. Some miners who stand to lose out are making plans to run the old version of ethereum — something known as a fork. But such a move will not be widely supported. Reducing crypto’s energy use is a widely shared goal.
The Lex Newsletter
Catch up with a letter from Lex’s centres around the world each Wednesday, and a review of the week’s best commentary every Friday. Sign up here