Merge shifts Ethereum to full proof-of-stake, price slumps

The Merge, the moment Ethereum cryptocurrency abandons proof-of-work for proof-of-stake validation, has concluded. So far, all signs point to a success, though not without some footnotes Ethereum investors should note.

Prior to early this morning, Ethereum was validated using proof of work (PoW), which required more electrical energy than some small countries to solve ever-increasing mathematical problems to validate transactions. 

And we finalized!Happy merge all. This is a big moment for the Ethereum ecosystem. Everyone who helped make the merge happen should feel very proud today.

— vitalik.eth (@VitalikButerin) September 15, 2022

Now, under a proof of stake (PoS) system, holders of Ethereum willing to fork over 32 ETH (roughly $48,000 right now) can become validators by staking their own cryptocurrency.

If randomly chosen to be a validator on a block, a staker is responsible for checking the legitimacy of that block's transactions. Multiple validators are involved in verifying each block, which involves some simple calculations. If a positive consensus is reached, the block and its transactions are accepted onto the blockchain, simply put.

If the block shouldn't have been validated, or a validator screws up in some other way, a percentage – all the way up to 100 percent – of their stake is forfeit and lost forever. By following the rules, stakers get paid a small percentage of newly created Ethereum.

Classic miners are no longer needed, and instead, people risk their own coins to ensure the blockchain maintains its integrity. The more you stake, the more chance you get picked to validate, and more the chance to earn.

Because there's now no need for miners to solve complex equations to validate blocks, the energy costs of Ethereum using PoS should decrease by around 99.95 percent, the Ethereum Organization said. That's just in the nick of time as the Biden administration only last week published a report urging policy action to be taken against cryptocurrency miners.

That report echoed common energy efficiency concerns of PoW, namely that it's inefficient and continually requires greater energy investment, which the White House said could derail efforts to transition us to renewable energy sources.

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Per CNBC, the now-merged Ethereum blockchain has already begun processing proof-of-stake transactions in a way that's been described as "the best-case scenario," making Bitcoin the last of the big PoW energy hogs.

Dogecoin, the now second-largest proof-of-work cryptocurrency, consumes far less energy than Bitcoin, but even it isn't immune from problematic levels of electricity consumption.

What The Merge isn't doing

The Ethereum Organization said there were several things users thought the Merge would accomplish that simply weren't part of the plan. Most notably, the Merge would not speed up the Ethereum network in any substantial way, and that it will still be just as expensive to get a transaction added. 

Gas fees are well-known to anyone who has tried buying anything using the Ethereum blockchain, used NFTs, or the like: it's what you have to pay to, in essence, motivate someone to include your transaction in a block for validation. 

The busier the Ethereum network, the higher the gas fees, and despite a massive reduction in processing power needed to validate a block under PoS, the Ethereum Organization said nothing has changed "that directly influence[s] network capacity or throughput." 

So, to those hoping PoS Ethereum would make transactions cheaper, sorry, those gas fees will still be way too high. Because the Ethereum network's capacity and throughput is unchanged, don't expect block processing time to get faster, either.

"Historically, on proof-of-work, the target was to have a new block every ~13.3 seconds. Under proof-of-stake, slots occur precisely every 12 seconds … this was a fairly insignificant change and is unlikely to be noticed by users," the Ethereum Organization said.  

Your staked Ethereum has been Shanghaied

Perhaps the most notable, but little mentioned, issue with the PoS merge is that, while those with at least 32 ETH in their wallets can place a stake, they can't withdraw it or any of the earnings they're accruing by validating blocks. 

For that capability, Ethereum's (as of writing) 427,314 stakers will have to hold out for the upcoming Shanghai update that, as of now, has no planned date. 

Per Bloomberg, Shanghai is at least six months away, and once live, withdrawals will still be capped so too much digital coinage isn't withdrawn at once. 

Whether that news will cause a bit of hesitancy on the part of stakers remains to be seen, but since flipping the proof-of-stake switch this morning Ethereum has lost around six percent of its value, after bouncing back from a bigger drop.

But you know what they say: buy the hype, and sell the news – so the plunge isn't that surprising. ®

PS: After Ethereum moved to proof of stake, SEC chair Gary Gensler indicated proof-of-stake cryptocurrencies could be subject to securities laws.