A major change in the way the Ethereum blockchain operates could have huge implications for crypto investors.
Ethereum (ETH -2.43%) has long played second fiddle to Bitcoin (CRYPTO: BTC) in the crypto world, despite the fact that many of the most exciting innovations in the crypto space (including the creation of NFTs and smart contracts) actually originated on the Ethereum blockchain. According to market capitalization, Bitcoin is still nearly twice as large as Ethereum, and many casual investors may keep a close eye on the price of BTC but seem to pay little or no attention to what’s happening with ETH.
But all that could change later this year. That’s when ETH might finally overtake BTC as the crypto you need to hold in your portfolio after making a much-anticipated change to its technological infrastructure.
Why “The Merge” is such a big moment for Ethereum
The event that crypto investors are keeping a close eye on is called “The Merge,” and it has acquired legendary status in the crypto world. It’s the moment when Ethereum officially shifts from a Proof-of-Work to a Proof-of-Stake consensus mechanism. It’s hard to put an exact date on this shift – it’s now targeted for early Fall 2022 – but when it happens, Ethereum is going to experience a massive upgrade to its capabilities. Proof-of-Work is the old, archaic model (at least, by crypto standards) still used by Bitcoin, while Proof-of-Stake is the new, innovative model used by upstart blockchains.
For the average investor on Main Street, what you need to know is that a shift to Proof-of-Stake is going to reduce energy consumption by the Ethereum blockchain by as much as 99%. This is huge, because Proof-of-Work requires crypto mining, and crypto mining is one of the most energy-intensive activities in the world. Electricity consumption by crypto miners is so high, in fact, that China has banned all crypto mining in the country. According to an analysis conducted by the New York Times in late 2021, Bitcoin uses more electricity than many countries, including Finland, Sweden, and Denmark. Proof-of-Stake does away with this system entirely. When Proof-of-Stake is finally implemented, crypto mining on the Ethereum blockchain disappears. With Proof-of-Stake, miners are no longer competing to verify new transactions on the blockchain by solving complex computational problems. As a result, it will no longer be necessary to use sophisticated and expensive mining rigs, reducing electricity consumption dramatically.At the same time, congestion on the Ethereum blockchain is going to disappear overnight, making it much faster to process every transaction. Everything you do on the Ethereum blockchain is going to become faster, cheaper and more efficient. Transaction fees (known as “gas fees”) could fall dramatically, making Ethereum more accessible to the casual user. For example, right now, you would likely pay anywhere from $35 to $40 in gas fees for an NFT purchased on the popular OpenSea marketplace. In contrast, gas fees for the same transaction using a Proof-of-Stake blockchain could be as low as $0.01. So, if you are buying NFTs on the Ethereum blockchain in the future, you will immediately notice the difference. Moreover, Ethereum will be in a much better position to fend off competitors such as Avalanche (CRYPTO: AVAX), Solana (CRYPTO: SOL) and Polkadot (CRYPTO: DOT), all of which already have Proof-of-Stake blockchains.
Difficulties in merging
While all this sounds fantastic, it’s the timing that’s the problem here. Ethereum has been promising “The Merge” for a long time. Yes, there has been considerable progress made, but for some reason, the date keeps getting pushed back. At the big Ethereum developer conference in Denver earlier this year, the consensus seemed to be that June 2022 was going to be the date of “The Merge.” But in April, the date suddenly got pushed back to later in the year. Meanwhile, blockchain rivals like Avalanche and Solana seem to be getting more and more popular by the day. For example, many people are now buying and selling NFTs on the Solana blockchain because it is faster and cheaper than doing so on the Ethereum blockchain.
The long-term outlook for EthereumAt some point, though, Ethereum is going to pull off “The Merge,” and that is going to be big news not only for crypto investors, but also for anyone concerned about the electricity consumption of Proof-of-Work blockchains. The new Ethereum will not only be faster, cheaper and more efficient for users – it will also be greener and more environmentally friendly due to lower energy needs. Once everyday investors wake up to the fact that different blockchains operate in different ways, with huge impact on key factors like throughput capacity and transaction costs, that’s when Ethereum could finally overtake Bitcoin.
