Today was a big, big day in the crypto world.
After years of preparation and anticipation, the Ethereum merge finally went ahead today. The network switched over from Proof of Work to Proof of Stake. There were songs, there were even viewing parties with people staying up all night to watch the Merge happen.
But for most people, today was business as usual. The Merge was completed and the event went by largely unnoticed by the wider world. Here is why what just happened was actually a big deal:
The biggest problem with Proof of Work blockchains (like the Bitcoin network) is that they use a tonne of power. Computers need to solve complex cryptographic puzzles to add new blocks to the blockchain, and a lot of electricity is used in supporting these computers.
Now that the merge has happened and Ethereum has moved away from Proof of Work, the network has cut its rate of energy consumption by over 99% overnight. It's estimated that the merge will reduce global electricity consumption by 0.2%. That's the equivalent of getting rid of all energy consumption from an entire country like Chile or Bangladesh. And again... this change happened overnight.
"The merge will reduce worldwide electricity consumption by 0.2%" - @drakefjustin
— vitalik.eth (@VitalikButerin)
Sep 15, 2022
ETH used to be an inflationary token - it is now a deflationary token. Since the network now uses much less energy to run, it can pay out smaller rewards to validators on the network. The supply of ETH is reducing, which is making the token more valuable. People have touted this as one of the main benefits of the merge, but there are two schools of thought on this.
Why ETH being deflationary isn't necessarily a good thing
Everyone is making a big song and dance about ETH being deflationary because it means the value of their investment goes up. But there are some drawbacks too - which much of the community seems to be overlooking. Firstly, as we all know, decentralisation is the point of this whole web3 thing. A deflationary token could lead to more centralisation on the Ethereum network. Why? As ETH becomes more and more valuable, it becomes harder for new entrants to buy large amounts and set up nodes on the network. More and more power goes to the original holders of ETH.
If you think about a country's currency, like the US Dollar, deflation is a terrible thing. Deflation is terrible because people realise the Dollars sitting in their pockets and bank accounts are just getting more and more valuable as time goes on, so they stop spending them (to the extent they can). Because people stop spending, economic activity declines, fewer goods and services get sold and less gets built. But Ethereum is also a network which people build on. So some of these considerations, which make deflation bad for nation-states, might well apply to the Ethereum network too.
The ETH Pump & Dump Trade
I'll be honest - I was secretly hoping that if there was some hiccup with the Merge, it would be a great chance to buy some ETH at a cheap price. There was no hiccup - everything went smoothly. But the price of ETH still went down by over 7%! Some are speculating that this is due to people buying up ETH pre-merge in the expectation that the price would soar upwards, and then dumping their holdings when they saw that wasn't happening.
The Merge is just the start for the Ethereum network. There are lots of upgrades being planned and lots being built. But let's not underestimate the importance of what just happened. If web3 technology is going to develop and realise the potential some people see in it, it's going to happen through step changes like the one we saw today.