Ethereum Merge: when is the blockchain upgrade and how will it cut energy use by 99.9%?

New system will mark a change in how transactions are carried out and how tokens are created

Ether is the second-largest cryptocurrency after Bitcoin, with a market capitalisation of about $200 billion. Reuters

A long-awaited software upgrade to the Ethereum blockchain aimed at slashing its huge energy consumption is under way, a move proponents say may widen the technology's use and support the price of the Ether token.

The upgrade, known as the “Merge,” will mark a radical change in how transactions on the Ethereum blockchain occur and Ether tokens are created.

The new system will consume 99.95 per cent less energy, said the Ethereum Foundation, a body which acts as a representative for the network.

When will the Merge happen?

The Merge has already started. The Ethereum Foundation initially said it would take place between September 10 and 20 and it has since updated that to September 14/15.

"The precise timing depends upon how the network hash rate develops and it can be monitored at bordel.wtf. The Merge will be triggered when the network passes a threshold accumulated difficulty, known as the TTD (terminal total difficulty)," the foundation said.

What does the Merge entail?

If successful, Ethereum will move from a “proof-of-work” system — in which energy-hungry computers validate transactions by solving complex mathematical problems — to a “proof-of-stake” protocol. This involves people and companies acting as validators and using their Ether as collateral, in an attempt to win fresh tokens.

Ether is the second-largest cryptocurrency after Bitcoin with a market capitalisation of about $200 billion, data site CoinGecko said. There are about one million to 1.5 million transactions a day on the Ethereum blockchain, compared with Bitcoin's 200,000 to 300,000, CoinMetrics data showed.

Cryptocurrency prices plunged earlier this year as a broader downturn in financial markets prompted investors to ditch risky assets. Ether has risen by about 80 per cent since a mid-June low, while Bitcoin has had little change.

“This is a very material development in the overall evolution plan for Ethereum,” said James Malcolm, head of FX strategy at UBS.

Energy-saving step forward …

The high energy use of cryptocurrency and blockchain technology has drawn criticism from some investors and environmentalists.

A single transaction on Ethereum currently requires as much power as an average US household uses in a week, researcher Digiconomist said.

To proponents, the energy-saving upgrade represents a major step forward in the race to become the world's top blockchain.

“The energy expenditure of Ethereum will be roughly equal to the cost of running a modest laptop for each node on the network,” the Ethereum Foundation said.

Ethereum has become the blockchain of choice for various functions in the world of decentralised finance, including smart contracts and projects involving tokens representing traditional assets such as stocks and bonds.

Ethereum backers say the technology will form the basis of a new financial system, in which money and assets can be traded in the form of cryptocurrency tokens without the need for providers of traditional financial services.

Others see it as a cornerstone of Web3, a hyped but still unrealised iteration of the internet where blockchain and cryptocurrency assets take centre stage.

Still, Ether has, so far, had limited mainstream adoption as a means of payment, with trading by far the most popular use.

Will the Merge reduce gas fees?

No. "The Merge is a change of consensus mechanism, not an expansion of network capacity, and will not result in lower gas fees," the Ethereum Foundation said.

How is the Ether price faring now the Merge is happening?

Ether made modest gains to hover around $1,605 as of 11.21am in Tokyo on Thursday, while Bitcoin edged up to about $20,000.

“The market is pricing in a virtually successful Merge to happen,” Teong Hng, co-founder at digital-asset platform Satori Research, said on Bloomberg TV. “For institutional investors, ones who are ESG conscious, they will use this as an opportunity to dip their toes into blockchain, into tokens, into Ethereum.”

The medium and longer term Ether outlook is brighter, said Stefan Rust, chief executive of blockchain development house Laguna Labs.

He said Ether could top $3,000 by the end of this year and possibly achieve the so-called “flippening” in time, referring to the idea that its market value might overtake Bitcoin’s.

* with agencies