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If the Merge Goes Well, Here's How Crypto Investors Benefit

TheStreet logo TheStreet 9/12/2022 Luc Olinga
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If a momentous crypto effort goes smoothly, crypto investors will benefit on a number of levels.

The crypto industry arouses both curiosity and distrust. 

Even amid the cryptomania in 2021, plenty of critics were warning about a crypto trap. This year's crash in the cryptocurrency market has confirmed those concerns and cooled the ardor -- not to mention the bank accounts -- of retail investors in the space.

But the young industry now has a major opportunity to reintroduce itself to Main Street. 

It's called the Merge. It's a software update of the Ethereum blockchain, which is considered the internet of the crypto space. The Merge is set for Sept. 15, and if all goes well, the crypto industry will take a huge step forward in building trust among investors, crypto enthusiasts say.

Experts say that the Merge will ease a major criticism of the industry by sharply reducing the energy consumption of crypto-related activities. And the Merge should boost the uses of crypto, particularly in financial services and the development of the decentralized internet.

The Merge, Explained

The ethereum platform was created in 2015. Developers use this digital ledger to build many uses for blockchain technology. 

Ethereum, which is different from bitcoin, is the home of more than 3,000 decentralized applications, from games to trading to financial services like loans. On ethereum various trends have emerged, like initial coin offerings, decentralized finance, nonfungible tokens and, more recently, the metaverse.

Ethereum has also enabled the emergence of smart contracts. Transactions concluded by smart contracts require no human intervention. Everything is managed by mathematical codes.

But the network's performance has been unable to keep up with growing demand. Ethereum has seen significant congestion, prompting, among other things, a sharp increase in fees on the network.

This is where the Merge comes in. Basically, it's Ethereum 2.0. It's a new way of conducting transactions that unites all the different methods of the past into one. It is supposed to be more eco-friendly, more secure, and cheaper for users. 

Speed is another benefit of the Merge. Ethereum in its current form can carry out 15 transactions per second. If the Merge is successful, the blockchain could eventually handle up to 100,000 transactions per second, which is more than Visa  (V) - Get Visa Inc. Report and Mastercard  (MA) - Get Mastercard Incorporated Report can do, enthusiasts say.

How the Merge Makes Crypto More Eco-Friendly

In general, transactions and operations are verified by a bank or a third party. Not with blockchain: The system relies on a network of computers that compete via complex mathematical equations for the right to validate transactions. In return those validators receive tradeable and potentially valuable tokens.

This validation mechanism is called proof-of-work. This system involves consumption of huge amounts of electricity because it requires enormous computer power. Ethereum consumes some 78.6 terawatt hours of energy a year, which is what the country of Chile uses. The carbon emissions of the blockchain are comparable to those of Hong Kong.

The Merge will replace proof-of-work with a system called proof-of-stake. 

In this system, the validators are appointed from among a group of cryptocurrency owners. Since many computers no longer have to compete for the right to verify transactions, the system's energy consumption will decrease drastically.

That decline will be about 99.95%, estimates the Ethereum Foundation, a group of developers who oversee the blockchain.

How the Merge Will Make Crypto Safer

As of 2020, developers were using two versions of ethereum in preparation for the Merge. This multiplied the possibilities of attack for hackers and scammers. With the Merge, one of the versions will disappear and the pool of validators per transaction will be reduced. Thus the attack opportunities for scammers will also diminish ,making Ethereum safer.

The Risks of the Merge

One of the biggest risks of the new ethereum would be that the platform becomes controlled by the wealthy because you have to pay an entry fee to become a validator. 

You must hold at least 32 ether, the platform's native token, or just over $56,000 at the current ether price. Validators must put their ether aside in a separate account. 

This clearly is a limit to the system because even if the validators put their cryptocurrencies aside, there is no guarantee that they will not act in their own interests.

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