Ethereum, the blockchain network behind the world’s second-largest crypto token Ether, has just completed a major software upgrade that could revolutionize the cryptocurrency universe, some experts say.
The upgrade, dubbed “The Merge” by crypto enthusiasts, promises to lower Ethereum’s energy consumption and attract more users. Climate activists have long criticized digital assets because their production consumes enormous amounts of electricity and causes large CO2 emissions. The University of Cambridge and Digiconomist estimate that the two largest crypto assets, Bitcoin and Ethereum, together use around twice as much electricity as all of Sweden in one year.
The high energy consumption of crypto production is due to the “proof of work”, i.e. the way transactions are verified and more digital assets are produced. By updating its software, Ethereum is changing the process to “Proof of Stake,” which will lower energy consumption, attract more users, and speed up transactions, experts say.
“The merger could be one of the most important events in history” for digital assets, said Jacky Goh, CEO and founder of Rewards Bunny, a platform that rewards buyers with cashback in either cryptocurrency or US dollars. “It will make Ethereum easier to use, more scalable, and there will be better adoption.”
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What is Proof of Work (PoW)?
To confirm a transaction on the blockchain, humans have to solve complex mathematical puzzles with heavy computing power. Once the puzzles are solved, the transaction is added to the blockchain ledger and the person or miner who solved the puzzles first is rewarded with cryptocurrency. This is also how new cryptocurrencies are released.
What is a Proof of Stake (PoS)?
This method replaces miners with “validators” who pledge their cryptocurrency as collateral to create new blocks. Instead of individuals vying to be the first to solve the same math puzzles to create new blocks, an algorithm randomly selects one person to validate, or confirm, a transaction.
Since your chances of being selected as a validator depend on how much you promise or “stake”, many people pool their digital coins to increase their chances of being selected. The rewards are then usually divided according to each person’s contribution.
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What are the advantages of PoS?
It doesn’t require huge computing power as not everyone is trying to solve the same math puzzle at once, making it more energy efficient than PoW.
Also, because it doesn’t require as much computing power, the barriers to entry are lower. Humans no longer need expensive, specialized hardware that can calculate complex equations at the speed of light.
“The merger will be a great evolution of the Ethereum network,” said Alan Goldberg, an analyst at BestBrokers. “Electricity consumption is expected to fall by a whopping 99.95%, which is huge, especially in the context of the current energy crisis.”
And this drop in energy consumption could be key to “making Ethereum more palatable to policymakers and regulators,” Teunis Brosens, ING’s chief economist for digital finance and regulation, wrote in a report. “This, in turn, removes a stumbling block for traditional financial institutions and other companies to offer Ethereum-based services.”
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What are the disadvantages of PoS?
Politicians, regulators, and financial institutions adopting Ethereum should be a telltale sign that PoS is a major downside, some say.
The World Economic Forum (WEF) “published an article on its homepage praising the merger as a ‘seasonal shift towards sustainability among cryptocurrencies,'” said Cory Klippsten, CEO of SwanBitcoin.com.
If an organization like the WEF decides to stake a large amount of cryptocurrency, it can do so without any obstacles and exert its influence on Ethereum, said Klippsten.
Ethereum was never truly decentralized like Bitcoin, he argues. “Ethereum was founded by a group of people, like a company, and it’s fundraising like a company, and it’s run like a company,” he said.
Medora Lee is a money, markets and personal finance reporter for USA TODAY. You can reach her at [email protected] and sign up for our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
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