Blockchain technology's negative effect on the environment is a large obstacle to its widespread adoption. However, this could all soon change with the new Ethereum Merge. Ethereum is the second-largest cryptocurrency in the world by market cap and reports are saying it could soon reduce its carbon footprint by over 99% via “The Merge.”
What exactly is this event though and what does the Ethereum Merge have to say about the Ethereum price forecast in the coming years? We did the research for you. Let’s get into it.
Before we get into the technical details of the Ethereum Merge, we first must understand the problem it is attempting to solve. The problem starts with cryptocurrency miners.
Cryptocurrency miners use powerful computers to solve extremely complex cryptographic puzzles. This isn’t just for fun. The miner who solves the puzzle first wins the right to validate a block of transactions. Hence, new data is added to the chain of blocks -- called the blockchain. This system is set in place to incentivize miners to verify the distributed ledger and all transactions associated with it.
Ethereum miners working on the ethereum blockchain get a reward of 2 ether for every block they verify. They call this protocol “proof of work” and it's the same one bitcoin miners use to verify transactions on the bitcoin blockchain. While it’s a great system that allows the blockchain to operate in a decentralized manner while maintaining security, it’s not without its faults.
Over time, the cryptographic puzzles become more difficult to solve, meaning miners must use even more powerful computers to compete with each other. Some mining operations even take up entire warehouses full of these computers. As one would expect, this requires a lot of energy. Lots of energy means a high carbon footprint. This is a fact that concerns a lot of environmentalists.
Those in the crypto world often hear about blockchain technology’s massive energy usage. Is it true though or just an attempt from traditional financial institutions to squash the competition?
Well, let’s look at the facts.
According to data from Statista.com, 1 single Bitcoin transaction consumes 2,188.50 kWh. To put that in perspective, 100,000 Visa transactions consume just 148.63. In terms of Annualized Total Bitcoin Footprints, Bitcoin has a comparable carbon footprint to the entire country of Romania, uses the same electrical energy per year as the entire country of Ukraine, and produces the same amount of electronic waste as the country of the Netherlands.
Ethereum meanwhile uses about 62 million terawatt-hours per year, which is close to what Switzerland’s 9 million citizens use each year. Furthemore, to match the carbon footprint of a single Ethereum transaction, one would have to make 265,386 VISA transactions or watch 19,957 hours of YouTube.
However, it’s not all bad news. A lot of the energy from crypto mining operations comes from renewable energy. It has nothing to do with appeasing climate watchdogs. As with most things in life, it’s money driven.
Renewable energy is simply cheaper. Miners can save money using wind, solar or hydroelectric turbines to power their operations. Still, Ethereum has a massive carbon footprint and if it wants to evolve with the times, it needs to address that. That’s where the Merge comes in.
Currently, the Ethereum protocol operates on a “proof-of-work” protocol and a “proof of stake” protocol. Soon, Ethereum will merge the two blockchains.
Suggested Reading: Proof of Stake vs Proof of Work: Ultimate Guide
The Ethereum blockchain that we all know and love is called the “mainnet.” This blockchain is open to the public. There are also other various versions only available to developers called “testnets.” In 2020, one of these testers called “the Beacon Chain” started drawing the attention of developers.
The beacon chain is a proof-of-stake blockchain that many are starting to call “the new ethereum.” The Ethereum Merge will see the data from Ethereum's current, mainnet blockchain transferred to the new, beacon chain. The beacon chain will then become the primary blockchain of the ethereum network.
For over two years, ethereum developers have been aggressively stress testing the beacon chain, preparing it for this event. Now, how does this all tie into the environment? Good question.
Proof-of-work blockchains like Bitcoin and the old Ethereum blockchain are much more energy intensive than proof-of-stake. That’s because, with the proof-of-stake model, miners don’t need to solve these complex cryptographic puzzles to verify new blocks of data. Instead, they simply deposit ether (ETH) into a pool.
Miners now referred to as validators in this situation, deposit ETH and then wait until their ETH gets called upon. Then, they win the right to validate the transaction and win the reward. Taking the puzzles out of the equation, The Ethereum Foundation estimates that electricity usage will decrease by 99.65% after The Merge.
At the time of writing, Ethereum (ETH) currently sits at $1,823 down 51% from the start of the year. However, many analysts believe the Ethereum price forecast looks good once the Merge happens. As always, this is currently being debated by many in the industry, some suggesting the increase is already “priced in.”
The two main reasons people think ETH’s price will rise after the Merge is:
There are reports of companies saying they will not invest in Ethereum due to environmental, social, and corporate governance standards (ESG). Once the Merge happens and Ethereum becomes more environmentally friendly, tech companies could be more willing to invest in Ethereum, thus increasing its overall value.
Furthemore, building dapps on Ethereum will become cheaper, drawing more technical talent to the blockchain. More talent leads to more innovation which leads to more investment. This will all help bring usability and attention to the blockchain, thus affecting ETH’s price.
The second point is regarding ether miners. On proof-of-work blockchains, miners typically sell the majority of the cryptocurrency they earn from mining. This is to cover the ever-growing energy costs from their mining operations. As a result, this creates massive sell pressure on the market, fighting against price growth.
Now, with proof-of-stake, miners don’t need to sell the crypto they earn. Validating transactions are cheaper than mining. In theory, this will alleviate some of the selling pressure and could potentially help the price of Ethereum rise in value.
Please read this company update to learn all you need to know about what happens to your Ethereum on YouHodler during the Merge. In short, your assets are safe and secure on YouHodler. Nothing is required from you during this upgrade. However, there are certain tactics you can use to help you take advantage of the incoming ETH volatility:
The Ethereum Merge is expected to occur in mid-September 2022. Head to YouHodler today to prepare your portfolio.