The world’s second biggest blockchain, Ethereum, has undergone a transformation — called the “Merge” — which could change the opportunities that it offers business. The post-Merge Ethereum is more environmentally friendly, has a lower barrier to entry and offers a way of generating income that may appeal to a different and potentially broader set of investors. It also now uses different methods to issue currency and provide security, which companies should understand and assess.
Here are five takeaways to help you understand what the Merge changed and what impact it could have on your company — even if you’re not currently using the Ethereum blockchain.
Ethereum no longer requires the use of immense computing power (“proof of work”) for transactions to take place. Instead, it now validates transactions with a process called “proof of stake.” If you own enough Ether (ETH), the Ethereum digital currency, you can “stake” it and join a group of participants who collectively validate transactions submitted to the blockchain. Since staking requires far less computing power than proof-of-work blockchains do, it uses much less energy — lowering its carbon footprint and making it more environmentally sustainable.
This lower carbon footprint could be attractive to companies that had hesitated to invest in digital assets due to ESG mandates or climate concerns. Assessed against an overarching blockchain sustainability framework, the changes from the Merge are an important part of the evolution to a more environmentally-friendly blockchain operation and digital asset strategy.
Proof of work (as Ethereum previously used) provided transaction security, in part, by demanding that participants invest massive and costly computing resources to validate transactions. Since the post-Merge Ethereum is proof of stake, security is different.
Owners of Ether must now “stake” their currency to validate transactions. For the blockchain to validate a fraudulent transaction, a malicious attacker would have to own and stake a majority of all staked ETH. Even then, once the fraud comes to light, the attacker would lose all the Ether that they had staked. For some companies, this change in how validation is done could help inform a broader strategy to mitigate digital asset risks.
If you wish to participate in validating transactions, one key requirement has changed. You do still need some technical expertise, and it’s an investment to buy and stake Ether, but you no longer need highly specialized machines and a team of specialists. Your hardware requirements are essentially a modestly powered computer (a consumer laptop will do) and a reliable internet connection, though you should have enough knowledge of blockchain operations to be an effective validator.
This change could have repercussions beyond potentially increasing the number of participants. Since the initial outlay now centers on a direct financial investment rather than investments in hardware, we could see different players owning and staking Ether to validate transactions. Companies may wish to monitor who owns staked Ether, since concentrated ownership would permit only a few parties to determine validation. That could present new security risks.
In the post-Merge Ethereum, if you choose to stake your Ether holdings to validate another participant’s transactions, you’ll receive more Ether in return. That’s different from proof of work-based blockchains, where you receive cryptocurrency in return for investing your computing resources. In some ways it is analogous to how bonds work: You receive a direct financial return on your financial investment and that return is effectively guaranteed by the Ethereum blockchain. As the Ethereum ecosystem grows, this yield could become more stable and potentially serve as a benchmark for other financial instruments within the Ethereum ecosystem.
A new source of investment income may involve new risks, compliance requirements and tax implications. If you choose this route, you should confirm that you have the tools, skills, controls and processes in place to help reduce key risks (such as fraud) and comply with all regulations and tax laws.
The Merge has changed Ether’s “tokenomics” — its economic functioning, including how it’s created, distributed and removed from circulation (a process known as “burning”). Previously, Ethereum issued a significant amount of new Ether to reward the work of participants validating transactions. It then “burned” some of the Ether it received through transaction fees.
In Ethereum’s new proof-of-stake approach, validation is less onerous, so the amount of new Ether issued to reward this work is lower — potentially making the currency more stable. With fees continuing to be “burned,” if transaction volume increases, the amount of Ether removed from circulation could even exceed the issuance.
The Ethereum Merge may just be the beginning, and further updates are expected in the near future, including a shift to “sharding.” This is a method of dividing data to be validated that could permit much faster and lower-cost transactions. That shift could join a lower carbon footprint, enhanced tokenomics, lower barriers to entry, a new approach to security and the potential for additional revenue streams as reasons for more companies to use Ethereum. Some may integrate it with products and services behind the scenes. Others may build new business models on directly related services. Financial services companies, for example, may offer not just Ether custody services but also asset and wealth management in the Ethereum ecosystem, Ether-based financial instruments and services such as staking, governance and validation. The result could be a “flywheel effect,” a virtual cycle of growing participation, efficiency and functionality.
It’s too soon to judge the impact of the Merge. But companies interested in blockchain and digital assets should consider these changes carefully as a potential part of their long-term plans for the digital economy.
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