The Ethereum merge entered Day 3 today.
ETH/BTC on Watch
On Tuesday, the Bellatrix upgrade started the final transition, when Ethereum's proof-of-stake layer Beacon Chain merges with the Ethereum mainnet.
Ethereum's market cap is around $200 billion and there are over 400 decentralized apps running on it. The upgrade is a massive and concerted effort that is underway.
Crypto Lending Platform Pauses Lending; Coinbase Pauses New Deposits
If you hold any ETH, Ethereum's native coin, you do not need to do anything.
But node operators and testnet participants will have to upgrade their software to be in sync with the merge.
During the merge, several functions that use ETH will be on pause. ETH lending will stop temporarily on decentralized lending platform Aave to reduce the risk of high utilization.
Coinbase has also paused new ETH and ERC-20 token deposits and withdrawals during the critical phase.
The Ethereum Foundation announced that Ethereum's transition to proof-of-stake (POS) will reach a key milestone this week and the next.
The upgrade will prepare its proof-of-stake protocol called Beacon Chain to merge with its older Ethereum mechanism, which uses energy-hungry proof of work.
Proof-of-stake and proof-of-work are consensus mechanisms through which users validate transactions on a blockchain.
Beacon Chain does not have transaction or "smart contract" capabilities yet. After the merge it will. Ethereum's upgrade will continue until Sept. 20, when the merge will be complete.
If successful, the Ethereum Merge is expected to make Ethereum transactions faster.
That's because validators rather than miners will complete blocks, the step necessary to ensure that transactions are confirmed. Validators have to merely stake their ETH to participate. (Staking is sort of banking your digital assets to participate in blockchains.)
But does faster mean more secure as well?
Bitcoin has long held first place for security, thanks to its proof-of-work protocol, which requires a 51% attack. That means that a hacker would have to control 51% of the network's total computing power to change a transaction on the blockchain.
That has been the holy grail of Bitcoin's SHA 256 algorithm and has made it one of the most secure blockchains there is.
On the other hand, in 2016, evidence appeared that Ethereum is not invulnerable to attacks. The Decentralized Autonomous Organization (DAO) was vulnerable to hackers and $60 million ETHs were stolen. Although the stolen ETHs were restored, the theft split the Ethereum community.
But Ethereum's creator, Vitalik Buterin, claims that Bitcoin may not stay secure for long.
Bitcoin's Algorithm May Result In Less Security By 2024
Bitcoin's heavy energy consumption is not its critical weakness, according to Buterin. Ethereum's staking is expected to use 95% less energy, according to the foundation. The Ethereum creator points out, however, that Bitcoin's energy problem is different from its other problem of gradually diminishing rewards.
Bitcoin is set up to mine fewer and fewer coins over time. For the security of a protocol, there just has to be more mining to shore up against attacks. And there has to be greater miner rewards for miners to stay active and protect the blockchain.
New Trends Ahead of The Ethereum Merge
The amount of staked ETH has increased significantly ahead of the Merge. Staking has risen along with more active validators on the proof-of-stake protocol, Beacon Chain which has been running since 2020.
Total ETH staked is around 14 million, which is less than 15% of the total supply of 120,401,063.61 ETH so far. There is a vast potential as more validators stake their ETH, and as there are more options for staking. Recently, Coinbase launched a system called CBETH that generates liquidity in staked ETH by letting users sell, spend and use staked ETH.
Growth in the network in one safety mechanism that makes it more difficult to execute a hacking attack.
Growth will also likely come from greater energy efficiency. If, after the Ethereum Merge, transactions are 95.5% more efficient as planned, that efficiency will have a domino effect and cascade down to all the tokens that Ethereum supports. It will likely draw more contracts to the blockchain. Over 600,000 tokens contracts are on the blockchain now and daily verified contracts are near their all-time-high of 650.
Ethereum is the world's leading programmable blockchain. It supports some of top decentralized coins such as Tether (USDT), Binance coin (BNB) Chainlink (LINK) and DAI (DAI).
These tokens extend the blockchain's capabilities beyond financial transactions. Chainlink, for example, allows data retrieval. DAI seeks to reduce volatility through its crypto-denominated collateralized lending. Furthermore, their decentralization allows them to respond more efficiently and dynamically to market changes.
Price Action Leading to The Ethereum Merge
The chief DeFi coin's price rose close to $2,000 after news of the merge. It has come down since and is approaching $1,700 after a low of $1,430 in August. ETH futures have been lower than spot prices — a rare event — since usually futures are higher than spot prices to reflect the time value of money.
The backwardation shows that investors expect ETH price to fall after the merge. But that may be a near-term trend, according to Katie Talati at digital assets firm Arca. The strange backwardation may be due to investors buying in the spot market and shorting ETH futures.
