2024 - Ethereum's "The Merge": the crypto revolution that will "end the controversies"

Cryptocurrency enthusiasts are holding their breath this week. In the coming hours, Ethereum, the second largest blockchain in the world, will switch to a radically different mode of operation. A high-flying operation that required years of painstaking work and testing. If this changeover called “The Merge” takes place without a hitch, it will open up vast opportunities for Ethereum and will certainly boost the entire sphere of cryptocurrencies, NFTs and decentralized finance (DeFi). Similarly, a failure would have repercussions far beyond Ethereum’s already vast scope. Decryption of the issues with Alexandre Stachchenko, blockchain and crypto director at KPMG France.

L’Express: Why is “The Merge”, this change in the functioning of the Ethereum blockchain, such an important event in the crypto sphere?

Alexander Stachchenko: Several reasons for this. First, it concerns the second blockchain in terms of market capitalization (almost 200 billion dollars). A trompe-l’oeil figure by the way, because there is also a whole economy of NFTs and decentralized finance (DeFi) backed by the Ethereum blockchain. If we take that into account, we reach just over 400 billion dollars, and we exceed the Bitcoin ecosystem at present. Moreover, “The Merge” is not a simple update, it is a change of engine, therefore a major shift. A real leap into the unknown.

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This toggle is supposed to drastically reduce Ethereum’s power consumption. Is the reduction mentioned – around -99% – achievable?

Yes, the current mode of operation (the proof of work or “proof of work”) implies having a great computing power and therefore many machines to have a fair chance of being the first to solve the mathematical test which then gives the right to mine a “block” of operations and earn the associated reward. In the proof-of-stake system adopted by Ethereum, this mining process is no longer used, and therefore all this computing power, which concentrated almost all of the energy consumption, will no longer be mobilized. We can theoretically participate in the Proof of Stake with a simple Raspberry Pi (note: a mini-computer at a reduced price and the size of a credit card). Electricity consumption has become a sticking point for some players, but it’s a debate that was poorly posed in my opinion. It is the result of a deep misunderstanding of the functioning of the crypto sector. “The Merge” will put an end to these sterile controversies, and will offer companies a blockchain to work on while preserving their image. This does not, however, call into question the value proposition of Bitcoin for example.

What other factors should then be taken into account, in your opinion, to accurately analyze the ecological impact of blockchains?

In 2017, a study relayed by the World Economic Forum, affirmed that in 2020, Bitcoin would consume as much as the rest of the whole planet. It is clear that these projections were erroneous! The problem is that at bottom, this is a usefulness debate, but many people do not yet understand what cryptos are for. Therefore, they necessarily find that it consumes too much. But we cannot talk about the ecological impact of Bitcoin, without recalling all that the instrument brings in terms of financial inclusion for people who live in countries with few banking services and without understanding that it draws a financial network of future.

We are offended that Bitcoin consumes more than some countries like Denmark, but it does not shock anyone that we use more energy to dry clothes in the United States alone. On the one hand, we have machines that dry clothes a little faster, and on the other hand, a new form of financial network that is profoundly useful to people living in underdeveloped and poorly banked countries. In the game of comparisons, it is also important to remember that Bitcoin is a complete system. Conversely, classic payment systems do not work if there are no banks, euros, etc. Bitcoin is self-sufficient. So comparing its energy consumption per transaction to that of a traditional payment system makes no sense.

The crypto sector often highlights the fact that blockchains could help renewable energies to develop. How?

Electricity is one of the main items of expenditure for miners, but they have the rare advantage of being geo-independent, ie their viability does not depend on any geographical constraint. Conversely, for example, you can only mine gold where there are veins, and you are not going to set up a shopping center in the middle of Siberia, because there are no customers. Crypto miners have no such constraints: all they need is a satellite connection. In addition, minors can quickly interrupt their activity if necessary. While you can’t stop a steelworks in a snap, nor even a data center, which must be available to its customers all the time.

All of these factors mean that miners are ideally placed to get the cheapest energy, the one no one wants. I am of course thinking of surplus production from renewables, such as wind or solar. In Texas, which has made a rather crazy energy transition to renewables in recent years, the electricity transmission infrastructure has not kept pace with the production capacities. As a result, energy production frequently exceeds needs, and electricity prices are even negative nearly 20% of the time in certain regions of Texas. The miners can therefore use these surpluses, which are in no way an additional load on the network, since the energy was produced anyway. We can also imagine synergies to exploit unexploited gas discharges instead of burning them as is currently done with flares.

Is Ethereum’s switch to a radically different operation technically perilous?

The purely technical part has been tested about fifteen times on test networks, so the risk that “The Merge” will be a technical failure in the coming days is relatively low, even if it exists. If there was a problem, it would theoretically be possible to revert to the old blockchain, but that would send a very bad message to the market about Ethereum, and possibly about some of its competitors. The market could indeed deduce that a failure of Ethereum frees up a place for its competitors, or conversely, that if it does not succeed, the others will also fail.

Could “The Merge” jeopardize some of the founding principles of Ethereum’s operation?

Some malfunctions could remain invisible or at least take a long time to detect. The major interest of blockchains is what is called “uncensorability”. Cryptocurrencies are like cash, you can do what you want with them without asking for special permission. In the physical world, you don’t need anyone’s permission to pay for a baguette at the bakery in cash, for example. Cryptos enable this in the digital world, a radical departure from the traditional financial system, which does not perform any operation without ascertaining the identity of the parties involved, or gathering information on the nature and motives of the transaction. ‘operation. There is no actor who can prevent you from accessing your cryptos and using them in the way you want.

The proof-of-work system used by Bitcoin and so far by Ethereum has proven to be strong at this level. This mode of operation means that even the big players in mining will find it difficult to cheat and would take reckless risks to do so, because they would be very easily detectable and would not have much to gain from cheating. The big question will be whether Ethereum’s proof of stake proves itself on this topic. If in the years to come, we realize that a flaw in the system has allowed an actor to acquire some control over the blockchain, this would obviously be a big problem. And the problem with censorability is that we risk realizing that there is a problem when a transaction has actually been censored, that is to say when it is too late.

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What new perspectives does this vast switch open for Ethereum?

Although debates about the energy consumption of blockchains are often misplaced, they have taken center stage and are holding back the adoption of cryptocurrencies. This transition will solve the problem and facilitate the adoption of Ethereum by institutions and the general public. It will also deprive Ethereum’s competitors, such as Avalanche or Tezos, of an argument that allowed them to distinguish themselves. Many competitors put forward a less energy-consuming operation than Ethereum. They can’t rely on it anymore. Ethereum, which had seen its market shares a little nibbled away by these adversaries – although remaining ultra-dominant – could therefore partially regain them in the future, especially since the rest of Ethereum’s roadmap should make it possible to process more transactions and lower their cost.