On Wednesday September 14, 2022, the world’s second largest cryptocurrency had officially upgraded to a new-and-improved network for it to run on. Forecasted to reduce Ethereum’s energy consumption by 99.95% as well as expand the coin’s scaling capabilities, “The Merge” is said to open a new era not only for Ethereum but for cryptocurrencies as a whole.
Some backstory
Since its deployment in 2014, Ethereum has used what’s called a proof-of-work mechanism to create new blocks on the blockchain (basically pages, belonging to a ledger, that contain transaction information) and mint new currency. As the name (kind of) suggests, proof-of-work requires that one party proves to others that they’ve exerted a specific amount of computational effort. The prover can only execute their desired operation once this work has been confirmed by verifiers.
Came up with in 1993, the original thinking behind proof-of-work was to serve as a defence against denial-of-service attacks (a cyberattack wherein the perpetrator attempts to overload a machine, typically a web server, by continuously spamming HTTP requests until it crashes) by requiring work from the requester’s end. In 2009, however, proof-of-work was being used to protect something entirely different: the Bitcoin network.
By introducing a little magic from hashes (a long list of random hexadecimal numbers), Bitcoin served as the first functional cryptocurrency with its own means of verifying new blocks and currency units. Computers were required to try and find the correct hash, and once they found it, the reward was some newly-minted Bitcoin. Bitcoin block #660000, for example, was mined in December of 2020; its hash was 00000000000000000008eddcaf078f12c69a439dde30dbb5aac3d9d94e9c18f6 and the decoder was rewarded 6.25 Bitcoins. That specific block will forever contain 745 transactions (involving just over 1,666 bitcoins) and can never be changed.
This system was later adopted by Ethereum alongside several other popular cryptocurrencies such as Dogecoin and Litecoin. It was often criticized, however, on the grounds of its inefficient energy use and thus, the negative consequences that mining may have on the environment. The point certainly has merit. Ethereum mining has indeed proven to be an extremely energy-intensive task:
Ethereum uses a lot of energy, eating up about as much as Switzerland’s 9 million citizens. It goes without saying that all this energy has to come from somewhere, more often than not from natural gas and coal. Furthermore, even ignoring the problem the energy’s source, crypto mining may also create massive strains for local energy grids given the intense nature of their activities.
Introducing the all-new Ethereum 2.0
So what does Ethereum’s modernized network, called Beacon Chain, have to offer? As mentioned before, energy consumption is reduced by about 99.95%, saving about 110 terra-watts per year (a terra-watt is a unit of electrical energy equal to that done by 1 terawatt acting for 1 hour). Notice that the graph above ends on September 1, 2022. Here’s what happens when we extend the end-date a little further:
Just how did Ethereum developers pull this off? They simply switched from the energy-intensive proof-of-work system to the more advanced proof-of-stake (PoS). While proof-of-work has “miners” solve mathematical problems to verify blocks and transactions, PoS requires that owners stake - send their ether to an address on the Ethereum network where it cannot be bought or sold - at least 32 ETH for a chance to verify blocks and then become an official verifier.
Here’s how a typical PoS workflow would run:
Users make transactions, all of which are recorded into a ledger by the Ethereum algorithm
The Beacon Chain randomly groups Ethereum stakers together into committees of at least 128 validators and assigns them to specific blocks. 1 random person out of the 128 members is selected as the block proposer - the only person who can propose a new block of transactions
The other 127 committee members vote on the proposal. If the block is approved, the validator collects their stake and reward. But if the block is rejected by those on the network, the validator loses their stake
Staked ETH tokens are thus like lottery tickets in that the more you put in, the higher your chances are of becoming a verifier (there is, however, some nuance here. The algorithm has its ways of giving everyone a generally fair chance of being selected). And randomly selecting coin owners uses far less energy than having entire “mining rigs'' tasked solely with deciphering hashes. Without the need to break through any hyper-complex math, approving new transactions or the addition of new blocks is faster. There is also no longer a need for “mining farms” (basically a warehouse of computers dedicated to crypto mining), thereby decreasing the cost of becoming a validator and increasing the scalability of the currency’s network.
Unsurprisingly, not everyone sees a rosy image of the shift from a proof-of-work system. While Justin Drake from the Ethereum Foundation describes it as “upgrading an engine’s car”, critics see the Merge as changing an engine airplane in the middle of a flight. As is the case with most major software updates, there could be many unforeseen bugs with the new blockchain, putting the $188 billion of ether at risk.
There are also doubts regarding its security. PoS, unlike proof-of-work, isn’t known for being particularly resistant to DoS attacks. To the contrary, DoS attacks may very well be PoS’s Achilles' heel. If an attacker is selected to be the block proposer, they can attempt a DoS on the current block proposer, causing them to shut down and lose their slot, and leaving the transactions in that block to be picked up from the attacker.
What’s ahead
The Merge was a much-anticipated event that didn’t face any particularly strong resentment and actually managed to eliminate Ethereum’s energy consumption by over 99% (which is no small feat). So then why did its price tank in the days preceding and following the Merge’s completion? The answer likely has little to do with Ethereum itself and more with external market factors. Cryptocurrencies and the good ol’ stock market are still very much intertwined, so with the Fed’s rate hike this last Wednesday and “stubbornly high inflation”, bear markets for both assets will expectedly follow.
Nevertheless, Vitalik Buterin, Ethereum’s co-creator, has made it clear that the Beacon Chain is not the be-all and end-all for the currency. He’s already outlining future plans to implement sharding - a technique that breaks large chunks of data into smaller pieces, referred to as shards. In the case of blockchain, sharding will theoretically reduce latency and prevent data overload. Short-term impacts, however, were never really the true intention behind the Merge. It’s not meant to completely transform the Ethereum network overnight but rather, simply laid the groundwork for future upgrades in the years to come.
Econ IRL
Unlike massive and well-established conglomerates, startups often don’t have the public profile to attract the necessary talent to help them grow. Think about it, which firm would be the easier one to evaluate from the employee’s perspective, a small enterprise that hardly anyone’s ever heard of or Google?
The problem, one that this week’s paper takes a look at, is the lack of information available to workers seeking employment at these companies. The authors gathered a bunch of high-potential startups and had them write their own ads. The catch was, however, that each of these enterprises were evaluated on the business end of things by experienced startup incubator staff. This was all posted on an online job board (yes, including the evaluations), the link for which was then sent to around 20,000 business school alumni. Positive information regarding the company’s underlying business increased applications by 30%, with there being an additional 20% increase when a wage was posted. The conclusion is a simple yet powerful tip for startups: potential employees simply don’t know who they are, let alone how credible of a business they are. Providing job seekers confirmation that a startup is superior to the vast sea of them will result in huge benefits.
‘Till next time,
SoBasically