- Is Ethereum about to be hijacked?
The world's second largest crypto is set to
undergo a major infrastructure change, marking one of
the biggest upgrades in crypto history.
"The Merge", as they're calling it, will
change how the Ethereum blockchain works.
And some of these changes are really, really good news.
The new blockchain will use way less energy,
and there's a good chance we'll see a
boost in Ether's price as well.
But not everyone is so hopeful.
Some people are worried about the side effects,
the side effects of these massive
changes for Ethereum and all of crypto.
They say that the new Ethereum blockchain could be
exploited by a small number of people taking control
and turning it into their own personal cash cow.
Others are worried someone will
take over the governance.
And there's another big problem.
Most of them are about to lose their income.
And that could prompt a rebellion against the upgrade.
So let's break down what's changing with
Ethereum and why some people are worried.
The leading platform for crypto innovation.
NFTs, DeFi and blockchain games were all
innovated on Ethereum more than anywhere else.
But it's been suffering from a major problem.
Even though it's billed as this global supercomputer, it
became slow and problematic as the platform grew.
Part of the reason is because of
something called MEV, Maximum Extractable Value.
It's a technique that Ethereum miners, the people
who process transactions used to increase the money they make.
In processing these transactions,
miners receive a fee for their work.
MEV maximizes income by arranging and
selecting these transactions in a certain order
and by running fee options and maximize they did.
It's come to the point where some
users saw fees of 100% on their transactions.
Those high fees prompted traders to create cartels
to fight the high fees, but that just
slowed down the blockchain even further.
So now Ethereum is switching to a new
technology touted as being much more efficient
from proof-of-work to proof-of-stake.
In simplest terms, this means the blockchain
will require far less energy to run.
In fact, some estimates show energy consumption
will drop by an incredible 99.95%.
Ethereum will soon use a tiny fraction of the energy
used by Bitcoin or Netflix or any major digital service.
For many people near the core of Ethereum,
including the co-founder of Vitalik Buterin, this is really
the number one reason for the switch to proof-of-stake.
Proof-of-work blockchains have gotten more than
their fair share of bad press recently.
Greenpeace even launched a campaign against Bitcoin
called "Change the Code, not the Climate".
But the real turning point might have come
when Elon Musk tweeted that Tesla would no
longer accept Bitcoin payments for their cars because
of Bitcoin's giant energy suckage.
And they have a point.
Bitcoin alone uses 150 Terawatt-hours of energy per year,
as much as the entire country of Argentina.
So no wonder Ethereum fans are already promoting
the upgrade as the environmentally friendly crypto.
There's a lot to be gained from going green,
and the biggest reason is money.
Large investment firms are very, very PR conscious and
are much more likely to make green investments.
So if Ethereum is green,
there's a good chance more money flows into Ethereum.
And the good news for the
Ethereum upgrade doesn't end there.
The new system means the number of new Ether coins
minted will drop sharply by as much as 90%.
And in fact, it's already dropping.
Since last year, nearly $6 billion of Ether
has been burned, as they call it, destroyed.
Wiped out of existence.
It's not as cool as it sounds.
There's no big bonfire of cash.
Instead, it's just money sent to a
wallet that no one can ever access.
So maybe it should be called as good as burned.
But either way, this is thanks to a mechanism
designed to stop crypto miners from gaming the system.
Under the old system, Ethereum miners could
send spam transactions to the network, driving
up fees and allowing the miner to
make money without adding any real value.
The new system, which Ethereum soft launched last year,
gives only a portion of the transaction fee to
the miner and the rest is burned.
Apparently, this new system has already caused the issuance of
new Ether to drop by two-thirds since last year.
But why does this matter?
The simple reason is supply and demand.
If the demand for Ether remains the
same and the supply decreases, then there's
only one direction price can go - up.
Now,
A big problem is the horde of
miners about to lose their jobs.
A million out of work miners.
Many assume that they will just
switch over to other blockchains.
But I did a research analysis on this and
let me tell you, it's not that simple.
It's going to be extremely hard for
these miners to find profitable work elsewhere.
I'll have a video linked in the description
that goes much more in depth there.
The point is, people are worried Ethereum miners
could force a hard fork in the blockchain.
This is when users of a blockchain
recognize a certain transaction while others don't.
It means from then on, there are two different ledgers.
Basically, a blockchain split and
two different cryptos are formed.
This actually happened before in Ether back in 2017.
There was a disagreement on whether to recognize
some transactions from a hack on the network.
Ether split into two, which is
why we now have Ethereum Classic.
There are two groups that are replacing miners.
There are builders who are those who
put together blocks of transaction requests.
And there are Validators who will
confirm the transactions as legitimate, adding
them to Ethereum's permanent ledger.
These are the groups people
are especially worried about.
Backers of the new Ethereum blockchain say the
system upgrade will democratize and decentralize the platform.
But that's not certain.
There has never before been such a big change
to a major blockchain, and it seems no one
is entirely sure how things will work out.
But here's what we do know.
Builders and Validators have to put up a stake
in order to collect fees from validating transactions.
The stake is 32 ETH which is
around $70,000 at today's prices.
Not everyone can afford to set up shop as a Validator.
And this creates big problems.
It means a few companies may earn a majority
of the money, and it's kind of already happening.
This is because the new Ethereum blockchain has
already been running ahead of the switch.
This is called the Beacon Chain.
And when the switch comes,
it will take over the Ethereum ledger.
That's why it's called The Merge.
Two blockchains coming together.
So we can look at the Beacon chain to see
how the Ethereum chain will act after the merge.
And so far, more than 400,000 Validators
have signed up, which sounds like a
lot of people, sounds pretty decentralized.
But of the tens of billions of dollars staked
to Validators, 69% came from just eleven providers.
In fact, just one business, Lido Finance,
has 30% of the Validator stake.
If this trend stays as is, earnings from
the new Ethereum network will be pretty concentrated
in the hands of just a few.
And there's something else here as well.
So far, only a handful of groups have come
forward to become builders on the new Ethereum network.
The largest of these is Flashbots, a software maker.
One that just happened to have written the MEV Boost,
the code set to manage transactions in the new Ethereum.
Flashbots is a company that's built
software on Ethereum in the past.
Software that some people think is unethical,
like allowing miners to front run transactions.
This is when you use the information from
a new transaction to make money for yourself.
Let's say, for instance, you see a large order
for an altcoin coming in and you know that
because of that order, the coin will jump in
value when the transaction goes through.
So as a miner, you can front run that and buy
a whole bunch of that coin before you put the order
through on the blockchain, meaning you are guaranteed a profit.
So there's a concern about Flashbot's role
as a builder on this new network.
Critics say a small number of builders means
those who bring in a lot of orders
could end up controlling all of Ethereum.
There are a few ways that they could do this.
For instance, a large crypto wallet company could favor
one builder, one that gives them better fees.
Or that wallet could even become a builder itself.
Which means it now controls
the entire flow of transactions.
That's bad news
if you want a decentralized, verified network.
Then we have to worry about censorship.
In crypto, censorship doesn't mean shutting someone up.
It doesn't mean they need to go make
an account on Rumble to do their livestreams.
It means blocking transactions to
or from certain addresses.
This is a thorny issue with no agreements made yet.
On one side are users who say Ethereum
should never allow censorship, that this would basically
kill the whole idea of decentralized finance.
On the other side are people
who say censorship is unavoidable.
If developers on the Ethereum platform don't stop things
like money laundering, then governments will eventually come after
it and shut the whole thing down.
So the real worry is, if there's just
a few large businesses controlling Ethereum, processing most
of the transactions, then it's going to be
easy for governments to go in and pressure
them to get the censorship they want.
So, yes, the Merge is a big leap forward for Ethereum.
It's exciting and a necessary step into the future.
One that sets the chain up for the next decade,
makes it greener and makes the system run much smoother.
But we just can't be certain about what happens next.
Will it help decentralize Ether or concentrate even
more power into the hands of a few?
Will Ethereum remain censorship free?
Or will builders be pressured to censor
when the government says sensor?
Let's just say the story of
the great Ethereum upgrade isn't over.