Here’s what happened in blockchain and crypto this week.
Ethereum’s long-awaited “The Merge” – the transition from Proof-of-Work to Proof-of-Stake – was successfully completed in the early hours of Thursday morning. This means that the blockchain is no longer secured by miners but by validators that stake ETH under the new consensus mechanism. Equally important, the upgrade entails a reduction of more than 90% in both ETH inflation and energy use. In the long term, the upgrade will pave the way for significantly cheaper and faster transactions that will allow millions of users to transact on Ethereum. Meanwhile, the weakness in cryptoasset prices continues amid a renewed selloff in traditional financial markets triggered by higher than expected U.S. CPI data in August.
The Merge is a monumental event for the blockchain space, with many market participants referring to it as the most important moment in crypto history. Technically, coordinating the Merge was an impressive feat since it involved a large-scale software upgrade across a global set of participants – all while maintaining 100% uptime. After rigorous battle testing that included three major testnet “merges” and 13 “shadow forks”, the mainnet Merge executed seamlessly. At 6:43AM UTC (2:43AM Eastern Time) on Thursday, a visualization of pandas and the words “PoS Activated” hit the screen, showing that the Proof-of-Stake process had successfully been activated. Ethereum’s founder Vitalik Buterin tweeted 15 minutes later: “This is a big moment for the Ethereum ecosystem.”
The miner-to-validator transition was almost flawless as validator uptime stood at almost 100% on the consensus layer, suggesting that most validators’ nodes were successfully connected and prepared for the Merge. Since then, network uptime has remained steady and blocks are being produced by validators without any major problems. Prior to the Merge, many leading crypto exchanges suspended deposits and withdrawals of ETH and Ethereum ERC-20 tokens.
Hashrate on Ethereum Classic (ETC), which continues to operate under a Proof-of-Work system jumped immediately after the Merge as some former Ethereum miners directed their GPUs to mining on the Ethereum Classic network. However, ETC revenues will be just a fraction of the former mining rewards, with ETC mining accounting for only about 1/40th of the daily revenue that was previously made on ETH pre-Merge, according to data by Coin Metrics. Meanwhile, the native token of EthereumPoW (ETHW) – a “fork” and continuation of the Proof-of-Work Ethereum blockchain – lost more than 60% today after yesterday’s mainnet launch.
Looking ahead, the long-term goal for Ethereum 2.0 will be to allow millions of users to transact on Ethereum on a regular basis by making cheap and fast transactions without limitations. However, this will not happen over night and there are many approaches to tackle this issue. In the short run, “Layer 2” protocols that sit on top of Ethereum and are based on a technology called “rollups” will help the blockchain to achieve greater scalability. Put simply, Layer 2 protocols allow for cheaper transactions while still receiving the security benefits of the Ethereum base layer.
Another scaling approach is “sharding”, a technique that uses multiple blockchains that will be coordinated by Ethereum 2.0’s Beacon Chain. The first implementation of sharding is expected to launch in 6 to 12 months and will likely lower transaction costs on the network. “Ethereum today can process about 15-20 transactions per second, this Ethereum, including the rollups and sharding, according to the math, could process 100,000 transactions per second,” Vitalik Buterin, co-founder of Ethereum, said during a presentation in July.
The global cryptoasset market capitalization dropped below the $1 trillion threshold this week, currently amounting to $990 billion – down from $1.08 trillion since Friday last week, with bitcoin accounting for 37.6%. Among the Top 30 cryptoassets by market cap, Cosmos (ATOM) outperformed once again, gaining another 14.3% over the week. During the same period, the price of bitcoin (BTC) was flat around $19,458 while the price of ether (ETH) fell by 12.9% to $1,424 after “the Merge”. The total value locked (TVL) in DeFi sits at $53.9 billion – down from $59.4 billion last week – with Ethereum accounting for about 57.5% of TVL.
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Manuel Trojovsky, Head of Crypto Investments & Research
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