Ethereum has completed a long-awaited upgrade to its system in a move expected to slash its energy costs and intended to prepare the ground for more use of crypto technology in mainstream finance. For us at Calvin • Farel this upgrade, known as “The Merge”, which changes how new transactions are verified on the Ethereum blockchain provides the foundation for us to further accelerate our project “Seed-Coin” as previously we had hesitations to do so by putting scale, speed, security, safety and environmental damage into consideration. In our opinion this milestone, which has been promised by developers for years is one of the most significant moments in crypto’s short history as Ethereum powers large swaths of the Web 3 world, which includes applications such as smart contracts, digital collectibles and decentralized finance systems which all form an integral part of our Seed-Coin ecosystem. The Merge is in our opinion Ethereum’s first big step towards being a faster and more mature system. But for us at Calvin • Farel “The Merge” represents just one step in a plan sketched out by Ethereum developers to overcome limits on the network’s capacity, which are seen as a big hurdle to achieving mainstream adoption of decentralized finance (Defi).
The Merge solves one issue but in our opinion it does not solve a heck of a lot of other issues.
Ethereum, like bitcoin, has so far relied on network participants solving complex maths problems to validate new blocks, a process called “proof-of-work”. Ethereum’s energy consumption was similar to that of Finland, one of the main reasons among others and a deep concern which has led to hesitation to proceed with full confidence with Calvin • Farel’s “Seed-Coin” and its ecosystem as environmental protection and sustainability forms an integral part of Calvin • Farel’s corporate culture. The Ethereum Foundation estimates that replacing the process of “proof-of-work” with “proof-of-stake” will cut the blockchain’s energy consumption by about 99.95%. it will also eliminate the need for Ethereum miners, companies that previously made money from validating new blocks via proof-of-work. Looking at it from the environmental impact we at Calvin • Farel feel now much more comfortable in proceeding with our project “Seed-Coin” and will further accelerate the development of its ecosystem over the next two decades. We should not forget that nine years after Ethereum was launched, there is still a long way to go. We at Calvin • Farel can for example name five important issues that will help to determine whether “The Merge” will one day be seen as a significant moment in the history of the Internet.
First, the new validation mechanism, known as “proof-of-stake”, doesn’t on its own solve one of Ethereum’s biggest problems: that it can handle only 15 transactions per second, a bottleneck that has led to high transaction fees. The Merge at least clears the way for the network’s next big step, scheduled for the second-half at next year. Called “sharding”, this would involve splitting the Ethereum database into 64 fragments. Since every computer on the network would no longer need to keep a record of every transaction, it would greatly increase capacity and speed.
But don’t be mistaken, there are still big, unresolved questions about how this will work. Also, sharding in our opinion will not be a complete solution. a 64-fold increase would lift the Ethereum network’s capacity to nearly 1000 tps – not far off the 1700 tps capacity of the Visa network. But the promise of Web 3 is to use blockchain technology to mediate every online interaction, meaning for greater capacity will be needed overtime.
Second, “The Merge” brings with it a whole set of unknown risks which need to be evaluated. In essence, a market worth 200 billion dollar is being shifted on to entirely new foundations, with new mechanisms and new roles for market intermediaries that haven’t been tested in real-world conditions. Rather than the risks, many market participants are in our opinion likely to be more focused on the potential for higher returns. Under the new “proof-of-stake” system, holders lodge either tokens as collateral to validate transactions in return for “staking rewards”. That has turned a previously unproductive asset into one that now offers a kind of yield – something many are in our opinion likely to find attractive. But at this stage, it’s anyone’s guess whether the yield will compensate for the new risks – not to mention the volatility in the cryptocurrency itself.
Third, the buildout of a broader layer of market infrastructure on top of Ethereum is still in its infancy. So-called layer two networks, such as Polygon and Optimism, act as “roll ups”, batching up individual transactions and lodging only a single entry on the Ethereum blockchain. Along with sharding, Ethereum’s backers claim this might lift overall capacity to 100,000 tps.
The companies that operate on top of Ethereum in this way could themselves in our opinion become powerful new intermediaries in the blockchain world – something that runs counter to the ideal of decentralization on which crypto is founded.
Some kind of “trade-offs” are in our opinion going to happen. These kind of “trade-offs” leads us to the fourth point: as the broader Ethereum system evolves, its backers will have to ditch some of the crypto world’s ideological baggage.
The emergence of influential new intermediaries could in our opinion also provide governments a new point of leverage over the system. For instance, if large numbers of holders turn to crypto exchanges for help with staking, then those exchanges would play a key role in validating transactions. That could expose them to political pressure to block certain transactions in pursuit of financial sanctions.
Fifth, and finally, improving the underlying blockchain infrastructure will in our opinion still do nothing to solve Web 3 biggest challenge: demonstrating to the public why this technology is needed in the first place.
The optimists like us at Calvin • Farel claim that, with “The Merge” completed and work underway on solving Ethereum’s scaling challenges, effort will shift increasingly to building the consumer-friendly experiences needed to draw large numbers of users.
That means devising things such as crypto wallets and marketplaces for digital assets that are easier for ordinary mortals to use. It also means in our opinion coming up with new applications that could not have worked as well on the existing web. The Ethereum “Merge” doesn’t provide any clues about what those new applications might be. But, to paraphrase Winston Churchill, it at least shows that Web 3 has got to the end of the beginning with lots of development work remaining.