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Ethereum ‘merger’ paves the way for the next iteration of the internet

Brian Mosoff: This is the start of the next frontier for blockchains

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Ethereum, invented and incubated in Canada, the second-largest cryptocurrency by market capitalization and the home of the industry’s most innovative development, has just completed a software upgrade called The Merge.

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Around the world, computer programmers, blockchain enthusiasts, and even a few skeptics have been hosting virtual streaming parties to witness the event in real time. It was one of the biggest events in cryptocurrency history, but many people outside the industry probably didn’t notice, maybe thinking it was just more kids. crypto that shilling more technical nonsense.

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Still, it is important to understand what this software upgrade was all about. Blockchains are basically about recording information. Bitcoin secured and ordered these transactions through a process called proof-of-work (PoW), more commonly known as mining, when it was created in 2009.

The dream of Satoshi Nakamoto, the anonymous inventor of Bitcoin, was for ordinary people to use their personal computers to help secure a ledger and receive the native token, bitcoin, as a reward for their efforts. Within a few years, application-specific integrated chips (ASICs) emerged, making the participation of personal computer mining more viable. The original hardware was replaced by data centers and specialized computers that consumed inordinate amounts of energy.

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Ethereum entered the arena a few years later with its new smart contract platform (and the ability to program assets) and followed in the footsteps of bitcoin using PoW as well.

But early on, there was another advanced idea called staking that could one day theoretically replace the power-intensive PoW mining process while maintaining network integrity. This new solution would not only significantly reduce power consumption, but would democratize the validation process by giving token holders the ability to approve transactions with fewer hardware requirements.

In Ethereum proof-of-stake (PoS), users can become validators and stake their ether, which is like entering into a bond with the protocol. They then take turns approving transactions and receiving newly minted ether (staking rewards) in return for helping secure the network. Under this new system design, access to specialized computer chips or electricity would no longer be required, meaning greater involvement from daily users and less strain on the environment.

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Since its launch, Ethereum has grown from a new toy to a $200 billion platform, with an additional $300 billion in assets and applications dependent on its availability and functionality. For the past seven years, researchers and developers have tried to follow through on that early promise.

Various proposals for the correct technical implementation were offered, but the developers found themselves at the drawing board, continually delaying the upgrade. Investors and community members even began to doubt that it would ever materialize.

In 2020, a consensus began to form around the technical standards that would make it appropriate to launch this new and improved version of Ethereum. Given the high stakes of the scale of the project, the new platform was launched in pseudo incognito mode with limited functionality.

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A year and a half later, it was time to marry the two networks and transfer the combined value of US$500 billion to this new implementation. Everything before this moment would happen within 12 seconds and without any visible changes to the end user. No pause in regular activity, downtime or broken interfaces.

Some have described the event as driving a car at 100 km/h and replacing the combustion engine with an electric battery without ever slowing down or the driver noticing that anything had changed.

Fortunately, the merger went smoothly. Just before 3 a.m. EST on September 15, we said goodbye to mining on Ethereum and embraced a new era, an era without specialized computing hardware or power needs like those of small country.

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The merger marks one of the most significant inflection points for Ethereum and the web, paving the way for the next iteration of the internet. If we are to believe in a future where trillions of dollars of assets and activities exist on a blockchain, it will take a system like proof-of-stake to remain stable and secure.

This new system also creates new opportunities. Retail and institutional investors are now incentivized to look to an asset that aligns with environmental, social and corporate governance (ESG) mandates.

To top it off, staked capital of any size can generate the same return, and economies of scale have been rendered unnecessary. This could be the catalyst our pension funds need to enter the industry and trust that this innovation is built to last.

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New professions have also started to emerge. Local digital asset exchanges will have new product lines to offer their clients, and to support this, specialized staking infrastructure companies will form. Figment Networks Inc., a Toronto-based company, has become one of the largest and most recognized staking providers globally for institutional clients as well as retail platforms. Companies like Figment weren’t possible just a few years ago.

But the Ethereum upgrade is not over. In the coming years, various technical upgrades will be rolled out, dramatically reducing transaction fees that have historically reached up to $50 per transaction, lowering user prices, and reducing value activity. This activity has felt stalled, with no other blockchain to move to without serious security compromises.

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In addition, the network will be able to process 1,000 times more transactions per second. A successful blockchain of the future will need to handle diverse spectrums of activity in terms of value and throughput to truly become a global settlement layer.

The Proof of Stake launch is one of the most impressive feats in computing to date, and it was all developed by a decentralized group of participants. This is the start of the next frontier for blockchains and the right move for a tech group that is aware of the ongoing climate crisis and can envision a world where people have transparency and autonomy over their finances.

Brian Mosoff is CEO of Ether Capital.



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