The upcoming ETH upgrade is a pretty big deal. Here’s what’s happening and why it matters
With a market cap of nearly $200 Billion, Ethereum (ETH) is second only to Bitcoin in the cryptocurrency market.1 However, all eyes are currently on ETH as it prepares for what can only be described as one of the biggest events in the history of the crypto markets.
Before we dive in, let’s take a look at the basics. The two most popular approaches for public blockchain consensus are proof-of-work and proof-of-stake. To review: A “proof-of-work” environment maintains its security because miners need to commit resources to the network, namely computing power and the electricity required to run it, to have a chance of earning a reward. This is typically a more energy intensive process. A “proof-of-stake” environment uses pledged currency as a way to grant participation in consensus. This makes it expensive to engage in any sort of attack and makes participants more likely to stay invested in keeping the blockchain secure.2
The “merge” all comes down to these two algorithmic approaches for reaching consensus on the blockchain network. Ethereum has historically run on proof-of-work and with this transition, it is anticipated the ETH will move fully to proof-of-stake. A change that The Ethereum Foundation believes will drastically decrease the energy consumption that is needed to keep the blockchain safe while increasing security of the network.3
What does a shift from proof-of-work to proof-of-stake mean?
According to ethereum.org, there are several expected benefits that come from the merge. They are predicting more security, easier implementation of scaling solutions, and reduced energy consumption from mining.4 “Ethereum, like Bitcoin, currently uses a consensus protocol called Proof-of-work (PoW). This allows the nodes of the Ethereum network to agree on the state of all information recorded on the Ethereum blockchain and prevents certain kinds of economic attacks.”5
There has been little in the way of resistance to the move to proof-of-stake (The Merge) from the Ethereum community. Many miners have, understandably, not been pleased because it requires a change to the way that they operate today. There is still the possibility of a proof-of-work fork following the merge. But overall, the ETH community has been supportive of the move and the upgrade looks poised for a successful transition to a proof-of-stake chain.
How is this change being facilitated?
In December 2020, Beacon Chain (proof-of-stake) went live and has been running parallel to ETH Mainnet (currently proof-of-work). For the last 18 months, it’s been tested and is now considered ready to merge. Earlier this month, the final testnet trial for the merge passed and we now prepare for the next step. “'The Merge’ is different from previous Ethereum upgrades in two ways. First, node operators need to update both their consensus and execution layer clients in tandem, rather than just one of the two. Second, the upgrade activates in two phases: the first at a slot height on the Beacon Chain and the second upon hitting a Total Difficulty value on the execution layer.”6
Given the upgrades that happened in early September, this means that we are expecting the merge to happen around September 15, 2022.
Will this impact the ETH I hold with Bakkt?
The nature of our crypto products will allow us to be fully operational during this merge. We plan to support ETH buying and selling activities at all times, and aim to ensure our users will not be affected. We will remain diligent in our attention to all possible outcomes resulting from this merge and will be monitoring for the possibility of any forks. Should any arise, we will approach each with a technical and compliance evaluation and decide if there is an opportunity for us to provide support for the forked chain to our commercial and institutional customers.