Blockchain

Bitget's Insights: How the Entire Ecosystem Will Benefit From the Merge

Beginner

2022-09-14 | 5m

We have been waiting for The Merge for a long time, now it's time! In this quick AMA session with Gracy Chen - our managing director, let's find out now what The Merge will change, what are the positive and negative points and finally what will happen to mining after The Merge.

Question 1: What are your views on the Ethereum Merge process?

Ethereum is in the process of making its transition as the protocol is currently based on PoW and will switch to PoS. It is a historical event, an incredible technical feat, and at the same time a huge risk. This explains why there are a lot of expectations around this and what will happen.

First of all, it is important to mention that the entire ecosystem will benefit from the progress offered by Ethereum. Ethereum is fighting some big battles and is trying in a slightly different way compared to all other protocols. In our opinion, Ethereum will continue to be inspired by Bitcoin regarding the security aspect and resistance to censorship, which is a current topic with the Tornado Cash affair in particular.

Neither Bitcoin nor Ethereum system is perfect. However, Ethereum's move to a Proof-of-Stake consensus is a good try because we will have two protocols with different attack vectors so both Bitcoin and Ethereum will come out stronger, especially regarding potential attacks towards governance.

Question 2: What will the Ethereum Merge change?

In technical terms, it is important to understand that this transition is only the inception of the new roadmap of Ethereum, which is well devised, established, and moreover, smoothly executed until now. So we are now approaching ETH 2.0. This is a key point for Ethereum‘s development for the next 5 to 10 years.

Ethereum will change from PoW to PoS so the criteria to become validators will be different.

The major issue of this change is based on a Beacon Chain that runs in parallel to Ethereum, and this chain is already active.

Some players have been running on this PoS chain for a while, where they stake ETH to become validators, but there are no transactions running yet. Transactions are being executed on the main chain currently known as Ethereum.

The idea of this transition is, roughly speaking, to deposit ETH on a smart contract of ETH 1.0 and to recover them on a contract of ETH 2.0 to make validation. The Merge will only keep one chain on which the execution and also the consensus part will take place. Thus, the transactions will now be included in the Beacon Chain.

Ethereum's monetary policy will change with an Ethereum asset that will become deflationary.

Question 3: Do you see this transition as positive or negative?

Regarding Proof-of-Stake, there are many potential boons. Among them, the most noticeable one is the improvement in energy efficiency. The Merge gives a green color to Ethereum. We are very curious to see the impact introduced by this change on institutional players. We know that many are reluctant to use Ethereum because of the energy-consuming concern of Proof-of-Work, such as some traditional investors or theme funds restricted by ESG elements.

We can expect this may serve as a trigger, or help remove barriers for some potential players and see a wave of massive adoption of institutions because Ethereum is now much more environment-friendly.

There are always risks along with change. The main risk is undiscovered bugs during the testing phase. The risk is somehow amplified and mitigated by the fact that there are several implementations on ETH, unlike BTC.

It means that several different teams are working on implementations of the protocol. Maybe there is a special case that the developers have not identified through the different interpretations of the protocol. The risk is that there are several forks in fact and the chains split. This already happened. If it really happens, there will be solutions to alleviate the negative impact, because it happened several times and there are several approaches to "save" the network. Now, some technical solutions and plans are ready, to react quickly to correct bugs on the mainnet. As the Merge is an extremely huge change, almost all are expectant.

But an unexpected bug may cause a real problem and trigger fear in the market, making the fear sentiment dominate the market again since it is a negative omen for many developers and projects. Even worse, some stakers may take advantage of the lack of information transparency or spread negative information to derive profits.

Finally, another possible risk is that there may be a fork of ETH in Proof-of-Work. Because miners have financial interests and motivations to stay with the PoW mode. After the shift from PoW to PoS, miners' hardware will no longer be useful, and they may be forced to sell them. Moreover, some centralized exchanges could be potential participants to maintain the chain of PoW as well, since they could generate the trading volume of ETH on this chain.

Question 4: Can you elaborate on where will mining go after Ethereum Merge?

Mining is still important to Bitcoin. The calculating power of mining may go there. Bitcoin Ethereum are complementary, not competitors. For a long time, we wanted ETH to become a real currency just like Bitcoin. The result is not as expected.

EIP-1559, an update to Ethereum, makes Ethereum a better cryptocurrency because it has interesting features but at the same time, it has set a precedent of changing monetary policy along the way, so we can no longer categorize it as "hard money" or take it as similar assets as Bitcoin.

Once there are 21 million Bitcoins in the world, no more Bitcoins will be created, ever. The existing supply will be the defining amount for all time. That is what makes Bitcoin a form of “hard money” that may be even more valuable than gold in the future.

Bitcoin is gaining traction in the mainstream and become an investment tool to hedge against inflation and diversify portfolios. Thus, if the return on it is high enough with its increasing value, then more people may seek to secure the network and amass mining power from Ethereum.