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The world of cryptocurrencies longs for “the merger” to take place

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The merger (Timo Lenzen/NYTimes)

The cryptocurrency industry has had a very bad year. A devastating crash caused a loss of almost $1 trillion in the market, causing thousands of people to lose their savings. Several companies declared bankruptcy.

Now, the industry is obsessed with a possible salvation: a long-awaited update to the software of the most popular cryptocurrency platform, Ethereum, which constitutes the technological backbone of thousands of projects of this type of currency. The update – known as ‘the merger’ – has earned a almost mythical status after years of delays that led some experts to wonder if it would ever happen.

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But if all goes according to plan, the merger will take place around September 15, more than eight years after it was first talked about. The change will make Ethereum have a more efficient infrastructure from an energy perspective, in response to widespread criticism that the climate effect of cryptocurrencies outweighs its potential benefits. Y will lay the groundwork for future updates to reduce high fees necessary to carry out transactions in ether, the base currency of the platform and the second most valuable digital asset after bitcoin.

“Essentially, this transition creates a map for a future that is much more scalable, much more energy efficient and much more usable for the common citizensaid Joseph Ayoub, a Citi analyst who has studied the merger. “It is laying the groundwork for its adoption.”

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Nevertheless, the risks are enormous. Even by the standards of these currencies, the process is almost ridiculously complicated.

Computer banks mine cryptocurrency in La Plata, Argentina. (Sarah Pabst/The New York Times)
Computer banks mine cryptocurrency in La Plata, Argentina. (Sarah Pabst/The New York Times)

For months, pundits have been immersed in frantic, terminology-ridden debates over developments like the Goerli testnet merger and the Bellatrix upgrade on the Ethereum Beacon Chain, key software changes leading up to the main event. A failed merger would jeopardize the thousands of cryptocurrency apps running on the Ethereum platform, which together handle more than $50 billion.

It is as if you were piloting a jet and decided to change the engine in mid-flight.said Chandler Guo, a cryptocurrency industry veteran who leads a group opposing the merger. “It is very difficult. It is very dangerous”, he sentenced.

Ethereum is a blockchain, a publicly visible ledger in which digital currency exchanges are recorded. Transactions on the chain are made in the cryptocurrency ether.

A teenage programmer, Vitalik Buterin (now considered one of the leading figures in this industry) started the platform in 2013. Buterin wanted to create a cryptosystem that was more flexible than bitcoin and could execute financial contracts as well as other complex forms of exchange. , instantly.

Ethereum’s design allows it to support a wide variety of financial engineering processes. Programmers can create software applications to perform tasks more complicated than simple money transfers. Thousands of businesses and projects in the experimental world of decentralized finance use the platform to offer loans, borrowing and other sophisticated investment options. Many non-fungible tokens—the unique digital collectibles known as NFTs—are created on Ethereum.

At its core, the merger is a change to Ethereum’s verification system.. When someone sends money in a traditional transaction, a bank acts as an intermediary, verifying that one person has enough funds to pay another.

Cryptocurrencies operate without that intermediary. In this alternative financial system, a dispersed network of computers verifies transactions. Anyone can connect a machine to the network and run software that solves complex puzzles, an energy-intensive process, to confirm transactions. In essence, the computers compete with each other: when the puzzle is solved, the winning participants are rewarded with new coins in the digital currency they are verifying.

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(Reuters)
(Reuters)

This verification process is widely known as cryptocurrency mining and has the technical name of “proof of work”. By some estimates, the amount of energy consumed each year in mining is comparable to the annual emissions of entire countries.

The merger contemplates switching Ethereum to an alternative framework called “proof of stake”, which requires less energy. In a “proof of stake” system, computers don’t expend energy racing to verify transactions. Instead, cryptocurrency investors deposit a set number of digital coins into a pool, which is entered into a drawing. Each time a trade occurs, one participant is selected to verify the transaction and win the sweepstakes rewards.

This change is expected to reduce Ethereum’s power usage by more than 99 percent, something cryptocurrency proponents hope will make the technology more popular.

But a change on this scale could also make Ethereum vulnerable to hacks or other disruptionsAccording to some experts on the subject. “Whenever changes are made to a complex system, necessarily unforeseen consequences arisesaid Christopher Calicott, a cryptocurrency venture capitalist.

Much of the criticism is motivated, at least in part, by self-interest. Most of the biggest opponents of the merger are businesses that have built expensive data centers to mine ether using the proof-of-work system..

A non-profit organization called the Ethereum Foundation helps oversee the platform. But in reality, Ethereum is run by a group of engineers from all over the world; no higher authority orchestrated the merger. From time to time, developers meet in public video calls to discuss the technical aspects of the change.

At one point, the switch to proof-of-stake was supposed to happen in 2016. As the merger brewed this year, crypto enthusiasts were hoping for a June launch date. Afterwards, the merger was delayed until August. It is now set for next month.

In the world of cryptocurrencies, delays have become something of a joke. At first, the engineers installed what is known as a “difficulty bomb” in the Ethereum code. They were designed to be honest: after a set amount of time, the bomb was supposed to go off, causing disruptions to the Ethereum network unless switched to proof-of-stake. But every time the bomb had to explode, the engineers created a new piece of code to deactivate it, which in a certain way distorted the objective.

“We do not take this lightly,” commented Danny Ryan, a researcher at the Ethereum Foundation who has worked on the platform since 2017. “There has been a myriad of engineering, testing, and academic research,” he explained.

In December 2020, the Ethereum programmers took a big step towards merging with the launch of a cryptocurrency platform called Beacon Chain, a proof-of-stake system designed to provide the foundation for an updated Ethereum. After two years of testing, the Beacon Chain will finally be integrated into Ethereum in mid-September, in the merger that gives the process its name.

As the merger approaches, companies and entrepreneurs with financial interests in Ethereum mining are increasingly concerned. Cryptocurrency mining has become a multi-billion dollar business, dominated by publicly traded companies.

In a recent corporate report, Hive Blockchain, a cryptocurrency mining firm that earns revenue from both bitcoin and ether, said that a change to proof-of-stake “may make our mining business less competitive or less profitable.” Hive did not respond to requests for comment.

It is complicated to plan the celebration. Although the developers have estimated that it will take place on September 15, the exact date of the merger is unknown and is subject to complex technical factors. Any failure could cause another delay.

“This could happen at four in the morning. It might happen at two in the afternoon,” Ryan said. “But I’m sure I’ll be awake.”

© The New York Times 2022

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