The Merge was completed last week successfully migrating Ethereum from Proof of Work (PoW) to Proof of Stake (PoS). The transition was not a foregone conclusion and the success was greeted with plaudits as well as relief. But while the Merge addressed some of the most pressing shortcomings of Ethereum, like energy usage which has now declined by 99.5%, other issues remain.
Andrea Barbon, a professor of finance at the University of St Gallen in Switzerland, who has a Ph.D. in Mathematics and teaches Fintech, highlighted the new reality of Ethereum which may fall short of the hubris. Barbon noted that while Ethereum miners will stop minting ETH they will probably migrate to other PoW blockchains and, in fact, there will be zero reduction in energy consumption – at least in the short term.
“In the long run, whether miners will close down and finally reduce the crypto footprint will depend on the profitability of mining on the alternative blockchains,” said Barbon. “As this depends on the adoption rates, users will have the final word on the matter: if crypto users care about sustainability, the blockchain footprint will be reduced in the long run.”
Barbon said that other issues like costly gas fees and scalability remain a hurdle but the Merge positions Ethereum for future upgrades which will recieve similar labels like “Surge” or “Splurge” as coders work on additional improvements.
Barbon noted that validator nodes now replace the role of miners in the new PoS consensus system, and validators must stake 32 ETH (roughly $50,000 at current prices) and run specific software clients. Validators collect rewards in ETH for their activity, and the annual return is expected to be between 4 and 8 percentage points, depending on the number of active validators.
As of today, there are over 400,000 validator nodes, totaling more than $20 billion worth of staked ETH. Is this a decentralized system? Barbon believes it sonds properly decentralized but in reality, just a few corporations dominate ETH staking – like Coinbase and Binance.
Because the stacked ETH is locked and cannot be withdrawn before the next upgrade which is expected between six months to one year after the Merge, acting as validators is out of reach for institutional investors – at least for now. And some potential validators may choose not to keep their clients’ money locked for an indefinite time.
“I expect many of those will invest in staking once the withdrawal is possible, thus increasing the level of decentralization of the network and potentially pushing up the value of ETH,” predicted Barbon.
Resilience is another question as the Merge is so new. There could be potential bugs or exploits. Hacks have been rampant in the crypto world so we know that nefarious individuals will be looking for an opportunity to uncover any weaknesses.
Another issue that Barbon does not address is the prospect that certain regulators decide Ethereum is now a security. Perhaps a remote possibility, but still, you have to consider it.