Ethereum’s Merge: A Case Study in Risk

The blockchain’s move to proof of stake holds lessons for any company facing change.

Written by Dmitry Gooshchin
Published on Nov. 16, 2022
Ethereum’s Merge: A Case Study in Risk
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One of the biggest changes in modern technology just took place — largely under the radar, and with significant implications for cryptocurrencies as well as many industries and businesses. 

Those changes surround the Merge, the integration of the main Ethereum cryptocurrency with the Beacon Chain, and the adoption of the latter’s proof-of-stake consensus mechanism, which replaces the proof-of-work valuation system common to most crypto currencies.

4 Lessons in Risk From Ethereum’s Merge

  1. Risk is necessary.
  2. Change takes time.
  3. Change and risk create winners and losers.
  4. Transparency is key.

Among the most important results of that change is an estimated reduction of more than 99 percent of the energy required to mine new ETH coins, eliminating one of the biggest drawbacks to the crypto economy.

While some smaller crypto platforms have used proof of stake to manage production, none of them has the heft of Ethereum, which means the change will be felt throughout the crypto world. Beyond that, the change may significantly affect the economy at large, not just thanks to the energy saved in ETH coin production, but because of the example the platform is providing for other industries desperately seeking ways to reduce energy consumption. 

Beyond saving energy, the Merge offers an even more important lesson, which is the need to take and manage risks in order to build something better. What worked for the Ethereum Foundation can work for many other businesses. Here are four lessons the Merge offers regarding risk and change.

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Risk Is Necessary

The Merge was a historical imperative, given the increasing criticism of crypto’s constantly growing energy use and costs. Essentially, the Ethereum Foundation decided it had to take a risk to survive and ensure the stability of the coin, as well as attract serious investors who had avoided crypto because of its high energy consumption.

With the software upgrade, the directors of the Ethereum Foundation faced the usual risks inherent in such rollovers. The biggest risk was that a less-than-perfect rollover would tank the Ethereum market. In order to ensure a smooth rollover and prevent investor panic, the Foundation offered to quadruple its usual bug bounties, paying as much as $1 million to researchers who discovered problems. 

Ethereum beat that risk, but others abounded, and still abound. While the upgrade was not supposed to affect trading in existing ETH in any way, it seems to have done so in the form of reduced value for coins since the Merge became official on Sept. 15, 2022. 

While many expected values to rise after that event, some analysts said the dip should have been expected, given the new ground Ethereum is treading. Also pushing down the price and creating more uncertainty is that the government is revisiting the issue of classifying the coin as a security, with the attendant extra regulation that would entail — a direct result of the Merge.

 

Any Change Creates Winners and Losers

The reality is that Ethereum is different. There will be losers and other changes that could affect stakeholders. Miners, who stand to lose the most due to a decline in business, may drop Ethereum mining to pursue other proof-of-work opportunities. This could lead to the chain forking, making Ethereum less valuable or less dominant in the industry. The price could remain depressed for an extensive period as Ethereum sorts itself out, leading investors to seek out more profitable pastures.

Risks clearly abound, but nearly all experts agree that the changeover was successful, and that success will enable Ethereum, and cryptocurrencies in general, to thrive. The Merge fundamentally changes the way currencies are created. It opens up opportunities for investors and for advanced Web3 opportunities simply not available before, whether due to the increased number of investors who will be motivated to try out cryptocurrencies, or the development of advanced applications thanks to expanded ecosystems.

 

The Process Can Be Long  

In essence, the Merge was planned from the outset of the coin’s introduction, with proof of stake as a preferred alternative first mentioned in 2014 by Ethereum pioneer Vitalik Buterin, a year before the Ethereum ICO. At the end of 2020, Ethereum launched its proof-of-stake Beacon Chain, the same chain that merged with the Ethereum Mainnet in September 2022 to create the Merge. 

The road from Buterin’s original introduction to the actual event wasn't smooth, though. Miners, whose business would be upended with the introduction of proof of stake, strongly opposed the move. Developers, too, were comfortable working with the proof-of-work model and needed to be persuaded to stick with the evolving plan. 

Other technical and arcane issues popped up, all of which could have created serious roadblocks to the Merge. It was indeed a long process, but the process offers an important lesson on following through on a vision by developing a practical plan and how both plan and vision are necessary for success.

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Transparency Is Key 

Just as important to the future is to be clear with those involved in the industry. Through all the years of planning the Merge, the Ethereum Foundation was candid with both investors and miners as to what the move would mean for them, both before and after the changeover. Keeping that level of transparency increases trust, both of users and regulators. 

By providing that transparency, Ethereum gave those involved in the platform the feeling that they were part of something big that could change the world. Manufacturers, farmers, and carmakers have a much greater impact on the environment than Ethereum. If they provide the transparency that people seek, they, too, will be able to change the world. 

The lessons offered by the Merge can, and should, reverberate among industries of all types, those looking to reduce their energy consumption and those seeking to grow and leave a major impact on their customers, their economies and the world. 

Ethereum’s Merge was the result of taking risks while also embracing vision, planning, and persistence. With those ingredients, there is no doubt the currency will continue to thrive.

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