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Ethereum Merge Is Done, What Now?
The switch from Proof-of-Work to Proof-of-Stake is only the beginning, explains Edul Patel, co-founder and CEO of Mudrex
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The huge drop in the values of Bitcoin and Ethereum this week seems to have made people forget about the 'Ethereum Merge'. While the debate last week was pertaining to the idea of the Merge introducing volatility in ETH prices and cryptocurrencies at large, this week the discussions are around the broader drop in markets causing the drop in crypto.
But with the Merge done, what's next? To understand more on this topic, BW Businessworld's Rohit Chintapali got in touch with Edul Patel, co-founder and CEO of Mudrex.
Could you explain to us the ‘Ethereum Merge’?
The key problem that Ethereum is trying to solve today is something called as Scalability Blockchain Trilemma. It says that you can't have scale, speed and security together. At some point in time, you need to sacrifice on one of these three to achieve the another. So, you can scale a blockchain with high speed, but with low security, or you can have a very secure blockchain, which is very fast but has very low scalability, or the other way around also - on how we can have a tie and achieve a little bit of all of these three. The conversations around this actually started about five years ago.
Ethereum is a great technology. It's a great concept that allows you to do compute on a global network. This compute leads to some transfer of value from one person to the other, which is a very interesting concept. This is different from Bitcoin as well because Bitcoin is transfer of something from one person to the other while Ethereum is conditional transfer of some value from one to another and this condition can be evaluated on a global permissionless blockchain. But because the way Ethereum was built, it was not highly scalable and it was slow, but it was very secure as it was using this concept of ‘proof-of-work’. And in proof-of-work (PoW), what you literally need to do is you need to put in actual physical computing power to be able to ensure security of the setup. What Ethereum realised over the course of the last 4-5 years is that for it to increase scale and speed, it needs to sacrifice some amount of security and move away from an extremely secure PoW concept to something called ‘proof-of-stake’, where unlike PoW you actually to put in the hard work to make sure that your transactions are validated. In proof-of-stake (PoS), you stake an amount to make sure that your transactions are secure.
Financial incentives are basically aligned in both cases. What has happened is that Ethereum’s move from PoW to PoS reduces the core security level of Ethereum slightly. But on the other end, it gets lots of benefits on scalability and speed.
But what we call as the Merge is step one in making Ethereum scale from about 12 transactions per second to about a hundred thousand transactions per second. So, the Merge is the step one in this very long journey that already started five years ago to make Ethereum more secure, more scalable and basically more available to users all over the world.
Has the Merge caused the value of Ethereum to drop?
No. The current drop is mirroring the broader current drop across all markets. It is primarily because of inflation data over the last week being significantly worse off than what was expected. Markets are pricing much higher in anticipation of Federal rate hike also. It has nothing to do with the Merge.
Over the last six months, the graphs of Bitcoin and Ethereum have been similar. Both are down 53 per cent. But do you see the value of Ethereum dissociating from what’s happening in the crypto market on the long run?
The Merge makes Ethereum more attractive. It will become more and more acceptable over time, which will warm up to a much larger audience and that will reduce volatility.
With the Merge, Ethereum moves away from a very unpredictable supply/generation schedule to a predictable, clearly required and understood yield schedule. This makes it easier to price Ethereum as well. And because this makes it easier to price Ethereum, some of the larger investors will be coming in over the course of time and be able to better assess price. Over time, this should make Ethereum less volatile, which will also mean that it will decouple Ethereum from Bitcoin.
Now, the reason why Ethereum exists is completely different from why Bitcoin exists. So, they should ideally decouple in the longer run.
The energy-efficiency debate around Ethereum got a lot of traction prior to the Merge. Your comments?
Energy efficiency is a very important challenge to solve for. With the merge complete, the world is spending lesser energy. PoS will cut Ethereum’s energy usage by around 99.95 per cent. This is a meaningfully large amount. This will inspire people to start making such choices more consciously when they are trying to design blockchain and blockchain systems.
If I were to put you on the spot and ask to choose only one amongst Ethereum and Bitcoin? What would your choice be?
Bitcoin’s value and its pricing reflects trust in the infrastructure. Ethereum, on the other hand, is more about compute power and its price reflects demand for the compute power of the network. I think the purpose of both are very different. But I am personally fairly bullish on Etheruem. Half my portfolio is Ethereum.
It’s Interesting that you say that because a few days back famed businessman and author, Robert Kiyosaki, tweeted and asked people to invest in real money. And he listed ‘real money’ as Gold, Silver and Bitcoin.
Three years ago, he wouldn't even include Bitcoin perhaps. But I think that his opinion is fair. As I said, the purpose of Bitcoin is very different from Ethereum. And of course, I do hold quite a bit of Bitcoin also in my portfolio. It's not binary, it's not about having one of the two. You need to have both in your portfolio. That’s the whole purpose of Mudrex.