The impact of Ethereum Merge on Businesses
Eth had been trading in a bearish market for the month of August (between $1,400 and $1,700), since reaching an all-time high at the end of 2021. Impacted by the increasing uncertainty that came with the Russo-Ukrainian War, higher interest rates, inflation, and a volatile stock market, Ethereum approaches “The Merge“ stage that will enable businesses to comply with the sustainability requirements needed for further development. On September 6th the consensus layer upgraded to Bellatrix, followed by The Merge between September 10th and 20th, 2022.
By switching to PoS, the Ethereum Foundation states the energy cost of each transaction could be cut by 99.95%! An immense milestone after 7 years of research, planning, and development.
At micobo, we have analyzed in detail the advantages and challenges of upgrading from “Proof of Work“ to “Proof of Stake“ consensus protocol in terms of sustainability, gas fees (EIP-1559-Before the merge), and we describe the next steps after the merge. In this opportunity, we deem it relevant to analyze how these changes will impact the businesses built on the Ethereum Blockchain in different areas: security, sustainability, gas fees, and scalability. In addition, we analyze which businesses will benefit the most from The Merge and sharding.
Businesses rely on secure technologies to offer services and products of quality. Proof of Stake consensus protocol offers a different mechanism to validate transactions that maintains honesty within the network while at the same time supporting energy efficiency.
“Proof of Stake” consensus protocol, establishes a minimum stake in ETH to participate as a validator (32ETH). With this, participating validators are chosen randomly to create new blocks and share them with the Ethereum network (Ethereum, 2020). “The total stake for the selection of each block proposer will consist of the sum of self-stake and the stake delegated from other token holders” (Blandon, 2020).
The consensus provides incentives/punishments so that the network chooses to act honestly. With PoS, validators are selected based on the amount of ETH that they have staked (deposited) in the network. If validators act dishonestly, their stake is slashed/destroyed.
The consensus mechanism “Proof of Stake” is secured by the fact that an attacker would need 51% of the total staked ETH to defraud the chain and the attacker’s stake would be reduced for malicious behavior. The risk of an attack is reduced as there is a higher probability of losing the stake.
The change to “Proof of Stake” consensus protocol will directly impact energy consumption, reducing 99.98% of the energy cost per transaction. Businesses built on the Ethereum blockchain add value to their ESG strategy as it helps them meet shareholders’ demands for responsible businesses and investments, attracting and retaining young talent who prioritize purpose over salary, and avoids reputational damage.
The current global trends indicate that industries intend to ensure that any energy consumed is entirely carbon-free. In April 2021, three important organizations (the Energy Web Foundation, Rocky Mountain Institute, and the Alliance for Innovative Regulations) formed the Crypto Climate Accord, supported by organizations spanning the climate, finance, NGO, and energy sectors.
The Accord aims to “decarbonize the industry in record time”, and achieve net-zero emissions in the global crypto industry by 2030. With this, the priority level that sustainability and environmental concerns have for emerging industries in the blockchain is evident.
Despite the confusion in different media, gas fees will not change in “The merge“. Gas fees are a product of network demand relative to the capacity of the network and a change from consensus would not significantly affect gas fees. Ethereum is working towards an alternative solution for scalability and reduction of transaction fees. The next phase after “The merge“ is the scalability of the network. In the past, the plan was to implement “sharding” as a scaling solution. However, after several layer 2 solutions, rollups seemed to be a better solution, with a preference for Zero-Knowledge (ZK) Rollups.
For Businesses, “The Merge” would not have an impact on operations. Transactions will not see a representative change and it will be imperceptible. However, businesses can expect a change in gas fees when the “sharding phase“ and Layer 2 integrations are implemented in 2023.
The scalability on Ethereum (Layer 1) will not change, at least not significantly to notice with “The merge“. Decentralized applications built on Ethereum and other applications will not see a change in the speed of transactions at this Layer.
In order to increase the transaction and database speed, there is a second layer that handles transactions off the main Ethereum chain (Layer 1). The beacon chain (coordination layer) allows people to “stake” and coordinate the validators on the platform and the Shard chain (data layer) splits the database horizontally increasing the capacity to store and access data (from 15 transactions per second to more than 2,000 TPS).
Originally the plan was to implement sharding before the merge. Nevertheless, with the boom of Layer 2 solutions, it was decided its implementation would take place after The Merge. Given the success of Layer 2 solutions to scale transaction execution, sharding plans have changed to “finding the most optimal way to distribute the burden of storing compressed call data from rollup contracts”(Ethereum, 2022) while at the same time being compatible with the Ethereum Virtual Machine (EVM) and Ethereum smart contracts.
Businesses that will benefit from Ethereum merge
With the original Ethereum setup affecting gas fees and scalability, many applications requiring speed in transactions and producing thousands and millions of transactions per day could not be built on top of Ethereum. The Merge will impact the adoption of blockchain for new industries.
One use case that will increase in participation after the merge and sharding is supply chain (manufacturing, farming, refining, design, packaging, and transportation). The Ethereum blockchain would be an excellent tool for adding transparency, automating processes, and reducing settlement costs. One of the biggest advantages of implementing blockchain in supply chain management is bringing down the cost, wastage, and time of the entire production cycle
Sustainable Real Estate and Carbon Markets are other businesses that will benefit from Ethereum´s new consensus protocol. Circular economies are on the rise seeking technology matching the environmental, social, and governance goals and now Ethereum fulfills those expectations.
To see more use cases that will outperform after “The merge“ and “Sharding“ click here.
micobo GmbH is a leading European software company for Security Token Offerings and Blockchain Software Development (DLT). It provides fully compliant software solutions for Security Token Offerings and advises on structuring DLT- and Blockchain-based Securities. micobo empowers financial institutions with state-of-the-art technology focusing on providing a better customer experience and achieving measurable results.
Laura Andrade (firstname.lastname@example.org)
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