Ethereum 'Merge' ends at a key moment for the crypto market

Ethereum has completed a long-awaited upgrade to its system to reduce its energy costs and pave the way for greater use of crypto technology in mainstream finance.

The upgrade, known in the industry as a “merge,” which changes how new transactions are verified on the Ethereum blockchain, was completed early Thursday, said co-founder Vitalik Buterin.

Ethereum powers large parts of the Web3 world, which includes applications such as digital collectibles and decentralized financial systems.

The milestone, promised by developers for many years, was hailed as one of the most significant moments in crypto's short history by fans, who planned "merge parties" in cities around the world and watched live-streamed watch parties on social media.

"This is the first step in Ethereum's great journey towards a very mature system. There are still steps to be taken," Buterin told the developers.

The merger was a high-stakes test for the crypto sector after this spring's crash in token prices wiped $2 trillion off the value of digital assets and shook confidence in the market.

Changing the architecture that underpins the $200 billion Ether cryptocurrency, the flagship token of the Ethereum blockchain, and tens of billions of other associated assets and applications is fraught with risks ranging from technical hiccups to squabbling among participants in the decentralized network, even after the merger is complete.

Its supporters expect a successful merger to boost confidence in Ethereum, launched in 2015 by Russian-Canadian programmer Buterin, and the multitude of tokens and projects running on its blockchain, as well as outspoken criticism of its energy consumption.

However, Ethereum developers said they would need to monitor the network in the coming hours and days to ensure the upgrade works smoothly.

“It’s a complicated task,” said Edouard Hindi, chief investment officer at crypto hedge fund Tyr Capital. "Forgotten fine-tuning . . . could lead to a lot of volatility and the market is in a state of panic."

The merger represents just one step in a plan designed by Ethereum developers to overcome the network's capacity limits, which are seen as a major hurdle to mainstream adoption of decentralized finance.

“[The merge] solves one problem, but it doesn’t solve many other problems,” said Lars Seier Christensen, co-founder of Saxo Bank, which now runs a blockchain project called Concordium.

Ethereum, like Bitcoin, has previously relied on network participants solving complex mathematical problems to validate new blocks, a process called proof of work. Ethereum’s energy consumption was similar to that of Finland.

The merger refers to the moment when the existing Ethereum blockchain will be connected to a new network where transactions will be validated by a group of individuals and companies that have staked their own tokens as collateral for the network's security, a system called Proof of Stake.

The Ethereum Foundation estimates that replacing Proof of Work will reduce blockchain energy consumption by around 99.95 percent. It will also eliminate the need for Ethereum miners, companies that make money from validating new blocks via proof of work.

Anticipation of the merger has helped boost the price of Ether, which has risen around 75 percent since its low point in June. Ether has gained ground against Bitcoin, which has only recovered 15 percent over the same period.

However, the years-long effort to complete the upgrade highlighted the difficulty of making improvements to the Ethereum blockchain. Transactions on the network are still hampered by slow speeds and high costs, which critics say limits the system's ability to grow.

Hindi said the merger is "just a step in the right direction. There are three or four more steps. It's a two- or three-year process. It's a big, big plan being put into action and we're going to have a lot of surprises along the way, good and bad."