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The Ethereum Merge and Its Implications for Decentralized Finance

The Ethereum Merge and Its Implications for Decentralized Finance

Last Updated on February 24, 2024 by Hamza Khan

When Ethereum announced its long-coming upgrade on September 15, 2022, the news met with mixed reactions from crypto enthusiasts. This upgrade, called “The Merge”, is the joining of Ethereum’s original execution layer (Mainnet) with its new proof-of-stake consensus layer (Beacon Chain). Since 2020, these two systems have been running parallel to each other but are now merged to replace Ethereum’s proof-of-work with proof-of-stake.

In this way, Ethereum eliminates the need for energy-intensive systems to validate transactions, reducing its power consumption by up to 99.95%.

Impact of “The Merge” on the crypto space

With the launch of the Ethereum Merge, the platform’s vision of more scalability, security and sustainability is genuinely realized. In addition, environmental enthusiasts can explore Ethereum’s blockchain space now that its impact has been reduced to the barest minimum. Furthermore, Ethereum has assured its users that no transaction will be lost, as the entire history of Mainnet was merged successfully with Beacon Chain.

However, this move has seen crypto miners moving to other blockchain streams to sustain their income. Ethereum is home to crypto developers and platforms as the second largest blockchain by market capitalization. Many use proof-of-work, Ethereum’s previous validation process, to mine their crypto rewards. Now, many miners are migrating to the EthereumPoW (ETHW), a different chain that launched separately from Ethereum’s Merge.

Implications of “The Merge” on Decentralized Finance

The unique selling point of Ethereum is that it allows its users to run smart contracts. Smart contracts are computer programs embedded in the blockchain that automatically performs an action when certain conditions are met. It is from smart contracts that the innovation of DeFi thrives.

Before the launching of Ethereum’s Merge, DeFi app store DappRadar and other stakeholders voiced their concerns over how the merger could potentially destabilize DeFi applications on the Ethereum blockchain.

The potential issue that DeFi stakeholders are concerned about is the advent of a hard fork, which has happened with the launch of EthereumPoW. Furthermore, the head of the U.S. SEC indicated that crypto might now be considered a security. This opens the Ethereum blockchain to the possibility of being fined for trading as an unregistered security. In a way, this could destabilize DeFi protocols built on Ethereum.

However, Ethereum developers have assured that the Merge will not affect the network, as it happened only on the base layer. Thus, the concerns raised by DeFi stakeholders are significantly reduced. In addition, rather than quenching the growing DeFi space, the Merge can boost decentralized finance.

In the proof-of-stake method, validators, not miners, verify transactions. Validators have to stake their own ETH to ensure that they perform the transaction verifications honestly. By successfully adding a block to the blockchain, validators can earn monetary rewards for their work. This way, DeFi can increase, with regards to market size and generate more profits for the people involved.

Conclusion

The Merge has been described as one of the crypto industry’s biggest moves and anticipated events. We can only look out for more changes and effects, either positive or negative, that it can have on the crypto ecosystem as a whole.

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