After six years of preparation and ongoing speculation around its potential success, the second largest blockchain came through with a win and completed a massive overhaul to its infrastructure. Ethereum successfully completed the long-awaited Merge of its existing Historic State layer and its parallel ledger, the Beacon Chain, officially shifting its consensus mechanism from proof-of-work to proof-of-stake.
To cut through the jargon, here’s the gist of the transition. Ethereum, like Bitcoin and other major blockchains, relied on decentralized cryptomining as its way of validating ether’s value. This process, otherwise known as proof-of-work, requires physical computer hardware running and solving puzzles to give the blockchain its value. With its successful Merge, Ethereum has adopted a decentralized stake-based value system for ether. This looks like individual actors buying stakes in ether, or companies like Coinbase pooling smaller ether holdings into a stake, and joining the validation pool which now gives ether its value.
Ethereum’s own website sums up the difference in the simplest of terms:
“In proof-of-work, miners prove they have capital at risk by expending energy. In proof-of-stake, validators explicitly stake capital in the form of ether into a smart contract on Ethereum.”
The decision to shift towards a proof-of-work consensus mechanism is truly game changing, allowing the company to promise cutting the blockchain’s energy requirements by 99.95%, saving the planet approximately 22.9 million megawatt-hours per year, and maintaining the blockchain’s decentralized appeal through a capital-intensive approach and a set of carrot-and-stick incentives to collaborate. It’s hoped that this shift will make skeptics rethink their perceptions of cryptocurrencies, the industry’s energy use, and its potential use cases.
“I think it’s fair enough to say that to mainstream audiences and particularly to those outside of crypto, the reduction of power consumption and the resulting environmental benefits are probably the number one benefit of the merge,” said Omid Malekan, Adjunct Professor at the Columbia Business School and often-termed Crypto Explainer-in-Chief.
But should businesses already investing in ether, leveraging its blockchain for solutions and services, or accepting ether as payments, care that much about this improvement? What does it actually change about Ethereum’s value proposition and use cases?
Raising the Ceiling for Potential Blockchain Use Cases
The energy argument is definitely a strong one, especially when doing the traditional “country” comparison where a blockchain’s energy spend is weighed against the total electric power demand of a nation. It’s a famous one for Bitcoin (which researchers say requires more energy than countries like Chile, Belgium and the Philippines) and one estimate places Ethereum’s energy savings as large as the entire electricity demand of Austria.
Even with ESG criteria increasingly becoming a priority for investors across various industries, experts we spoke to tend to agree that energy spend isn’t the main metric businesses are using to define the value and utility of their blockchain investments.
“Today, we are processing transactions. Our merchants are accepting payments for their goods and services in all sorts of cryptocurrencies,” said Peter Jensen, CEO of Rocketfuel Blockchain. His company, which helps manage crypto payments for banks and retail operations like ACI Worldwide and Sky-Tours, allows businesses to accept cryptocurrencies from BTC and WBTC, to ETH and SHIB.
“No one is ever complaining about the amount of power it takes. It just works. And so, I think that it’s wonderful that we are using less power. But for the average person that uses Ethereum every single day, they won’t see that much of a difference,” he said.
“I don’t know if it matters if it’s 99% or 95%. The broader point is that, after the merge, Ethereum’s energy use will be that of any other computer network,” Malekan said.
Not much will change for Ethereum holders and end users making transactions over the blockchain; compare it to the release of a new iPhone with a new chip. Incremental shifts are minute, but over time the improvements are made evident in performance and overall capabilities. There’s not much of a noticeable change from the iPhone 13 to 14, but try putting an iPhone 6S on the same tasks an iPhone 14 knocks out daily and it becomes a night and day improvement.
To this extent, while the amount of power being saved per transaction is worth noting, businesses should be looking ahead at what this shift means for the foundations of blockchain-based solutions.
“What we’re looking at mainly is a maturation of the blockchain,” said Gabriella Kusz, CEO of the Global Digital Asset & Cryptocurrency Association. “There is an understanding that the Ethereum protocol that we’re looking at is only 40% complete, and this is another step in the evolution of the blockchain.”
Kusz, whose global voluntary self-regulatory association builds blockchain use case awareness and education, works with companies across the blockchain space like proof-of-stake ledger Casper Network, Bitcoin ATM company CoinFlip and NFT incubator BlueDolphin, as well as with blockchain users and peripheral industry players like tax advisory network KPMG, forex law firm G. Dowd Law, and currency exchange trading platform CrossTower. She finds that most blockchain enterprise users are weighing security, transaction speed, and the natural synergy between the infrastructure and their solutions when choosing any given protocol as their foundation.
At least when it comes to speed, it appears Ethereum’s Merge will help meet that demand. CoinDesk recently reported on an exclusive Citigroup research report which found that, while the immediate improvement to block creation speed will only drop by about one second and a half, the blockchain’s upgrade is preparing it for a future “Surge” upgrade; this coming upgrade will push transactions-per-second up to a promised 100,000 TPS.
This forthcoming improvement to block-adding speed and even the minute 10% reduction in block times opens the door for powerful enterprise use cases, even if they’re not immediately evident. Use cases that are already in motion, like insurance leader Allianz’s use of Hyperledger Fabric for cross-border auto insurance claim or EY’s “Nightfall” solution for scaling on Ethereum, will only improve their security and capacity on top of a proof-of-stake Ethereum.
As Bitcoin made clear in its initial white paper, a blockchain’s primary service and the one that Malekan sees as its “killer use case” is the medium of exchange utility, or offering a peer-to-peer alternative infrastructure for validating, processing and accepting currency. This will likely remain the use case that businesses flock to as it’s how most users, and businesses, interact with blockchains. IDC’s most recent full report from 2020 found banking still held a majority of single-sector blockchain market value with 29.7%, which includes use cases like cryptocurrency transactions. Process manufacturing use cases held a weak second place at only 11.4%.
However, IDC’s own forecasts show that percentage is shrinking, overwhelmingly eaten up by “Other” use cases which signals a growing variety of applications gaining steam. And as our experts explained, Ethereum’s foresight and successful Merge should signal to businesses that this one use case is only the beginning for blockchain’s mainstream utility.
“Cryptocurrencies as an asset is only scratching the surface, that’s just one use case,” Jensen said.
“This technology is an enabler of companies of all stripes doing business more cheaply, more efficiently, and serving their customers,” Malekan said. “While the merge itself doesn’t impact Ethereum’s scalability, it does enable the next steps in the roadmap for things like rollups, and if those succeed, they will significantly increase the throughput and significantly bring down the transaction fees, and I’m looking forward to when that happens, because then we’ll be talking a lot more about businesses and companies and merchants on top of this technology.”
Worldwide blockchain solutions spend was already forecasting significant growth before the completed Merge; IDC’s Worldwide Semiannual Blockchain Spending Guide expects as much as $19 billion in spend by 2024. Crypto professionals like Jensen, though, still see enterprise buy in as lacking and hopes Ethereum’s proof-of-stake adoption will be another catalyst for wider adoption.
“We need these improvements, it’s great to see them, but the next thing we need is for people to take advantage of this technology, because it’s great with infrastructure, but if nobody builds applications and use cases on top, what does it matter,” Jensen said.
Blockchain use cases today, even though they’re dominated by the financial sector, still vary widely and could offer a glimpse into some of the sectors where a new-and-improved Ethereum will motivate enterprise blockchain adoption. Beyond money transfer solutions, these include…
- Smart contract solutions for employment contracts and title registry (Dfinity, BurstIQ, Propy)
- IoT infrastructure solutions for credentials and device management (HYPR, Xage, Helium)
- Healthcare sector solutions like life sciences product verification and EMR systems (Chronicled, Patientory, Medicalchain)
- Logistics solutions like shipping accountability and digital ledgers (io, DHL, ShipChain)
- NFT solutions for minting (RECUR, Candy, Pixura)
What’s even more encouraging for the blockchain industry is that individual organizations that do invest in blockchain technology are doing so on multiple fronts; Ethereum’s Merge will further support that internal diversification.
A 2021 Deloitte Global Blockchain Survey found that companies are investing in a number of use cases including digital currencies, secure information exchange, asset tracking, regulatory compliance, and financial oversight.
As of about a year ago, excluding companies that are only in the research stage, 65 of the Top-100 publicly traded companies have invested in, developed or already deployed blockchain solutions. 18 of those 65 are already leveraging the Ethereum blockchain.
Ethereum Merge Creates Reverberations Across the Crypto Industry
In terms of the possibilities that this Merge brings for the broader industry, whilst it most definitely was not easy for Ethereum it most definitely is now justified. Trying to introduce a very sophisticated, complicated technical upgrade for a living breathing 24/7 network is not easy and required over 5 years to implement.
“Maintaining and upgrading decentralized communities has its challenges, playing the long game and being patient, which I think that Ethereum community is better at being than a lot of the other smaller crypto communities and it does pay off,” Malekan said.
While Ethereum will surely capitalize on being the pioneer in this scaled shift towards proof-of-stake, the bar has now been raised for other major competitors who seek to stake their claim in future advancements to blockchain infrastructure and use cases.
“I look forward to seeing the next wave. But I also think that this also serves in many ways as a precedent and an opportunity for other blockchains and other builders, to see how in real time, you can manage such an important upgrade and perhaps offer insights into how we can continue to both evolve and develop Ethereum, but also other blockchain protocols,” Kusz said.
Ethereum’s proof-of-stake adoption also places it in a unique position to draw in investor capital. Reducing Ethereum’s energy footprint, aligning it with ESG metrics, and further expanding its value proposition beyond the volatile cryptocurrency market could get institutional investors like banks and portfolio management companies to invest more money into the blockchain.
“There is also an interesting question of how much of this is by now priced in? So, while I would not be surprised on the margin, there are institutions whose attitude to crypto investing would’ve shifted because of the ESG implications of the merge. What we don’t know is how much of that has already happened. Only the market knows and then if all goes smoothly then we’ll see what the reaction is,” Malekan said.
Whether or not Ethereum receives increased business from this Merge is going to take a few bold operations to validate Ethereum’s improved layer-2 capabilities and prove a test case to other companies. Kusz believes that an essential part of supporting this ideal future for Ethereum is, ultimately, legal clarity rather than just sustainability improvements or use case validation. This can come either in the form of either the visible hand of the government or a self-regulatory approach.
“We take a very strong position around the importance of allowing technology to evolve and allowing it to do so relatively unimpeded,” Kusz said. “It’s important to recognize and respect some of the opportunity in its natural evolution.”
In order to bring in fresh capital to the sector, there remain some unsettled aspects surrounding the classification of major cryptocurrencies such as Ether, with regulators and legislators debating whether cryptocurrencies should be classified as a security or a commodity. But after policy speculation is clarified, it is likely that there will be a greater adoption of cryptocurrencies and the underlying blockchain as it becomes easier for investors to make an accurate business case for placing dollars in this still-emergent technology.
“Over time as legal and regulatory becomes clarified, as people continue to enhance their education and awareness about digital assets and blockchain technology more broadly, I think you’ll see this as lending itself to make Ethereum more amenable and those products that are built off of Ethereum more amenable to those who have an ESG or sustainability mindset or corporate governance requirement,” Kusz said.
“The most important thing the government can do is to pass regulation that fosters broader adoption of blockchain and cryptocurrencies, and the way to do that is to create the digital dollar…. We’ve seen it in China. We’ve seen it in India. We’ve seen it in some of the countries in Latin America. That changes everything because it forces every boardroom, every CEO, to think about how they are going to adopt,” Jensen said.
Ethereum remains a short- and long-term front runner in the crypto space because of this Merge, but this does not necessarily mean that they have leader status in the bag. Highlighted again by Malekan, one of the distinguishing factors that will hold Ethereum in good stead versus its major competitor Bitcoin is its multi-purpose functionality. If we look at the whole ecosystem of popular and rising blockchains, it’s clear that other blockchains understand the importance of supporting a wide variety of functions.
Companies like Shell, Lowe’s and Merck all use Ethereum for different purposes, and naturally different businesses have different demands and potential uses for decentralized networks. Like we explained, even internally organizations are using multiple blockchains to achieve their goals (like SAP which uses Quorum, Ethereum, MultiChain, Corda and Hyperledger Fabric), meaning that the blockchains that can diversify their use cases will have the best foundations for tapping into the still-undefined well of blockchain potential.
“We have choice. We have a high degree of competition and alternatives available in the blockchain space. Obviously there is Bitcoin and Ethereum today, but there are numbers of other protocols that exist…. I think in some cases this may be well-suited towards certain industries versus others or for certain use cases versus others,” Kusz said.
As more businesses become aware of the extensive benefits that the crypto industry offers with the now real possibility of leveraging proof-of-stake at scale, ledgers such as Ethereum will give businesses a leg up in their industry, and it’s very possible that a company’s use of blockchain technologies becomes one of the key metrics for measuring its competitive edge.
“There are way too many companies who don’t understand that this will fundamentally change their business and it may get them out of business. They must start thinking about how you can take advantage of the technology today and then be rest assured that the technology will improve and get better and better,” Jensen said.
Article co-written by Matt Franje and Daniel Litwin.