Last Thursday there was one of the most important milestones for the crypto market, not just for this year 2022, but throughout the history of crypto assets. The upgrade, also known as ‘The Fusion’, essentially meant evolve the consensus model of proof of work (proof of work) to give way to the Proof-of-Stake (proof of participation).
This change in the methodology in which transactions are validated and recorded in the accounting register of ethereum It has a number of advantages, including a 99.95% reduction in energy consumption for each transaction. In addition, the change is called to reduce the speed of validations by at least 12%, while reducing the costs of using the network. This is a significant improvement that potentially makes transactions of Ethereum itself, as well as other assets and tokens built on its network, more accessible. In addition, a drastic reduction in the issuance of new Ethereum coins will be applied, which means that it will be progressively closer to a deflationary monetary asset.
With all that, the merge It provides a series of obvious improvements for the user in terms of network use., and even makes it a potentially more attractive asset for long-term investment. But the other side of the coin is that the changes after ‘The Fusion’ also mean a greater centralization of the Ethereum network. In practical terms, the consensus based on proof of work It means that anyone with a computer can join the network and validate transactions for a chance to get paid for it, which they receive in the form of new coins. In this model, obviously the greater the computing power, the greater the competitiveness and the greater the potential reward, although it is true that it poses low barriers to entry.
By cons, under the new format Proof-of-Stake The network is based on validators, and to become one of them and aspire to receive commissions, it is necessary to have multiples of 32 Ethereum units blocked in the network. In this way, the validating user forms a complete node. Namely, at current prices with Ethereum around 1,350 euros, 43,200 euros are necessary to be an autonomous participant in the network. Alternatively, a user who has less than the 32 necessary coins can delegate their Ethereum units, depositing them in an entity so that they are grouped together with those of other members, form a complete node of 32 ETH, and can thus distribute part of the remuneration received.
As a result of this system, currently more than 70% of the ETH deposited in stake are concentrated in six poolswhich make this grouping of cryptocurrencies to validate transactions on the network. among these six pools is the decentralized platform lidowhich offers a net annual return of 5.3%, but also centralized companies such as the exchange houses Binance, Kraken or Coinbase.
As a result, this concentration of the network confronts one of the fundamental principles that technology proposes blockchain, and even the essence of the movement that gave rise to the birth of Bitcoin. It should be remembered that the first of the cryptoactives, Bitcoin, aims to offer a decentralized payment system directly from user to user, also providing its own currency.
Regulation and privacy
Although it is true that Ethereum’s value proposition differs from what, for the moment, is its older brother, it is opposed to the essential pillar that seeks to combat the centralization of the financial and monetary system. And if that was not enough, This concentration of validators that Ethereum presents after the Merge raises uncertainties from the point of view of regulation and privacy, since it grants greater censorship power over a few centralized companies. In fact, something like this happened with the case of Tornado Cash, which resulted in a chain of closed accounts, data leaks, frozen funds, controversial arrests of its developers, and ultimately, an intense debate on censorship and the right to privacy. .
So much so that last Tuesday, less than a week after the Merge was completed, the Securities Exchange Commission (SEC) American already claims its jurisdiction over the Ethereum network in a lawsuit against youtuber Ian Balina. His argument is based on considering that 42.56% of Ethereum nodes are on US soil, and that consequently validated transactions are in his area of action and therefore he points out that he has full powers as a regulator. This point was also stressed by SEC Chairman Gary Gensler, who while considering Bitcoin as a commoditiesnoted that Ethereum could now be under commission regulation.
Any technology, especially in its early days, struggles to survive by adapting to the demands of the ever-changing environment.. In this case, the phenomenon is perfectly portrayed in what is known as the blockchain trilemma, where the decentralization, security and scalability of a network intersect. The recent evolution of Ethereum has improved scalability at the cost of sacrificing what was its high degree of decentralization until then. It is at least paradoxical that the largest ecosystem of decentralized applications on the market is today built on the Ethereum network, which, from now on, is more centralized than ever. Whether it is from a technological, economic, monetary, regulatory or operational point of view, Ethereum is undoubtedly one of the most interesting focuses of the future of the crypto market.