Offchain: After the Merge

Offchain: After the Merge

The Merge is done and dusted. Now what are we going to talk about?

By the time you read this, the Ethereum Merge will be complete. If it went well then basically nothing will have changed. If it went badly, well, may as well delete those crypto apps and pick another hobby because baby we going to goblin town. I’ve heard good things about crochet.

But let’s be optimists here. It’s not like this thing has suffered for lack of planning. Vitalik and co have spent more than 3 years getting ready for this exact moment. They’ve staged test run after test run. The Proof-of-Stake Beacon chain has been running since December 2020 and nothing has gone wrong. It should, by all rights, go off seamlessly.

So, now that it’s done, what happens next? Here are five big themes to keep an eye on going forward.

The ultimate ESG venture

If you haven’t heard of it before, ESG stands for environmental, social and governance and it’s an investment methodology that aims to make money by investing in companies that generally want to improve the world.

Any time someone brought up the tremendous amounts of energy being used by Ethereum, our first instinct was to go on the defensive – “Other industries use heaps more energy!” “Nah we’re like using stacks of renewable power” – which tends to suggest we knew deep down we may have been slightly in the wrong.

But with a global energy footprint that now mimics that of a mid-size town, Ethereans now find themselves on the other side of the debate. Want to mint an NFT? We’re talking the same amount of power that it takes to turn on a light bulb. Get outta here, guilt!

While this might not make a difference to those still waiting for crypto to find its billion user app, it certainly means companies have one less reason not to take a punt on that experimental web3 project.

Bitcoin vs the rest

With Ethereum’s departure from Proof-of-Work, the divisions between Bitcoin and the rest of the blockchain universe become much starker.

I’m not here to render judgement on the various merits of PoW and PoS chains, but I will say that this is likely to increase the regulatory and governmental pressure on Bitcoin to decarbonise. (See the White House’s recently mooted crypto mining standards.) It’s not simply that Bitcoin stands alone; it’s that Ethereum has proved a different model is possible.

It’s highly unlikely that Bitcoin will change its code any time soon – Proof-of-Work is tightly bundled up in Bitcoin’s culture and entire value proposition – but mining operations can expect a lot of scrutiny going forward.

Risky business

Vitalik strikes me as a pretty smart guy. I have to imagine that the people slogging away at the Ethereum codebase are all pretty smart people. They’ve gamed it out and thought long and hard about what Proof-of-Stake means and how people might try to break it.

And it’s not even like they’re entering entirely unexplored territory. There are plenty of PoS networks already operating today and they’ve all been ticking along just fine.

But but but. There’s no denying that Ethereum is a bit different. It’s freaking huge and has a colossal amount of capital on the line. It’s all well and good for upstart chains to experiment with PoS and say it’s hunky dory in the same way that it’s a bit easier for the Bahamas to blockchain their currency than, say, the United States. The stakes are a teensy bit lower – along with the incentives to break it.

Put simply, there’s no telling what people with vast resources might achieve when presented with a new attack surface. But the same proviso exists as with Bitcoin: it’d be hard to do anything malicious without simultaneously crashing the price of the asset you’re presumably trying to liquidate. Just take the easy path and hack a bridge instead.

You can’t say that

The US government’s move to sanction Tornado Cash is a Big Deal. While it might be outside of a nation’s power to stop a decentralised app, it can certainly make life uncomfortable for those who use it.

But when Circle, the issuers of USDC, decided to simply freeze the USDC tokens being held in Tornado Cash’s tumbling pools, it made the heretofore impossible spectre of transaction censorship seem very real.

So, here’s the concern. Under the Proof-of-Stake system, nodes not only compete to prove the transaction and earn more ETH, they also need to be available to validate the proofs of others. But if these validators refuse en masse to validate transactions from certain addresses – and post-Merge it’s expected that compliance-focussed centralised exchanges will become an ever bigger part of the validator pool – then it could cause chaos and potentially even another fork.

This all remains firmly in the realm of the hypothetical. But censorship resistance is one of the single most fundamental parts of cryptocurrency – anything that alters it deserves our fullest attention.

We’ve made it fam

The Merge is a good news story and god knows we’ve been in need of one. It also marks one of the first times I can remember mainstream media outlets covering a crypto story without derision, suspicion or simply to point out that people have lost money.

Is this a threshold moment when people outside the crypto bubble accept that something of consequence could actually be happening here? We can only live in hope.

Luke from CoinJar

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