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The second week of September 2022, stands to be one of the most transformative in crypto history as Ethereum readies The Merge, its consensus mechanism transformation. A metamorphosis of epic proportions, it will set the stage for future scaling upgrades, including sharding. This article explains The Merge, its benefits and several possible risks you should look out for during transition.
Risks of the Ethereum Merge
As beneficial as The Merge will be, it is not without risk from scammers looking to make a buck from potential victims or from potential technical difficulties. The Ethereum Foundation cautions, “As we approach The Merge of Ethereum Mainnet, you should be on high alert for scams trying to take advantage of users during this transition.”
What is the Ethereum Merge?
The Merge is the second major step in achieving the Ethereum vision of security, scalability, decentralization and sustainability by shifting from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) protocol. This transformation will reduce energy consumption by almost 100%. Producing a block on the blockchain will move from miners using energy-hogging graphics processing units (GPUs) to staking validators.
The Ethereum Foundation explains that “validators receive new blocks from peers on the Ethereum network. The transactions delivered in the block are re-executed, and the block signature is checked to ensure the block is valid. The validator then sends a vote (called an attestation) in favor of that block across the network.” This transformation paves the way for future upgrades that will reduce transaction costs and increase the speed of transactions.
Why is the Ethereum Merge Important?
Ethereum aims to achieve three goals — scalability, security and decentralization. Unlike the old business adage that “you can have it fast and cheap, fast and right, cheap and right, but you can’t have all three,” Ethereum refuses to compromise. The foundation writes that “a naive way to solve Ethereum's problems would be to make it more centralized. But decentralization is too important. It's decentralization that gives Ethereum censorship resistance, openness, data privacy and near-unbreakable security.” Decentralized finance (DeFi) principles form a crucial part of the Ethereum ethos.
To accomplish these three goals, Ethereum (CRYPTO: ETH) plans to increase the size and power of its nodes without sacrificing speed or decentralization. It plans to implement the process of sharding to increase transactions per second while decreasing the power needed to run a node and validate the chain.
Risks of the Ethereum Merge
No change comes without risk, and bad actors seek to capitalize on the confusion and uncertainty that comes with change. During The Merge, you can count on opportunistic thieves trying to make money off crypto users’ inexperience, gullibility, indifference and greed. Here are a few scams to watch out for.
- Fake airdrops: The Ethereum Foundation will run no airdrops, so if you see one, ignore it or send it to a burn address.
- Phishing scams: Most people are aware of the many phishing scams where fraudsters try to get you to share your information. ETH-related phishing scams are likely to escalate this week.
- Support scams: Entities and people who purport to be part of a support organization may ask you for details or access to your computer. Don’t give it.
- Fraudulent mining pools: These scams offer a swap page that promises high returns for sending funds to its fake mining pool. Coinbase estimated that users have lost more than $50 million this way.
- Misleading offers for a nonexistent ETH2 token: The Ethereum Foundation tells users that they should “not send your ETH anywhere in an attempt to ‘upgrade to ETH2.’ There is no ‘ETH2’ token, and there is nothing more you need to do for your funds to remain safe.”
- Risk of outage: Although it is unlikely, The Merge could result in a period of outage similar to what happened with Solana in the past.
- The power of slashing: The ability to slash ETH in a PoS system is a benefit to the protocol but is not without risk because if someone attacks the network and slashes coins, it’s irretrievably gone.
- Little or no reduction of gas fees: Fees for transactions are not expected to decrease after The Merge, but future upgrades are aimed at reducing fees.
- Miniscule reduction in time for transactions: Ethereum transactions take 13 to 14 seconds; after The Merge, they should take 12 seconds, keeping Ethereum’s speed behind that of Solana and Avalanche. To put it in perspective, however, mining a block of Bitcoin takes about 10 minutes. The next Ethereum upgrade, which will incorporate sharding, stands to reduce transaction time and fees for users.
When is the Ethereum Merge?
Ethereum has been preparing for and working toward The Merge for years. The exact moment the transformation will take place has not been announced, but the Ethereum Foundation published plans for a soft deadline of Sept. 19. Many speculate that it will happen at 3 a.m. Coordinated Universal Time (UTC) on Sept. 15, 2022, based on when the timing of the terminal total difficulty (TTD) will reach a certain level.
From https://blog.ethereum.org/2022/08/24/mainnet-merge-announcement
How to Buy Ethereum
You can buy ETH from centralized exchanges (CEXs) like eToro or Robinhood; from decentralized exchanges (DEXs) like Uniswap or 1inch; or from some crypto wallets.
CEXs are easiest for people new to crypto. You sign up with a CEX much like you’d do at a bank or brokerage, providing your Social Security number and other identifying information. A DEX puts more control in your hands because it uses smart contracts instead of using a third party to safeguard funds in the transaction. Accessing a DEX is harder for U.S. citizens because you have to already have a personal wallet with at least some Ethereum in it to pay fees and another crypto to swap for it. Using a wallet like MetaMask lets you buy crypto with a debit or credit card, bank transfer or Apple Pay.
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What’s Next for Ethereum?
Ethereum has been improving since its inception in 2015. The Merge, among other things, acknowledges the importance of caring for Mother Earth by reducing energy consumption.
It’s rare to see an organization that persists in holding true to its formative tenets of security, scalability and decentralization. The foundation writes that “a naive way to solve Ethereum's problems would be to make it more centralized. But decentralization is too important. It's decentralization that gives Ethereum censorship resistance, openness, data privacy and near-unbreakable security.”
After The Merge, Ethereum aims to make itself even more scalable and accessible to all by upgrading to a sharding process. Sharding will lower transaction fees by distributing data storage requirements and making nodes easier to operate. The system will experience even less network congestion and faster transactions per second.
So, Is Ethereum a Good Investment Right Now?
As much as he might confirm its value in the crypto world, even Ethereum Co-Founder Vitalik Buterin himself couldn’t swear that Ethereum will make you money right now. In the transition from PoW to PoS, The Merge could cause an increase in the price of ETH as more users buy it. The price could remain unchanged because the plans for The Merge were already priced in long ago. The price could drop from technical difficulties that emerge in the process or from broader economic concerns.
As with all trading, nothing is guaranteed, and anything is possible. Learn more about crypto trading signals from Benzinga’s crypto experts and gain more knowledge about crypto to maximize your profits as you take part in this $3 trillion market sector.
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About Kathryn Hauer, CFP®
Kathy is an expert in finance (personal, corporate), financial planning, financial literacy, tax preparation and laws, saving and investing, retirement, insurance, careers, college education planning and financing, cannabis, gig economy, forming and running a business, credit and debt issues, blue-collar workers, and military issues. She has a strong interest in crypto, DeFi, FinTech, InsureTech, AgTech.