The new, greener, and eventually far faster Ethereum 2.0 is here.
At 2:43 a.m. on Thursday (Sept. 15), the second-largest crypto blockchain, and arguably the most important, switched to a vastly more energy-efficient and scalable system of securing, validating and adding transactions called “proof-of-stake” or PoS.
Read more: Blockchain Series: What Is Ethereum? The Blockchain That Moved Crypto Beyond Currency
Seven years in the making, the Merge reduced the power and pollution bill of Ethereum — which yesterday used as much energy annually as the nation of Chile — by an estimated 99.95%. In doing so, it shut down a multi-billion-dollar crypto mining industry second only to Bitcoin.
See also: Can Proof-of-Stake Solve Crypto’s ESG Problem?
Pitched as the “world computer,” Ethereum added self-executing smart contracts to blockchain technology, taking it from a bitcoin-style peer-to-peer digital payments currency to a platform capable of doing everything from revolutionizing supply chain management and supporting immutable — unchangeable — digital identity systems to decentralized finance (DeFi) and permitting faster, less expensive and safer back-end transactions by financial institutions.
Learn more: DeFi Series: What Is a Smart Contract?
And we finalized!
Happy merge all. This is a big moment for the Ethereum ecosystem. Everyone who helped make the merge happen should feel very proud today.
— vitalik.eth (@VitalikButerin) September 15, 2022
Why Change?
The Ethereum Foundation’s massive undertaking had two main purposes: First, removing the bad reputation that kept many businesses and investors concerned about environmental, social and governance issues away from crypto, non-fungible tokens (NFTs) and the much-hyped but still-unrealized Web3 vision of a privacy-focused, metaverse-dominated, and big-tech-free internet.
Read here: Web3: Is There Any ‘There’ There? And if so, Where Is It?
Second, the foundation hopes Ethereum 2.0 will eventually become vastly more scalable, growing from about 12 to 13 transactions per second (TPS) to as much as 100,000, making it far more useful for payments and more or less everything else.
See: Ethereum 2.0 Will Not Be Any Faster, Vitalik Buterin Said. But It Will Still Scale Massively
However, that upgrade that won’t happen for at least a year. So for now, most payments and other uses requiring large number of transactions will either remain saddled with high transaction fees that start at several dollars and go up — at times far up — from there for a clogged and slow-moving blockchain or switch to one of Ethereum’s already PoS and far faster competitors like Algorand, Avalanche, Cardano, Polkadot, Polygon and Solana, collectively known as “Ethereum killers.”
Also read: DeFi Series: What Are the Top DeFi Blockchains?
Most decentralized finance and NFT projects are built on Ethereum, but more and more have been moving onto these alternate blockchains. While the environmental cost of Ethereum was one issue, the high transaction costs and slow speeds are still bigger factors.
Not Ready for Prime Time?
Another reason for the existence and success of Algorand, Avalanche and the like is that the move to Ethereum 2.0 took much longer than intended — 2019 was the first target date. That does throw a big question mark next to plans to make Ethereum 2.0 scalable enough for payments by 2023 —something developers have already let slip from the first quarter of 2023 to sometime in 2023.
Beyond that, any change as big as Ethereum 2.0 will almost inevitably come with problems that need to be solved, meaning many projects — and particularly financial ones — will hold off until the kinks are smoothed out.
In addition, questions remain about whether Ethereum 2.0 will ever be the blockchain of payments.
One of the biggest pitches for blockchain payments is the potential for real-time payments and settlement. And that, even according to Ethereum’s primary creator, Vitalik Buterin, is something that Ethereum 2.0 won’t really have in the foreseeable future. That’s because that 12 to 13 second TPS also comes with a roughly 14 second “block time” — meaning the length of time between the addition of a new block of transactions is added to the immutable blockchain. And as it takes about five blocks additional before a transaction is truly considered finalized, that means Ethereum 2.0 will still have a roughly one-minute finalization time.
And while that’s a lot better than Bitcoin’s 10-minute blockchains and 1-hour finality, many Ethereum killers do this in a tiny fraction of a second, meaning they can actually compete with The Clearing House and FedNow’s real-time payments capability.
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