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Ethereum: eco-friendly update could speed up bitcoin challenge

Ethereum is on the cusp of an update that should silence those who say blockchain technology and cryptocurrencies are too energy-intensive to play a role in the future of finance. Known as The Merge, it involves the main ethereum blockchain network merging with a different system in order to reduce energy use. A successful dress rehearsal in August means the change could take place in the coming weeks.

Like bitcoin, ethereum uses a proof-of-work model in which complicated equations must be solved in order to unlock new digital tokens or validate transactions — something that requires a great deal of computer power. The Merge means ethereum will shift to proof-of-stake in which users verify transactions using their existing assets. This requires less power — 99.95 per cent less according to community created information site ethereum.org. Token owners can invest their capital via staking, loaning out digital assets to validate transactions.

On proof-of-stake blockchain network Solana, crypto platform Coinbase estimates that the annual return for staking is about 3.85 per cent. Ethereum, a larger network with more transactions, could provide higher returns. Ethereum.org predicts 7 per cent.

Ethereum’s digital token ether is the second-largest cryptocurrency after bitcoin. However the gap is substantial. Ether’s market value is about half bitcoin’s according to data from CoinGecko. Like all cryptocurrencies, the price has retreated from a record high last year as interest rate rises reduce demand for risky assets. It is down 60 per cent from its high point, just below bitcoin’s 65 per cent drop. The Merge could reduce the gap by propelling ether’s price. It jumped by more than a tenth after a test network completed a simulation of the switch planned for the main network.

The update has been delayed before. Even if it occurs, not everyone plans to adopt it. Some miners who stand to lose out are making plans to run the old version of ethereum — something known as a fork. But such a move will not be widely supported. Reducing crypto’s energy use is a widely shared goal.

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