The Merge, Financial Inclusivity and Web3

This article was submitted to TechCabal by Luke Sheehan / CrossFund

On September 15th, the Ethereum network transitioned from proof-of-work (PoW) into proof-of-stake (PoS) in a process that was labeled ‘The Merge’. PoW requires competitive use of intensive computing power to create blocks on the chain and receive rewards; but a PoS system requires a ‘stake’ or currency holding to participate in the chain as a validating node and earn ETH (the Ethereum standard token) rewards.  

The Merge was remarkable for a number of reasons. The world of blockchain leans towards decentralization, including decision-making in the Ethereum ecosystem. Any engaged developer can propose moves to the community, with the best ideas emerging organically.  That, as well as the billions of dollars in value and the million+ smart contracts held on the Ethereum blockchain, meant that the switch took years to prepare, but a mere 12 seconds to complete. 

There were doubters, of course. Could these dispersed devs self-organise to pull off such a complex manoeuvre? The answer appears to be yes.  

In the crypto world, two priorities exist: 

• Financial inclusion 
• And a globally decentralized payment and monetary system 

Additionally, crypto doubters who sit on the outskirts of digital communities question when regulators will implement policies to regulate crypto exchanges. 

A more sustainable Ethereum will bring more people into an open system where they can run nodes, create apps, and be users of said apps with more security and ease of access, with financial tools the first in line for innovation. Regulators should play a part in this, especially when it comes to solid consumer protection.  

CrossFund spoke to one of the main engineers on the Merge, ConsenSys’ Matt Nelson. As Matt described it, the major driver was the priority of reducing energy wastage, which everybody agreed was a necessity. The Merge brought down Ethereum’s energy demands by ~99.98% in one day – or, more accurately, in 12/13 seconds. 

Can you describe your contribution to Besu, ConsenSys, and The Merge?

I’ve been with ConsenSys (the leading Ethereum software company founded by Joseph Lubin) for over a year and a half. I work on Besu, an open-source execution client for the public Ethereum network – it was a crucial component to making the Merge happen, allowing participants to have a seamless experience as we ‘merged’ the execution layer and the consensus layer, and switched to a Proof of Stake consensus structure.  

Can you provide a visual analogy of The Merge’s backend process?

This was like swapping an engine from gas to electric while a car is on the motorway without changing the user experience. Setting it up to achieve it smoothly from a user point of view was years in the making. There has never been such a dramatic lowering of the carbon footprint of a piece of technology, reducing the emissions cost by over 99% in a single moment. 

Almost from the beginning of Ethereum, there was a drive to shift to a sustainable energy use model, which quickly became settled as a PoS (Proof of Stake) model. However, the ecosystem continued to grow and technology changed, so the switch had to be carefully calibrated.  

When it came to it, we had an optimal block number already picked from the point of view of the blockchain growth, and it was set to switch automatically. We observed our Testnet Merge results and prepared for potential problems. 

When it occurred, we didn’t see the anticipated problems manifest: nodes losing contact or slashing of malicious nodes. Slashing is a new mechanism meant to punish malicious nodes, potentially removing a validator from the network, which could result in the loss of the whole 32 ETH stake required in PoS – but we didn’t see that.  

Now, we have a more environmentally friendly, more secure Ethereum.  

Do you see more progress happening with Ethereum in Nigeria?

Now that it is PoS, to regulate effectively, authorities must address what it means to own the currency, use it as a token on the network, and use the currency to secure the network. These are all different relationships. We can see that there are infrastructure providers, application developers, and users. We will see a regulatory framework emerge following this change – as Ethereum is the most utilized smart contract platform, it will drive clarity in places like the US, Asia, and Europe. I think that will also help deliver a framework that will be useful in other locations.  

Discussions around stable coins and consumer protections are beneficial. We have seen blockchain and cryptocurrency discussions laden by these narratives around scams and illegal or sketchy apps. More consumer protection will bring more users onto the network, including in places like Africa, where they directly access payment rails and other services.  As with the GDPR, which was followed as it established a standard, better consumer protection should carry over into different regions. I hope that more protection will lead to more transparent projects when we see regulatory clarity and collaborations between the governments and people building things on networks – whether in the US or elsewhere.  Maybe I won’t get to make an algorithmic stablecoin (like the LUNA stablecoin, which collapsed this year); perhaps I will have to prove my collateral backing, so my users won’t lose all of their money if my stablecoin has an issue.  

This will build confidence, bring more people onto the platform and let 3rd parties flourish because they will have access to stable capital to provide services and make revenue. Businesses like ConsenSys work with the government to effect this progress while keeping an open, decentralized format.  

Is there any ‘non-sketchy’ app or development theme you’d like to highlight?

As the Ethereum protocol grows and changes, we will see a lot of changes in how wallets work. Metamask, a ConsenSys product, is the most widely used wallet. We want to make sure that wallets work appropriately for all users. For example, holding 12 words on a piece of paper is not the safest way to ensure thousands of dollars can be stored safely. 

There is a lot of innovation coming around with questions like how wallets work, how does recovery of a wallet work, and how does your wallet protect you from sketchy apps and help you get the best prices? So wallet technology, as the portal to this stuff, will be looked at closely as a significant component of consumer education and protection. 

A lot of the regulatory scrutiny is happening at the protocol level, but I think we should move it up to the application level. There is the infrastructure here, and then there are the wallets, but all these smart contracts hold so much power in these consumer relationships. As we iron out the understanding of the infrastructure level of how these wallets evolve and protect consumers, we should see more applications emerge that will be safe and secure to use.