The 'Merge' did not repair Ethereum

The author is a legal professor at the American University Washington College of Law

The Ethereum Blockchain, which made a large part of the crypto world easier last month, finally accomplished the long-promised and often delayed "Merge", a technical changeover of its functioning.

The Ethereum blockchain is one of the most common digital ledger and the main platform for Web3, not fungal tokens and decentralized finances. While the merger is clearly good news for the environment, it brings the other problems of the Ethereum blockchain even more to the fore.

Instead of relying on centralized agents such as a bank to approve transactions, blockchains rely on a so -called "consensus mechanism".

Before the merger, Ethereum used the "proof-of-work" consensus mechanism. So -called "miners" consume enormous amounts of electricity to supply computers with electricity to repeatedly guess the number that enables them to add a transaction block to the blockchain. The winning miners are then compensated for their work with cryptocurrency.

The Bitcoin blockchain still does it that way. The review of Bitcoin transactions consumes more energy than entire countries such as Norway; In areas where a lot of Bitcoin is broken down, the local population suffers from increasing energy costs and noise pollution.

The changeover of Ethereum to a "proof-of-stake" system avoids these environmental costs. Ethereum now uses an algorithm who happens to choose someone to create a new block that is to be added to the blockchain. The party is selected from those who have staket their ether (the native Ethereum blockchain). Coin) for the opportunity to do the work and be paid for it. The more ether someone sets, the more likely it is that it will be selected to create the new block.

This creates incentives to acquire even more ether, and it seems to be reasonable to predict that every blockchain that rely on proof-of-stake will begin to concentrate the ability to handle transactions in just a few hands. According to the data provider Nansen, the diligence is already a strongly centralized business in which some of the largest companies in the industry such as Coinbase are involved. A stronger centralization seems inevitable.

Remember that the whole meaning of a blockchain with a consensus mechanism is to avoid that you have to rely on centralized agents to check transactions. Without a sensible decentralization, you have to ask yourself whether all the other problems in connection with Ethereum are worthwhile.

For example, the Ethereum blockchain is notorious for overload at peak times, which is expressed in slower transaction processing times and fluctuating transaction fees (which are known as "gas fees"). At peak times, gas fees for users who try to complete smaller transactions can be unaffordable (in May 2022 the average daily gas fees reached almost $ 200), but the merger has not changed the way in which gas fees are calculated or raised.

Such an overload contributes to another problem. Users can pay examiners higher fees so that their order is first executed within a transaction block. These are costs for users who benefit the larger validists who are selected to create more transaction blocks, and therefore have more ways to collect higher fees. A validator can even insert its own transaction in front of others to benefit from market movements, a practice that is known as a MEV or "maximum extractable value".

The Merge will not make the blockchain safer either. Ethereum's claims to do this assume that the merger will increase decentralization. But if the opposite applies, there are risks. A report commissioned by the US Defense Advanced Research Projects Agency showed that proof-of-stake blockchains can be successfully manipulated if the number of validators is too low.

The switch to proof-of-stake also increases legal uncertainty around the status of ether. Before the merger, US Senator Debbie Stabenow proposed a draft law that is ether as an example of a "digital goods" that lies outside the responsibility of the Securities and Exchange Commission (securities are regulated by the SEC in the USA, during trade in raw material futures). Commission has the supervision of the raw material markets).

Now that Stakers fold their ether in the hope of being compensated by the gas fees of the Ethereum blockchain, a stronger argument can be stated that Ether is securities and not goods. The SEC could have something to say about its decentralization and advantages.