By June Hee You
On September 15, 2022, Ethereum (ETH) completed a milestone that will hopefully change crypto’s landscape in the long run: ‘The Merge.’ Ethereum is the blockchain that hosts Ether (or ETH), the world’s second-most-traded cryptocurrency after Bitcoin. The key takeaway from this event is that ‘the Merge’ will reduce the cryptocurrency’s energy consumption by 99.95% and facilitate transactions in the space, thanks to a switch in how transactions are processed. More specifically, it changed methods in ‘how’ coins are created: from a ‘Proof-of-Work’ mechanism, which requires miners to solve cryptographic puzzles, to a ‘Proof-of-Stake’ mechanism, which requires individuals to stake tokens, thus allowing them to confirm transactions/validate data in the blockchain.
Ethereum’s ‘Merge’ brings significant tailwinds, which further decentralizes crypto and produces positive environmental externalities ‒ since the energy-demanding super-computers used to “mine” the coins from the Proof-of-Work mechanism would be rendered obsolete. However, this pivotal change brings to light the intricate relationship between cryptocurrencies and their users, who act as their customers and shareholders. This results in cryptocurrencies, such as Ethereum, wearing two different hats: one as a “corporation” that oversees the production of coins and its own “market,” where the coins are exchanged. In this case, this dual role of cryptocurrency, Ethereum, brings to light the liminal position it plays in the economy: ESG factors thus become fascinating topics.
Environment
The biggest concern behind cryptocurrencies was the environmental impact of mining and the high demand for energy that its processes required: it is estimated that Bitcoin alone generated 132.48 terawatt-hours (TWh) annually. To put this into perspective, Norway’s annual energy usage was 123 TWh in 2020. Therefore, Ethereum’s switch to reduce its energy consumption by an estimated 99.95% is a significant first step to making cryptocurrencies greener. The Merge isn’t the first instance where cryptocurrencies have switched from a Proof-of-Work (energy-demanding method) to a Proof-of-Stake method: Polkadot, Avalanche and Cardano are other blockchain systems that use this “environmentally-conscious” method. The question is whether Bitcoin will move to a Proof-of-Stake system still remains, although unlikely.
Social
We can also think of the Merge as a way for Ethereum to create shared value (CSV): a concept introduced by Michael E. Porter & Mark R. Kramer in Creating Shared Value, where companies should adopt “[…] new approaches that generate greater innovation and growth for companies — and also greater benefits for society”. We can think of the Merge as this two-pronged approach by Ethereum to achieve economic and social growth. According to Porter & Kramer, “there are the three key ways that companies can create shared value opportunities: by reconceiving products and markets, by redefining productivity in the value chain and by enabling local cluster development” (Porter & Kramer, 2011). The Merge essentially checks all three boxes: by reconceiving how its products are created and redefining the efficiency in all of its processes, Ethereum enables its community (of worldwide users) to thrive.
Governance
The Merge increases the users’ agency in Ethereum’s already decentralized ecosystem, where decision-makers and decision-receivers are not two separate individuals. Ethereum could be regarded as an almost perfectly efficient market. Thanks to the fact that the shareholders are also the company’s managers (to a certain extent), there are nearly no discrepancies between the interests of the shareholders and managers since they are the same entity. The cryptocurrency market is highly efficient, with prices reflecting the accessible real-world information almost immediately. The Merge increases the agency of each user: the governance aspect is amplified through the accessibility of each user’s experience (it’s now easier for individuals to perform transactions).
The Merge is not a common event, and cryptocurrency is not a common economic reality. The decentralization, the liminal position (operating similar to a firm and its own market), and the technology involved are all factors that make crypto so different from the traditional asset classes we’re used to. The move is a giant step towards de-stigmatizing ETH as an energy-hungry asset class and making it more ESG-compliant. With the Merge, we can expect more individuals and investors, especially ESG investors, to take an interest in Ether.