The US looking to control Ethereum: Is it possible and what are the implications?

A widely anticipated software update for one of the most well-known cryptocurrency systems, Ethereum, was released last week in response to recent pressure on the digital asset markets.

Many people have been wondering whether an alternative, energy-efficient consensus protocol for the crypto industry will ever happen because the upgrade, known as “The Merge”, has been repeatedly postponed starting from the postponement in 2014.

The crypto economy has been waiting for a recalculation in the direction of sustainability – a recalculation that maximizes the functionality of cryptocurrencies and blockchain implementations for users of digital assets, as well as for Web3 climate innovators, the next generation of environmental activists, and overall U.S. climate attempts.

The Ethereum Foundation estimates that such a change will cut the network’s energy use by 99.95% and establish the framework for future upgrades to the essential infrastructure. In terms of possible climate benefits, the Ethereum Merge might fundamentally alter the entire industry.

Crypto Regulation in the U.S.

The first-ever blueprint for regulating cryptocurrencies in the US has just been made public by the Biden White House. It covers topics including how the financial services sector should develop to ease international trade and how to prevent digital asset crimes.

The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), among others, are referenced in the new guidelines, although nothing is yet required. However, the whole crypto sector and investors in this new type of digital assets are paying attention because of the long-awaited order from Washington.

In accordance with their mandates, the reports encourage authorities like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to vigorously pursue investigations and enforcement actions against illegal digital asset operations.

The framework comes after President Joe Biden requested government agencies to research the advantages and disadvantages of cryptocurrencies and publish public reports on their conclusions in an executive order released in March.

The Treasury department will collaborate with other organizations to recognize, monitor, and analyze emerging strategic risks related to the markets for digital assets.

Pushing for a Digital Currency from the US Central Bank over the past year, there have also been calls for the United States to create a central bank digital currency, along with more severe penalties and science and technology policy actions against cryptocurrencies (CBDC).

To specifically cover digital asset service providers, such as digital asset exchanges and non-fungible token (NFT) platforms, the President will think about asking Congress to amend the Bank Secrecy Act (BSA), anti-tip-off statutes, and laws against improper transfers of funds.

Federal agencies have been working for six months to create their frameworks and policy recommendations to address the half-dozen priorities listed in the executive order, including: consumer and investor protection, encouraging monetary sustainability and promoting financial stability, disputing illicit finance risk assessment, U.S. governance in the global financial system and economic competitiveness, financial inclusion and responsible innovation, enabling access to financial services, and further technological innovation.

Together, these suggestions represent the first “whole-of-government approach” to enforcing those laws.

According to a statement from Jake Sullivan, national security advisor, and Brian Deese, head of the National Economic Council, the new regulations are intended to establish the US as a leader in managing the digital assets environment domestically and overseas.

After taking office, the Biden-Harris Administration and independent authorities have fought to ensure consumers and guarantee fairness and equality in digital assets markets by providing guidelines, expanding regulatory resources, and rigorously going after fraudulent individuals.

Proof-of-Work and Proof-of-Stake

PoW (Proof-of-Work) is a payment system that keeps the blockchain network secure and decentralized by validating transactions. Through the process of mining, Bitcoin uses the PoW (proof-of-work) method to control the generation of blocks as well as the stability of the network.

PoS (proof-of-stake) is an alternate consensus process that grants network users ownership of a certain coin. PoW (proof-of-work) has long been criticized for using so much energy.

A turning point in the history of digital assets is the Ethereum Merge. The Merge significantly strengthened Ethereum’s security and financial stability, according to Justin Drake, one of the influential Ethereum researchers who oversaw the changeover.

To gain control, an attacker needs to control 51% of the blockchain’s value. It costs around $5 billion to purchase enough machines and transformers, link them all to the network, and launch an attack using Proof of Work, the previous Ethereum powering technique.

There is currently around $20 billion in financial security thanks to Proof of Stake, the method Ethereum is switching to with the Merger, and we anticipate that amount to rise significantly.

Decentralized applications (dApps), decentralized finance (DeFi), and millions of non-fungible tokens (NFTs) are just a few of the tools and services that the Ethereum Merge will impact, in addition to improved security and more effective anti-fraud and anti-money laundering safeguards.

Considering the scale and power of Ethereum, this development is also likely to affect how both the crypto industry and the larger Web3 industry develop and help in the fight against climate change.

Ethereum Merge Isn’t Everything

However, it’s important to note that the Ethereum Merge isn’t everything.

The Ethereum Foundation has several additional steps it wants to take. Vitalik Buterin, a co-founder of Ethereum, stated that the foundation would focus on the Surge, the Verge, the Purge, and the Splurge, all of which were designed to make Ethereum a quicker, safer, and more decentralized financial system, with faster cross border transactions.

By the end of this plan, Ethereum will be a considerably more scalable system with significant benefits. When all is said and done, Ethereum will be able to handle 100,000 transactions each second.

What Are the Consequences?

It’s a frequent fallacy that the Merge will significantly reduce Ethereum’s transaction costs (also known as gas costs) by implementing sharding.

Sharding, or the split of a network into smaller pieces known as shard chains, enables greater application flexibility and the so-called “rollup” of numerous transactions into a single transaction, thereby lowering latency and boosting network performance. Sharding, however, has been postponed until the surge in order to concentrate on the switch to PoS (proof-of-stake). Gas prices won’t start to drop considerably until the surge.

The Ethereum blockchain and ETH tokens will be affected by the Merge in many ways. First, a 99.9% reduction in energy use is anticipated from the PoS (proof-of-stake) consensus technique. As a result, the output of ETH (the quantity of new ETH tokens produced minus the amount burned) as a reward will drop from 4.3% each year to 0.43% of the overall supply.

The overhead of PoS (proof-of-stake) validators represents the opportunity cost of capital, whereas PoW (proof-of-work) demands high investment costs and waste that calls for significant payouts to pay miners for maintaining security.

To put it another way, since less energy is required to protect the network, validators require less pay, which leads to lower fees and issuance. Simply said, PoS (proof-of-stake) validators require less payment, which lowers ETH supply.

Lower energy consumption will attract those that support ESG and investors alike. There has been a significant amount of speculation about how the Merge will impact the price of Ethereum.

There are a number of market factors that influence the final impact: how the end of PoW (proof-of-work) mining will impact the price, how effective the Merge will really be, and whether the new, green and sustainable PoS (proof-of-stake) Ethereum 2.0 will attract more attention or investment in ETH (or projects using the Ethereum network) from companies that have previously avoided Ether due to climate concerns.

Final Thoughts

It is still to be determined how the ecosystem will be affected by the Merge and the other exciting prospects and developments on Ethereum’s agenda.

As the Ethereum ecosystem keeps growing, users, developers and investors will concentrate on these significant developments and their implications, hoping they will continue to positively impact the market, users, and environment.