This morning the main Ethereum blockchain completed the ‘Merge’, which moved the blockchain from the Proof of Work security mechanism that burns oodles of energy to the more efficient Proof of Stake, claiming to cut energy usage by more than 99%. Instead of using electricity to solve lots of mathematical problems to write transactions to the network, with Proof of Stake, users risk ETH cryptocurrency to ensure that only legitimate transactions are validated. Bad actors are ‘slashed’ or lose their crypto.
With $23 billion of DeFi value on Ethereum, securely making this sort of live upgrade is no mean technical feat. To address the risks, some DeFi protocols, such as Aave, voluntarily reduced activity. In the last 24 hours, the DeFi value locked on Ethereum has dropped by 27% compared to small single-digit percentage declines for other chains, according to Defi Llama.
Apart from sustainability, Proof of Stake creates a new business model for Ethereum token holders because they now have the option to earn a crypto return, currently around 4.5% on their tokens. That’s something that other newer blockchains that leverage Proof of Stake have already been offering. Institutions are getting in the act with the likes of the SIX Digital Exchange (SDX) offering staking services.
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