The Merge of Ethereum: The End of the Beginning for Web3

The launch of the first web browser in 1994 was a turning point for the internet. Now, if cryptocurrency enthusiasts are to be believed, the Ethereum blockchain’s shift to a new transaction validation system, known as “The Merge,” is also a historic moment for something called Web3.

Moving away from the previous energy-intensive validation mechanism puts Ethereum on a more sustainable path for long-term development. This is undoubtedly significant for a network that has become the main platform for blockchain-based applications such as NFTs and DeFi.

However, nine years after the launch of Ethereum, there is still a long way to go. Here are five questions that will help determine whether The Merge will one day be seen as an important moment in the history of the internet.

Firstly, the new verification mechanism, namely Proof of Stake, cannot solve one of the biggest problems of Ethereum: it can only process 15 transactions per second (tps), which leads to very high transaction fees.

This merger at least clears the way for the next major step of the network, which is scheduled for the second half of next year. This is called “sharding,” which will involve dividing the Ethereum database into 64 segments.

However, the promise of Web3 is to use blockchain technology to mediate every online interaction, which means it will require greater capacity.

Secondly, the merger brings a series of unknown risks. Essentially, the current $200 billion market is being transferred to a completely new basis, with new mechanisms and the new roles of market intermediaries not yet tested in the real world.

Under the new Proof of Stake system, holders will use their Ethereum as collateral to verify transactions in exchange for “stake rewards,” which has turned the previously non-productive assets into assets that now provide returns, something many investors may find attractive.

Thirdly, the construction of a broader market infrastructure layer on top of Ethereum is still in its infancy. The so-called Layer 2 networks, such as Polygon and Optimism, act as “roll ups,” batch processing many individual transactions themselves, leaving only one entry on the Ethereum blockchain.

Companies operating in this way on top of Ethereum may themselves become powerful new intermediaries in the blockchain world, which contradicts the decentralized ideals on which cryptocurrencies rely.

This leads to the fourth point: as the broader Ethereum system develops, its supporters will have to shed some of the ideological baggage of the crypto world in favor of greater pragmatism.

The emergence of influential new intermediaries may also provide a new leverage system for governments. For example, if a large number of holders turn to cryptocurrency exchanges to help them stake, these exchanges will play an important role in verifying transactions.

Fifth and finally, improving the underlying blockchain infrastructure is of no help in addressing the biggest challenge of Web3: proving why this technology is needed in the first place.

Optimists claim that as the merger is completed and work to address Ethereum’s scalability challenges progresses smoothly, more and more efforts will be shifted towards building consumer-friendly experiences that attract a large number of users.

This means that products such as digital asset encryption wallets and trading markets must be designed to be easier to use for ordinary people. It also means that brand new applications on the existing network cannot meet the smooth experience of users.

The Ethereum Merge has not provided any clues about these uses. However, in the words of Winston Churchill, it at least indicates that Web3 has reached the end of the starting line.