the ethereum merch one of the most awaited events in the history of crypto is finally upon us the transition to a proof of sex system will transform ethereum's monetary policy that should greatly improve the network's scalability and security i think ethereum does have just from an economic perspective and um because of the effect of the supply shock a chance to flip bitcoin in this video we talked to ethereum researcher vivek raman about how the merge will change ethereum forever and how it made lead eid to take over bitcoin as the leading cryptocurrency i'm giovanni your host welcome to another coin telegraph interview with the merge the ethereum network is going to transition from a proof of work to a proof-of-stake consensus mechanism what does that mean for ethereum and what are the main improvements that the merge will bring absolutely so the ethereum merge i don't think it's it's um an overstatement to say it's one of the most uh important and impressive engineering feats in the whole history of the blockchain movement from the founding of bitcoin assignment ethereum and i would say the ethereum merge is up next and um ethereum started like bitcoin as a proof of work network with miners um uh mining blocks uh and securing the blockchain that way but unlike bitcoin from basically very very early in the ethereum roadmap ethereum had it in its goals to transition to fully prove the stake and there's a lot of reasons for it the main ones are proof of stake makes ethereum a more economically sustainable blockchain and we can go into detail on the why um it makes it a more secure blockchain uh it's a higher cost to attack ethereum under proof of state um we can go into that that detail as well and it makes ethereum a more sustainable blockchain even from like an environmental standpoint because instead of having to have a hardware minor footprint um the hardwares are replaced by validators um that use proof of stake and a validary can be run by anyone with a laptop computer or any sort of computer anywhere so it promotes more centralization of validators you said that ethereum is going to become more sustainable in two ways one it's environmentally sustainable and the other is more like economically sustainable could you get a little bit deeper into the economically sustainable aspect of the of this whole story so just from an economic standpoint running ethereum as a proof-of-stake blockchain requires less issuance to validators then proof of work would require to miners this is really really important because it pays less to secure the blockchain it means it requires less inflation ethereum as a monetary asset its value goes up and if durham's monetary value goes up then in theory the security value of the entire ethereum the market cap of ethereum will go up and the higher the market cap of the base layer the harder it is to attack the chain the more it costs to affect the chain getting this very very um positive feedback loop of under proof of stake issuance goes down which means cost to attack the chain will go up and the whole ecosystem works without the need for constant block subsidies that's really important that's something that proves work change um like bitcoin don't have bitcoin will have to have a block subsidy basically in perpetuity until 2140.
this supply shock which is going to be a 90 or around 90 percent issuance reduction what is the impact of that on the ethereum price according to you so ethereum by doing the merge is going to see the effect of the effect of three equivalent bitcoin havings at the same time um this is just hard it's hard to see how this will not create a structural change in ethereum instead of having um uh issuance four point three percent inflation that goes to effectively zero um with a ninety percent reduction in um an issuance that means effectively ninety percent less ethereum issuance that can be sold on an everyday basis um it's hard to see economically how with a lot less selling pressure we won't see uh a reflection ethereum's price to the to the upside um we don't know when that'll happen usually bitcoin having is going to happen it takes six months or something for the effect of the lower inflation to kick in ethereum is doing three at once effectively and it i think we'll see the effect on day one um cell pressure goes to almost zero so in short i'm optimistic on price i think it's a supply shock that we've never seen before we saw that bitcoin when when it underwent the last bitcoin halving then it skyrocketed to new all-time highs so i'm super excited to see something similar to happen with ethereum 2.
Now i would like to actually ask you why is it taking so long so the merge for those who don't know it's a process that actually started back in 2020 in december 2020 when the beacon chain was created so the beacon chain is the parallel shadow chain where ethereum has been running on a proof of stake system um while the well the majority of the ethereum network of course is still running on the proof of work system and the merge will mark the moment where the two chain the main chain and the beacon chain will merge with with each other and so uh many have compared this process to changing the wheel of a car while the car is moving so why is it taking so long and what are the main difficulties of this whole process no that's an absolutely valid question and um again darren's been talking about proof of stake since very shortly after it's genesis and now almost eight years later you would say in 2022 we're getting to the actual merge um the analogy you say about um uh the car is valid i would say it's even more difficult it's like it's like changing the engine of an airplane while the airplane's mid-flight and that right there encompasses why it has so much technical difficulty um the majority of desai runs on ethereum which means a tremendous amount it's been 100 it's been over 100 billion dollars of value secured on ethereum plus the nft world runs on a dairy plus ethereum is setting itself as the the proper the digital proper property rights layer um where you can basically have your property that's embedded into the blockchain that can't go down um there can't be issues with this and when the merge when the actual transition happens from the proof of work to state blockchain it needs to go so all the value secured exists and so confidence remains in the ethereum blockchain we can't have downtime we can't have the blockchain be shut down and uh that's a very very big part of it theorem ethos so better safe than sorry in this sense it's it's better to test over and over and over and um the last thing i'll say on this is ethereum has this property called client diversity which which sets it apart from other blockchains um there's a vast amount of execution layer clients there's a vast amount of consensus player clients that's good for decentralization that's good for separation of power but what it creates is is human thinking issues where all the clients have to all sync with each other and all be ready and that's something that brings in another complexity that we've had to test over so a lot of people are waiting for these new technological advancements uh as a path to see ethereum finally scale and become a truly global network that can onboard much more users and much more activity on the other hand you pointed out in a recent uh twitter thread that this is a very big misconception so that the merge is not going to tackle this scalability problem it's not going to bring the fees of the ethereum network down so can you clarify this common misconception and if the merge is not going to do anything about fees then how is it gonna make ethereum more scalable um that's a great question it's a very important question and it shows that um we as ethereum needs to continue educating and showing um what its value is versus where the scaling is actually going to be and the short answer is ethereum has identified as as blockchain's evolved that there's effectively a scalability trilemma and it means that blockchains can either be very decentralized very secure or very scalable and fast and between those three um blockchains have to pick two it's basically architecturally impossible to do all three correctly um ethereum has chosen that you know what let's actually separate have separation of powers and separation of duties and let's have ethereum be a settlement and security layer that's very very secure incredibly neutral and and can't be tampered with by third central parties and let's make it decentralized by having uh hundreds of thousands of validator nodes and by making it very very easy to run the node um hardware requirements are i can run i can run a validator that's something that other l1 can't do but that comes at the cost of not being able to get scale of the base layer and you know what that's actually okay because ethereum has chosen what they've called a role electric road map where it's outsourced the execution which is the scalability to a series of roll-ups that are known as layer two and the funny part is roll-ups are already live scaling is already here there's already environments to have very very low fees very very fast execution on ethereum scaling's here apps exist on scaling what needs to now change is that users need to learn that all of their activities should be on layer two and then the layer twos ultimately will use ethereum as a base layer one for settlement security and decentralization so some people say that these layer two solutions that will be the only way ethereum can will be able to scale will acquire more value proposition than ethereum itself and it will kind of suck out from from if all the value so uh or part of the value so what would be your counter argument so that's a very common criticism and i would i would sort of uh point out that that's that criticism's sort of very um zero-sum game uh meant it's a very zero-sum game mentality we're saying that either if you're in can win or roll ups can win if roll-ups get more users and that's bad for ethereum if we are bringing on hundreds of millions of new users onto roll-ups then i would argue that everyone wins there's no roll-up squint and ethereum loses because ultimately roll-ups can't function without ethereum as the settlement security layer that's that's the trade-off roll-offs made just like we were talking about the scalability dilemma because rollo takes execution they are not picking security and decentralization as a big player their help they're outsourcing that to ethereum so as rollups grow rollups will need to pay fees for settlement security um to ethereum as the base layer and 100 million more users on the roll-ups will mean more more feeds paid from roll-ups to ethereum which increases the dm security and keeps that flywheel going very positively critics of the merge says that it will lead to increasing centralization because while miners in a proof-of-work system usually have to sell a part of the rewards in order to fund their operations the uh validators in a proof-of-stake system um are incentivized to accumulate more and more heat in this case and that would that would mean that more and more it will be basically accumulated in the hands of these validators so what would be your response to this argument so that's one of the most uh common uh criticisms of proof of work of proof of stake by proof of work players and i would counter that these are two very different complementary consensus mechanisms and there's trade-offs for both um could proof-of-stake be more centralizing because uh it has less cell pressure well there's no no miners and no cell pressure for miners but validators could potentially hold yes it could but that's assuming that everyone is only profit maximizing for staking the whole point of the ethereum economy is it creates use cases and creates a velocity of money i mean ethereum really is the money that's used across the entire ethereum system to buy nfts of collateral and d5 to pay for gas and a bunch of use cases that we probably haven't even invented yet um the point is to keep recycling money so there will be validators selling and that will create more redistribution into the input system um validator validator rewards are taxable so that will already create if you send the 50 tax rate um that'll already create a 50 cell pressure from validators over the long run to pay taxes so there are still decentralizing um methods will it be everything sold from validators versus miners need to sell everything not as much but let's turn to the flip side too let's turn to the maya to the to the mining front um again i think bitcoin's a fantastic technology i think ethereum and bitcoin will be very complementary and um people who want proof of work exposure will have bitcoin people that want um exposure to digital economy will have ethereum but on the on the bitcoin side mining is also fairly centralized um mining operates with uh with with scale so it's its scales the better operate the the larger players are the larger main pools are going to have better economics and are going to scale their operations better especially nowadays with power prices going into the roof it's harder for smaller individual individual miners to set up their own operations so you could actually argue the same the same phenomena could happen with with large miners that can happen with validators because the large miners could also accumulate bitcoin and hold on to it as an investment so this is just a long-winded way of saying there are trade-offs to both uh you said that ethereum and bitcoin will be largely complementary but on the other hand on your twitter handle you said recently that the ethereum with the merge has all the chances to take on bitcoin's throne so that sounds more of a not a complementary sort of relationship but more of a basically the flipping right so ethereum kind of gaining more value proposition than bitcoin why do you think so so i don't think those are uh contradictory statements at all i mean complementary doesn't necessarily mean that um the equal market cap or the market kept stay the same gold and uh tech companies are complementary story values some some pension funds will put money into gold others will put money into apple stock and they're all part of a balanced portfolio i think in that same sense bitcoin and ethereum have very different use cases people that want an immutable source of money that doesn't have velocity but has the proof of work um the proven uh whatever this 13 years of proof of work backing it we'll pick we'll pick bitcoin and keep some money in there and it'll be effectively digital gold but the uh the adoption space for ethereum is much larger for a lot of reasons one ethereum has a staking yield so institutions um that want yield um can express that view with ethereum and they can stay there there and they can earn validator awards and be part of a digital economy also as a store of value you want the monetary policy to be as strong as possible after the merge ethereum will have lower inflation than bitcoin um especially with fee burns ethereum will be deflationary well bitcoin will always be inflationary although every happening that inflation rate does go down so um in terms of market cap i think ethereum does have just from an economic perspective and um because of the effect of the supply shock a chance to flip bitcoin you said that bitcoin is supposed to in this scenario is supposed to retain the the the role of digital gold but on the other hand um in this scenario it seems to lose it it seems to kind of lose to ethereum the um the role of the better digi the best digital money so it seems that you kind of foresee that ethereum will sort of take on at least part of the bitcoin narrative here um i do i it's a personal view again this is just a personal opinion but um based on use cases based on the fact that ethereum can have an economy running on top of it it's program it the design space the program on top of the theorem blockchain is basically infinite and the base layer has lower issuance um i think proof of stake will end up being a more sustainable consensus mechanism and proof of work over the long run and um there's more velocity to it i think the one part that is not too debatable is bitcoin doesn't really move bitcoin has a culture of people hodling and that's totally okay i mean gold doesn't really move either but today did we see gold being used as money or do we see other more um uh portable forms of money being used as mediums of exchanges and i would argue ethereum's gonna fall in that ladder camp and bitcoin's gonna call fall in the former camp i would say that bitcoin has still this uh as you said reputation for being basically immutable in the sense that the supply is set in stone that's probably one of the main selling points of that bitcoin will still uh preserve in the face in the face of ethereum's improvements that's fair that's fair i mean there's counters to that too in my view in in the view of washington design you want the blockchain to be sustainable and supported by its own economic economic activity ethereum has a tremendous amount of transaction fees and the transaction fees are what cause ethereum's monetary policy to ultimately be deflationary because eighty percent to eighty-five percent of all transaction fees are and that creates a deflationary effect to counter the issuance from uh the block subsidies to validators bitcoin in theory after 2140 after after a a lot of happenings um will have an inflation rate close to zero but you still need something to pay miners to incentivize them to secure the blockchain when that goes away the question is what will incentivize miners to continue spending all the money on electricity to secure the block and that's that question has been hand waved away a lot of times um saying that in 2140 we'll figure it out or um the transaction fees on bitcoin will be high enough to secure miners i would argue that if the whole point of bitcoin is to huddle it and to keep it as a as in a vault as a form of digital gold transaction fees are never going to really be higher and we've seen that over time bitcoin transaction fees are are a fraction of what ethereum's transaction fees are so if there's a structural issue long term i think maybe it'll get kicked the the the can will get kicked down the road but bitcoin can't have a fixed supply cap and low transaction fees and and no real utility other than hobbling a little long term unless there's some change to the protocol so we'll see what happens there as well but um ethereum is tackling that up front and has economic sustainability from its transactions from its economy from all the applications that are built on top of it that we haven't yet seen in bitcoin um again i would i welcome competition maybe we'll have a robust layer to um ecosystem on top of bitcoin maybe we'll have um [Music] a lot more smart contracts and functionality but so far we haven't seen it yet and um ethereum is taking that place so just food for thought yeah that's definitely food for thought thanks a lot vivek for coming on our show thank you for having me fingers crossed for successful girly merge uh fingers crossed for the actual successful net merge and excited to see how it all plays out
