Ethereum’s Final ‘Merge’ Test Succeeds. Here’s What it Means for Regulation

Ethereum's "Goerli" testnet has succeeded. Photo courtesy of Shutterstock.

Ethereum is one step closer to its hyped ‘proof of stake’ model.

On Wednesday night, the final Ethereum testnet, Goerli (named after a train station in Berlin), completed a successful transition from a proof-of-work to proof-of-stake network. The test is an identical process to when Ethereum’s mainnet will undergo the process in September.

The Goerli transition follows two previous successful Ethereum testnets this year- Ropstein and Sepolia- bringing the network to a new model for consensus.

Why It Matters 

Cryptocurrency detractors have long criticized the ‘proof-of-work’ model at the heart of Bitcoin and Ethereum, citing the environmental impact from POW mining operations in which computers use large amounts of electricity to solve complex math problems to issue block rewards. Bitcoin, the first successful case study in a decentralized monetary network, was founded on a POW model.

POS is an evolution beyond the first iteration of decentralization, and works by having  Ethereum holders stake their cryptocurrency for rewards. Rather than third-party miners who require large sums of electrical input, a POS model effectively turns Ethereum holders into stakeholders who share more directly in the profits generated from the network.

Governments around the world, including in the United States, have cited Bitcoin’s environmental impact as they have cracked down on mining operations. This summer, the New York State Senate passed a bill which would impose a two-year ban on Bitcoin mining permits. The legislation follows similar efforts led by China and other countries to ban Bitcoin mining.

Ethereum’s transition to POS effectively bypasses the environmental argument at the crux of the state’s efforts to impede on the network, centering regulatory debate on the issue of whether Ether and other ERC-20 tokens built on its network constitute securities or commodities. Although Bitcoin has been defined in the U.S. as a commodity, Ethereum might not get the same designation, especially considering the Ethereum network is much more fluid and widely in use by developers, the backbone of the DeFi ecosystem. With the transition to POS, Ethereum will become even more integral to the push for decentralized governance structures. With most of the political conversation centering on overplayed environmental talking points, which are set to become irrelevant after the Merge, lawmakers may realize too-late that they’ve been asking the wrong questions about digital assets.