ethereum: How Ethereum makeover will change crypto space

Synopsis

The software change, ‘Merge’, will lower Ethereum’s energy use by 99%, addressing criticism of blockchains’ electricity consumption. This is possible since the merge will move from a system called Proof of Work (PoW) to Proof of Stake (PoS) for validating blockchains, including cryptocurrency transactions. PoW uses a huge amount of power, while PoS consumes very little electricity.

This precautionary move is only temporary.(This story originally appeared in on Sep 15, 2022)Ethereum, the popular crypto network that runs Ether, the world’s second-most-valuable digital currency with $200 billion mcap, is undergoing the biggest system upgrade since going live a little over seven years ago. Called ‘Merge’, this upgrade is unlikely to have any technical hurdles for the people within the Ethereum blockchain ecosystem but will have some tax implications for Indians who hold Ether. Ether investors will witness a split in their holdings with two different types of cryptocurrencies in their wallet: Ether ‘PoW’, in addition to digital coins they hold.

What is Merge?

The software change, ‘Merge’, will lower Ethereum’s energy use by 99%, addressing criticism of blockchains’ electricity consumption. This is possible since the merge will move from a system called Proof of Work (PoW) to Proof of Stake (PoS) for validating blockchains, including cryptocurrency transactions. PoW uses a huge amount of power, while PoS consumes very little electricity.

What are PoW and PoS?

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View Details »These are the two dominant processes through which blocks within blockchains are created and old ones are validated. Under the PoW system, Ethereum’s decentralised network of computers race to solve complex algorithms and mathematical problems, competing for the right to order transactions and add blocks of data to a digital ledger. Owners of the computers, called miners, who successfully solve and validate the blocks, are awarded newly created cryptocurrencies. Under the PoS system, existing crypto holders who work to validate blocks, need to put up their holdings, validate new transactions, and get paid in cryptocurrencies. In PoS, if a miner is found to be gaming the system or trying to commit any fraud, the cryptos already staked are taken away by the system. Also, a failure to validate a transaction may lead to loss of part or the full stake.

Will PoW cease to exist after the Merge?

No. Since the Ethereum ecosystem is a hugely consensus-based system, and PoW miners have invested billions of dollars to set up crypto mining systems, there will be a split of the Ether crypto into Ether that will use the new PoS system and the ones who will have Ether PoW. All existing users will get both these currencies in a 1:1 ratio and the market will determine the price of each type of coin, said Om Malviya, president, Tezos India Foundation. The future utility of the new coin will depend upon its acceptance in the market, Malviya said.

Any tax implications for Ether holders in India?

According to Punit Agarwal, founder & CEO, KoinX, a crypto tax consultancy, there are discussions that, post-Merge, some miners may continue to support the Ethereum PoW chain. “In this scenario, all the wallet-holders who have shifted to the Ethereum PoS chain will also hold 1:1 Ethers on the PoW chain. This event may be treated as an airdrop (equivalent to a bonus share in stocks) and will incur income tax on the new tokens received. Also, when the Ether holder disposes of the holdings (new and old ones), it will incur a capital gains tax (CGT).” In this case, the cost of acquisition of Ether PoW will be treated as nil and taxed accordingly.

How are the exchanges responding?

Most crypto users don’t see any technical hurdle in completing the Merge. But, to be on the safer side, most exchanges have now suspended transfer of Ether coins till it actually happens. According to Rajagopal Menon, VP, WazirX, the Merge has been in the works for several years, the software has been debugged and the end-product is ready. Like all major exchanges, WazirX too has halted deposits and withdrawals till the Merge is complete. This is being done to secure the allocation of forked tokens in the case of a chain split. This precautionary move is only temporary.
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    Updated: 09/15/2022 — 23:00

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