Ethereum’s ‘Merge’ prompts schisms, too

Presented by CTIA - The Wireless Association: How the next wave of technology is upending the global economy and its power structures

Sep 15, 2022 View in browser   By Ben Schreckinger Presented by CTIA - The Wireless Association With help from Derek Robertson Ethereum co-founder Vitalik Buterin. | Michael Ciaglo/Getty Images Early this morning, the Ethereum network completed its so-called Merge, a complicated upgrade that fuses together its original blockchain with one running on a new set of rules. So far, the heavily-anticipated software update has gone off without a major hitch, and crypto enthusiasts are hailing it as a technical achievement. The upgrade also carries a number of political consequences, the biggest of which stems from a massive reduction in the network's energy usage, which had been a source of environmental concerns. For that reason, policymakers in the U.S. and Europe have welcomed the Merge. "In a time where we're talking about energy, energy, energy and reducing consumption and concerns around blockchain, this is positive," the European Commission's financial policy chief, Mairead McGuinness told POLITICO's Bjarke Smith-Meyer and Sam Sutton. Meanwhile, within the fractious world of crypto, the Merge heightens divisions between backers of Ethereum and Bitcoin, the largest blockchain network, which continues to consume huge amounts of energy. While Ethereum can now claim to be the greener network, Bitcoin's most fervent devotees contend that Ethereum's new system for governing the network, called proof of stake, will lead to centralization of network power in a relatively small number of hands. Many Ethereum backers argue the opposite. And, as we reported last month, some in the industry fear that the post-Merge structure of Ethereum's network will make it more susceptible to interventions from regulators. The Merge has also been contentious within the Ethereum network itself because it eliminates the role of miners, upending what had been a multibillion-dollar industry. In decentralized blockchain systems, major conflicts tend to take the form of schisms, or "forks," with two competing camps recognizing rival, incompatible versions of a distributed database. An early fight over technical changes to Bitcoin snowballed into a conflict called the Blocksize War, which resulted in a rump of dissenters creating a network fork called Bitcoin Cash in 2017. In 2016, the Ethereum Foundation oversaw the reversal of a transaction in which hackers moved stolen funds, prompting a group of purists who opposed the reversal on ideological grounds to adhere to an unaltered fork called Ethereum Classic. The Bitcoin Cash and Ethereum Classic networks are both much smaller, and their tokens much less valuable, than those of the mainline versions they split from. Now it's Ethereum miners who are taking the lead in creating a new fork, called EthPoW, slated to launch tomorrow morning. The PoW stands for "proof of work," the mining-based governance system being discarded by the Merge. Though the miners' fork is not expected to rival the mainline version in size, more Ethereum schisms could lie ahead, as the network's developers, led by Ethereum inventor Vitalik Buterin, are planning a series of additional software updates in the coming months and years. After the Merge, the next update, dubbed the Surge, is intended to increase the network's capacity to process transactions. Following the Surge are three further planned upgrades meant to achieve goals like greater decentralization. They've been dubbed — no joke — the Verge, the Purge, and finally, the Splurge. In the face of all that change, those mourning the passing of the original Ethereum protocol may be tempted to recite a dirge, but in the name of progress, please resist the urge.   A message from CTIA - The Wireless Association: 5G is fighting climate change. According to Accenture, 5G's impact across just five industries will help the United States meet 20% of its climate change goals by 2025. That's equivalent to taking nearly 72 million cars off the road. Learn more about how 5G is making this happen, and how wireless industry innovation and commitment is helping create a more sustainable future.   the color of money Think green: Governments of the largest EU economies demanded in a policy letter this week that the union's proposed central bank digital currency must be "environmentally sustainable by design." That's in contrast to the majority of crypto mining that occurs today, most notably of Bitcoin — which a White House report last week said accounts right now for 60 to 77 percent of global crypto-mining energy usage. The demand comes as Ethereum, the second-largest crypto network by market cap, completes its shift to the alternate form of mining that will cut its energy usage by more than 99 percent, a potential model for other large networks hoping to green themselves. POLITICO's Bjarke Smith-Meyer reported for Pro subscribers today that the letter from France, Germany, Italy, the Netherlands, and Spain also includes requests for "a degree of privacy" and built-in technology to enable usage across international borders, which will "likely attract the attention of U.S. credit card giants Mastercard and Visa." He also writes that the European Central Bank is currently experimenting with the digital euro's design, and the European Commission is preparing legislation on the issue for next spring. — Derek Robertson   On Wednesday, September 21, the McCourt Institute will host an exclusive event in NYC on "The Future of Digital Governance," to positively shape the next digital era and anticipate how tech will be regulated in the Web3 generation. It is part of the Unfinished Live festival and will feature transatlantic policymakers, academics, and other experts including Cedric O, Stefan Berger, Camille Canon, Jeremy West, Primavera de Filippi, Eric Salobir, POLITICO's Mark Scott and others for discussions on digital governance, the decentralized web, competition, privacy, content and more. Tune into the live stream beginning at 1:00 pm EST on September 21 on the McCourt Institute's website.     another kind of crypto The race to become "post-quantum" — to develop forms of cryptography strong enough to withstand cracking by quantum computers — is well underway, and a new report from the National Academies of Sciences, Engineering, and Medicine predicts the impact it could have on the intelligence community. The report's authors present an array of scenarios, from "basically nothing changes" to what it describes as a "colony collapse" of security systems, but presents a series of common findings that include: Vulnerable commercial technology as a major, widespread risk A weakening of global alliances that will create a less unified cryptographic landscape, with each nation developing its own encryption systems and standards A lack of the necessary talent to create and test new security protocols Breakthroughs in mathematics that could be just as threatening as quantum computers The U.S. losing its competitive advantage over other nations in encryption That encryption advances could become a boon to consumers seeking more secure transactions "The transition to post-quantum encryption will be delayed by chaotic systems, and when the transition is complete, chaotic systems may have made the resulting products less trustworthy," the report's authors write. "To the extent that this situation does not change—and in the committee's view there is little reason for optimism—it has an extremely significant effect in enabling offense (attacking cryptography) to prevail over defense. In other words, breaking systems will be easier than protecting them." — Derek Robertson   A message from CTIA - The Wireless Association:   the future in 5 links Coinbase is now assigning politicians a crypto scorecard within its app. The weeks-old open-access AI image generator Stable Diffusion is already producing some wild results. As crypto bulls (mostly) celebrate Ethereum's merge, what challenges does the technology still face? The MoMA's director expressed openness to adding NFTs to its collection. A tech reporter recounts his experience with Sony's first new VR headset in six years. Stay in touch with the whole team: Ben Schreckinger (bschreckinger@politico.com); Derek Robertson (drobertson@politico.com); Konstantin Kakaes (kkakaes@politico.com); and Heidi Vogt (hvogt@politico.com). Follow us @DigitalFuture on Twitter. Ben Schreckinger covers tech, finance and politics for POLITICO; he is an investor in cryptocurrency. If you've had this newsletter forwarded to you, you can sign up and read our mission statement at the links provided.   A message from CTIA - The Wireless Association: 5G is helping address the challenge of climate change.  These networks are unleashing new use cases across industries that are increasing efficiency and lowering emissions. 5G innovation across transportation, manufacturing, energy, agriculture and everyday life will transform the way we live and work – and have an equally transformative effect on our ability to tackle this generational challenge. According to Accenture, next generation 5G networks will help America meet 20% of our emission reduction goals by 2025. That's equivalent to taking nearly 72 million cars off the road. Learn more about how 5G is making this happen, and how wireless industry innovation and commitment is helping create a more sustainable future.     The Concordia Annual Summit is the leading nonpartisan forum alongside UNGA, and this year's gathering is taking place September 19-21 in New York City. Providing an essential platform to bring together leaders and decision-makers from across sectors in a spirit of inclusivity and nonpartisanship, the Summit will hear from US First Lady Jill Biden, Bank of America Vice Chair Anne M. Finucane, New York Mayor Eric Adams, World Bank Group President David Malpass, and Actor Goldie Hawn, among others (view the  agenda). Concordia is pleased to offer POLITICO readers 20% off the General Access Pass. Sign up here!       Follow us on Twitter Ben Schreckinger @SchreckReports Derek Robertson @afternoondelete Konstantin Kakaes @kkakaes Heidi Vogt @HeidiVogt   Follow us

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