The Ethereum (ETH) merge is the process of linking two separate blockchains currently active on different networks. The process consists of Ethereum switching to a new, more secure Proof-of-Stake(PoS) consensus layer, the Beacon Chain.
One of the most significant impacts of the Merge is the move from environmentally unfriendly, energy-intensive mining of Proof-of-Work (PoW) to PoS, reducing the electricity costs associated.
Smart contracts are programs that run on the Ethereum blockchain and are essential for fintech businesses to stay ahead of the competition and remain relevant. Read on to see why smart contracts will last: and how the Ethereum move to PoS will impact fintech.
Ethereum Move from PoW to PoS Explained
Ethereum is moving from Proof of Work to Proof of Stake. Occasionally, Ethereum adopts new technologies and processes to improve its network. This often includes replacing outdated technology with new systems. The most current adoption is known as the Merge.
Proof of Work: This decentralized consensus mechanism requires members of the network to expend effort solving an arbitrary mathematical puzzle - preventing anyone from gaming the system. The growing popularity of cryptocurrencies has led to the necessity for vast amounts of computing power, and Proof-of-Work (PoW) was the most effective means available. PoW has been used in cryptocurrency mining, validating transactions, and new token mining.
Proof of Stake: PoS allows each node to randomly mine or validate transactions at blocks based on the node's number of coins. You can mine more effectively when you hold more tokens in your wallet. Fewer resources are needed when using PoS than PoW because it doesn't require so much computational power.
We can now see a new proof-of-stake system similar to how mining began in the first place but without the need for robust machines that enable significant gains in efficiency over traditional mining.
This new system will be more straightforward and result in fewer errors, more efficiency, and more reliability.
How Does the Merge Impacts Traditional Finance?
Banks are taking note of the advancements in blockchain technology and looking to integrate this new system into their traditional finance (TradFi) ecosystems.
TradFi, in the case of financial institutions, needs well-organized and documented plans for significant trading moves, which can take years to execute. Traders must make a lot of planning and effort with the Trade Federation to ensure it runs efficiently. However, in the rare case where something goes wrong, financial institutions are fully prepared to cancel it at any time.
A lot has been discussed regarding data storage, privacy, and exchange in recent weeks. What has grown out of this discussion is that the Merge to PoS intends to share more data effectively and in a community-driven way. TradFi has no impact on the Merge, as ETH is community-driven; however, TradFi can benefit from the Merge through the increase in Financial institutions that are forced to wait out any fallout and respond or adjust.
The banking industry will likely experience little change because they are rigid with their current methods, and fintech applications will not be changed significantly.
Will the Move to PoS Impact Smart Contracts?
All providers of smart contracts on the Ethereum blockchain will need to transition over to PoS. Any company providing financial services on the blockchain will have to take time and resources to ensure they're ready for this technological shift.
As a result, smart contract applications and API providers offer solutions for users to adapt to the transition.
You can use smart contracts across the globe. They are decentralized and an entirely digital way of transferring money, assets, and other items in your digital wallet. They will likely affect many aspects of society, especially with the number of people wishing for digital financial services. With the increasing popularity of blockchain-based digital assets, many people have been looking for ways to access them conveniently and safely. Through smart contracts, this is now possible with Ethereum's high-level blockchain structure. This allows users in industries with significant financial regulation to avoid the limitations they would face when dealing with permissioned blockchains.
Navigating This Change While in Fintech
Fintech apps require the most advanced technology to provide clients with a user-friendly, efficient and safe process. Smart contracts are a newer technology that solves the trust problem so that transactions are done correctly. They are a novel way to ensure all parties can view and agree to every contractual term without having to be in the same space. This saves time and effort and makes things easier.
The potential applications of smart contracts are nearly limitless, and they promise a new way of organizing and conducting business.
The advantages of smart contracts allow you to offer a publicly accessible app that is tamper-proof and guarantees being executed as planned. This is especially helpful for providing a blockchain-enabled digital wallet.
The use of smart contracts in the financial services industry has become popular not only with businesses but also with consumers. The critical aspect is that they are becoming more advanced and helping transactions proceed at a level that's been difficult to attain up until now.
Why Smart Contracts Will Last
Smart contracts are self-executing lines of computer code with the terms of an agreement between buyer and seller automatically verified and executed via a computer network. Smart contracts deployed to blockchains render transactions traceable and irreversible while increasing transparency.
The reason smart contracts are called "smart" is that they define the terms of a transaction or agreement. When those terms are met (i.e., the receipt of a trigger or event), they execute and perform their assigned tasks automatically.
Smart contracts are proving their value in the modern financial technology industry. They use machine-based decision making to increase accuracy and verification for worldwide transactions.
Sil’s technology taps into the power of smart contract for automated finance. Developers can integrate with Sila to support smart contract features. Contact Sila to learn more about smart contracts that can save you a lot of development time and money.