One step closer to decentralised finance through Ethereum’s ESG breakthrough

With the climate crisis on the global agenda and environmental, social, and corporate governance (ESG) concerns on every boardroom’s agendas, your business needs to know about a significant recent ESG-friendly development in the cryptocurrency world.

What is this new ESG-friendly development?

It is called “the Merge”. In simple terms, it is a change to the way that the world’s second largest cryptocurrency and blockchain technology, Ethereum, processes transactions and creates new tokens. The new method radically reduces the amount of energy consumption required to run and secure the cryptocurrency system.

Traditionally, blockchains and cryptocurrencies have operated under a “proof of-work” system which requires powerful computers to solve complex equations (and therefore a large amount of energy) to maintain the security of the system and “mine” bitcoin. Now, under the new “proof of stake” system, the integrity of the system is upheld by “validators” pledging their own cryptocurrency to validate new transactions. Thus, less energy consumption is required.

Why does my business need to know about this?

One of the key hurdles to the institutional adoption and growth of decentralized finance (DeFi) - the term used to describe blockchain-based emerging financial technology - has been its vast energy consumption. Now this hurdle appears to be fading away, it is expected that there will be a renewed appetite to invest in this space and it is more likely that your business will be needing to utilize this technology in the coming years.

What is so attractive about DeFi?

Given that the aim of DeFi is to be “decentralized” i.e., free from the control of intermediaries such as banks and financial institutions, there is no banking fee and assets are held in a secure wallet which can be accessed without needing prior approval.

DeFi empowers asset holders to have more control of their own money. There is still work to be done in terms of transaction speeds, but it is widely considered that DeFi is the future of finance.

What other changes may we see?

The Merge is not only likely to set a path towards DeFi, but a broader adoption of blockchain technology associated with Ethereum.

Ethereum is the technology behind more than just the cryptocurrency ether, it has resulted in thousands of decentralized applications. It is a digital database shared across thousands of computers and is the likely backbone and necessary feature of the new “Web3” world (the next and third generation of the internet).

Ethereum is what allows for the completion of “smart contracts” (self-executing or automated contracts with the terms of the agreement written into the code) and NFTs (digital collectibles).

Therefore, given this new ESG-friendly development, we are likely to see increased investment and a boom in this sector and we are now one step closer to the institutional adoption of decentralized finance and the next generation of the internet.

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.