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ETH down more than 5% despite smooth Ethereum Merge

Hours after midnight Thursday, Ethereum, the second-biggest blockchain network, successfully completed its Merge upgrade.

Lauded by both supporters and critics as crypto’s most ambitious software upgrade, the change shifted how Ethereum processes transactions — from proof-of-work to proof-of-stake — a first in the world of blockchains.

The upgrade caused Ethereum's energy consumption to plummet, with proponents saying the move also had to be finished before upgrading it to be a faster, cheaper and more useful financial layer for the internet.

Other analysts expect the change will enhance the financial prospects for the protocol’s native cryptocurrency, (ETH-USD) ether. But within the hour before the Merge, Ethereum’s native token slipped below $1,600 per coin and was trading relatively unchanged at $1,501 per coin by Thursday 2 p.m., down more than 5%. After logging record gains for investors last year, the asset is trading 58% lower since January 1.

The ether to bitcoin (ETH-BTC) ratio also seen a 5% drop following the Merge.

In the coming days and weeks, Ethereum developers will be watching for any significant problems, but "so far so good," Adam Levine, a crypto investor and early podcaster in the space, told Yahoo Finance.

The move to proof of stake has been contemplated as far back as 2014 by the protocol’s co-founder Vitalik Buterin - more than a year before Ethereum was launched.

The upgrade's final stage took about 12 minutes followed by another 12-15 minutes for Ethereum’s core developer team to gauge the transition's "finality" with as many as 41,000 people watching during a live Merge “viewing party."

By eliminating mining, the Ethereum Foundation and other analysts projected the protocol's energy consumption — which had required as much power as a small country — would drop by 99.95%. Justin Drake, an Ethereum researcher said just before the upgrade that the Merge “will reduce worldwide electricity consumption by 0.2%."

live Merge “viewing party”
Live Ethereum Merge “viewing party”

According to Nansen, within the hour after the upgrade, participation of network validators in the new version of the protocol averaged 98% — smoother than what most experts anticipated — with the figure rising since then. For reference, Ethereum needed at least a 66% validator participation to continue processing transactions.

For end users of Ethereum,"the merge does basically nothing in terms of their experience," Tim Beiko, an Ethereum core developer explained during the call. "For all the users of Ethereum, all the infrastructure just keeps working as expected."

"It's both better for the environment as well as I guess like other non-environmental externalities, like how [Ethereum] proof of work just massively increased prices for GPUs and made a bunch of gamers angry," said Buterin.

Speaking at a Barclay's conference Tuesday, Mike Novogratz, founder and CEO of Galaxy Digital called the upgrade "wildly important" as if nothing else it proved decentralized communities could accomplish such a significant project without a CEO.

“After so much successful testing, honestly, the event itself was a 12-minute thing where nothing happened,” Martin Leinweber, a crypto strategist with indexing firm MarketVector, told Yahoo Finance.

Given the hundreds of billions of dollars held in ether, a major misstep during the Merge could have meant significant volatility in its value, Leinweber said, adding that Tuesday's higher-than-expected inflation print may have turned the upgrade into a "non-event."

“A lot of investors on the institutional side are still worried and I think they likely chose to wait until the Merge is finalized and it's safe to play," he said.

Shortly after the Merge finished, Buterin said Ethereum had taken "the first step" in becoming a "very mature system," but noted the protocol still needed to improve privacy, scaling, and security for regular users.

It has several software upgrades - all rhyming with Merge - that couldn't be progressed without first completing its proof of stake transition.

"So let's go out and build out all of the other parts of that ecosystem," he said, "and turn Ethereum into what we want it to be."

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David Hollerith is a senior reporter at Yahoo Finance covering the cryptocurrency and stock markets. Follow him on Twitter at @DsHollers

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