When China banned cryptocurrency mining and trading, many saw it as the end of a booming industry in the world’s second-largest economy. It turned out that the country’s crypto investors, developers and enthusiasts continue to play a vital role in building the backbone and applications of Web3.
The Merge, the highly anticipated network update to Ethereum set to roll out this week, could provide a new way for Chinese crypto enthusiasts to participate in the blockchain economy two years after the country began phasing out the lucrative crypto mining industry.
While crypto mining, the process that verifies and adds new transactions to the blockchain using the proof-of-work method, is expensive to join and subject to regulatory repression, crypto staking, enabled by fusion, offers increased resistance to censorship thanks to its low barriers to entry both in terms of cost and computing power required.
More discreet
The merger is expected to address one of the biggest criticisms against cryptocurrency – its environmental impact. For China in particular, the transition will also make it harder for regulators to track down participants in the Ethereum network, which has a market capitalization of over $200 billion at the time of writing.
Major blockchains like Bitcoin and Ethereum have used what is known as the proof-of-work consensus method to validate transactions, where computer servers – or miners – race to solve cryptographic puzzles by consuming huge amounts of energy.
Before China banned crypto mining, the country accounted for as much as two-thirds of Bitcoin’s global hashing powerthe energy consumed to perform the proof of work.
But Beijing saw the novel sector as a drag on its economy. In 2019, China added crypto mining to a list of industries to be “eliminated” because they “lack safe production conditions, seriously waste resources, pollute the environment,” among other issues. Since then, regulators have launched a number of crackdowns on mining, but the industry recently saw a hash rate rebound after keeping a low profile for several months.
It will not be surprising to see local governments loosening their grip a little over time. Crypto mines are often located in backward and landlocked regions of China where there is not much economic development for tax revenue otherwise.
But post-merger, the amount of energy needed to validate Ethereum transactions will be “indistinguishable,” said Daniel Dizon, co-founder and CEO of Swell Network, an Ethereum staking protocol.
Ethereum will switch to a so-called proof-of-stake mechanism. Servers compete with each other by “staking” their tokens as collateral in the network in order to approve transactions, which is estimated at reduce blockchain power consumption by 99%.
“All you need is basically fairly low computing power, like a computer at home, and the asset itself, because that’s the proof of the asset you’re staking,” Dizon said. .
The power needed to run a “node” can be as light as a Raspberry Pi, the microcomputer originally designed to teach basic computer science in developing countries, Dizon added.
The switch means that regulators can no longer detect Ethereum node operators by tracking abnormally high electricity consumption. Proof of work, on the other hand, normally takes place in mining farms full of rigs, the set of hardware and processors assembled for crypto mining.
“[A mining facility] is a large, hot, noisy place that consumes a lot of energy. It’s kinda hard to miss, right? said a longtime crypto miner from Singapore who uses the nickname James.
More decentralized
Apart from its impact on the environment, cryptocurrency mining also entails exorbitant upfront investments in rigs that could easily cost hundreds of thousands of dollars. Proof of Stake, by comparison, allows anyone with the tokens to start staking immediately.
Running a node is one way to join the staking economy, but being a node operator requires not only having a healthy dose of technical skills, but also having at least 32 ETH, which at the time of writing , amounts to $55,648.
This is why many ETH holders delegate the staking of their assets to third parties. Centralized crypto exchanges such as Binance and Coinbase allow users to deposit any amount by pooling each other’s tokens. But these platforms have mostly left China and removed Chinese users following Beijing’s crackdown. This means that if one holds a Chinese passport, he will not pass the know-your-customer or KYC requirement on a centralized platform that fully complies with Chinese law.
More crypto-savvy users might opt for decentralized protocols, which use algorithms to facilitate peer-to-peer transactions rather than relying on a centralized intermediary, allowing for a higher degree of anonymity. Decentralized options often allow for liquid staking, which means users can access their funds at any time and avoid the custody risks associated with centralized platforms.
For the technically skilled, it is possible to operate nodes from China, although the country’s complex censorship machine may add uncertainty. Nodes need a “good internet connection” to talk to nearby peers to complete the validation process, explained Lecky, CTO of Swell. But the nodes in China could be on a virtual private network or VPN, which is used to bypass the Great Firewall by hiding their true IP address, making it difficult for the nodes to know exactly where their peers are.
Despite these hurdles, Chinese crypto users are already jumping on the staking bandwagon. While a firm figure is difficult to pin down, Dizon estimated that a “significant” percentage of ETH is owned and managed in China, with increased capital inflows into the staking economy expected after the merger. .
“The issue of geography, especially in the context of a permissionless and decentralized network in cyberspace, which is in fact what Ethereum is, complicates things slightly when it comes to determining whether assets are actually held or ultimately staked within a specific ‘meat space’ boundary, i.e. a certain jurisdiction, whether in China or elsewhere,” the founder added.
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