In this episode of CrypTalk, BizNews’ Ross Sinclair talks to Jaltech’s Gaurav Nair about the upcoming Ethereum merger, its economic implications and likelihood of success, and the recent scandal surrounding an ISIS supporter creating NFTs to potentially finance the terrorist organization.

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Gaurav Nair on what the Ethereum merger entails

Well, to understand that, we need to understand how blockchains work, and the two main ways blockchains work is something called mining, which is known as proof of work. Is there another way to run a blockchain called proof of stake. And without going into what differentiates the two options, the main difference is that mining requires a lot of energy to run blockchains, while proof of stake does not. In fact, it uses 99.9% less energy to run the blockchain. So the combination is that Ethereum is the second largest blockchain by market capitalization and the largest blockchain by activity – in fact it is even more active than the Bitcoin blockchain, which runs on proof of work (mining) in the same way. how does the bitcoin blockchain work. And from the beginning, the intention was to change Ethereum to this new method. Proof of share. There are other blockchains that work on the basis of proof of stake. So we know it works. But at the time Ethereum was conceived, trying to launch it on a proof-of-stake basis seemed too risky. More research and development was needed, so he worked on proof-of-work mining. And in parallel, many researchers and programmers, developers worked on trying to convert Ethereum into a proof of stake. And the analogy that is often made is that these developers are trying to change the engine of a flying airplane in flight. That way, they don’t stop the blockchain for a few minutes or hours and then change it and restart it. Instead, the blockchain will continue to work all the time. The reason it’s called a merge is because I think about two years ago they started a parallel chain called the Beacon Chain. And this chain has been running on proof of stake all this time. What will happen is that the existing Etherium chain and the Beacon chain will merge into one and then mining will be disabled. And the Ethereum chain will continue to use the proof-of-stake system that the Beacon Chain uses. So it’s a merger.

About how the union is technically implemented

The way they set it up is called the “complexity bomb”. And the difficulty bomb will make mining much, much harder. And so it was built into Ethereum a long time ago. This complexity bomb was predicted to go off when Ethereum moved to Proof of Stake. And so there would be no incentive to continue mining. Simultaneously, they upgraded both chains to actually implement this automatically. And what they did is they chose a metric. And when this metric is passed, the chain will automatically merge. It will be replaced by proof of stake. This indicator is not a time. Basically, one of the metrics you can measure in blockchain is the difficulty of mining the chain and that difficulty keeps moving. So they chose total complexity. And so we have an approximate time. It is likely to happen on Thursday morning in South Africa when this difficulty is reached and the merger takes place. And the reason they choose this kind of esoteric metric is that it’s very hard to fake. However, if the mining activity changes on the chain, it could happen before Thursday morning or later. That’s why we have a window and an approximate time when the merger could happen.

About what the economic consequences of this merger are likely to be

So, usually to start a blockchain, a miner spends money on capital, then they spend money on energy and do the work of managing the chain. And as a reward, every time they mine a block, they get some Ethereum as a reward. So when Ethereum moves to proof of stake, it becomes much, much cheaper to manage the chain. Because you are no longer mining. Instead, you do something called a check. And since it’s much, much cheaper, the person doing the verification doesn’t need such a large reward to make the chain verification worthwhile. And so instead of issuing the same amount of ether per block. The emission becomes much smaller, it falls by 90%. Now, whether it’s Ethereum or Bitcoin or any other blockchain, every time they issue a currency, it causes inflation. And this lowers the value of all other coins. By reducing Ethereum inflation, as less Ether is released per block, this means that the value of the coins will decrease on a permanent basis. So from an economic point of view it’s pretty good, but it’s still worth checking the chain and running it. But separately, when those coins are accepted by a miner validator, if they are a miner, they usually sell the coins pretty quickly because they have to pay for the energy costs and replace the hardware they’re using. Compared to a validator, they don’t have as much need to sell because they don’t have as heavy a cost structure. But even if they sold everything they got on this issue, they are selling much less, only 10%. Therefore, this means that there will be fewer new Ethereum offerings in the market. And if you look at the price of any other commodity as the interaction of supply and demand, when supply falls, it should cause the price to rise. So we’re going to see less supply in the market, and that’s how the economy is going to change.

About what happened with ISIS NFT and what it means for the future of crypto

My guess is that most people don’t want terrorist organizations to receive funding. And if we also look at the case of North Korea, they don’t necessarily want another country to have nuclear weapons, and so they don’t want to then finance North Korea to be able to do that. However, the question is whether that means we shouldn’t have technology that can be used in this way. Much of the financing of terrorism and the financing of rogue states is actually done in cash, because cash is the most impossible thing to do. This does not mean that cash should be banned. I think a lot of smart people want good technology. They want privacy. But they also want law enforcement to catch the bad guys. Currently, blockchain is a completely new technology. And because of this, law enforcement agencies still do not know how to police well, how to track streams and catch criminals, including terrorists. So you have criminal elements using different blockchains, and some of those blockchains are actually much more traceable than cash. So when you look at Bitcoin and Ethereum, the blockchain is effectively the story of each transaction. That way, once law enforcement becomes aware of a terrorist organization’s wallet, they can see the history of all the transactions they’ve made and monitor it. However, there are also tools to try to hide it. That’s why law enforcement recently also banned tornado cash, which is a privacy tool. So what happened here is what appears to be, as you said, an ISIS supporter listed nfts that look like pictures or digital art that support ISIS or have ISIS messages. So we can’t even tell, actually, who it was that listed it. It could even just be someone joking. However, it appears that this is a backer who is now testing the ability to sell these NFTs to other backers and thus raise money. Now there are companies behind most NFT markets that control what is listed there. And so when that person tried to list in these other markets, they either got removed very quickly or they were unsuccessful, they couldn’t do it. However, there are also decentralized ways of listing these NFTs. Three of them were listed on one of these decentralized platforms, and it is very difficult to remove them from there. So that means there’s a fear that there’s going to be a new way for people to send money to essentially terrorist organizations, either by buying these NFTs or even just sending money directly using cryptocurrency, and that those organizations will then move from their terrorist acts. Or, in the case of North Korea, build nuclear weapons.

How can the financing of criminals be prevented?

Much like the cash analogy, regulators stop the use of cash for various types of criminal activities by regulating its activities in the banking system or many other institutions, financial services and institutions. And they require these companies to know the person they are doing business with. KYC (Know Your Customer.) They require these institutions to understand who they are doing business with and where they are getting their money from. And a similar approach can be used when it comes to cryptocurrency. And we call how you get into cryptocurrency and back out of it into normal money, we call what happens on and off the ramps. And so one approach that has been proposed is for the regulators to adjust the on and off ramps. Exchanges that exchange cryptocurrencies for cash may be regulated. And so when a terrorist organization tries to exchange ether back into dollars, when they try to sell ether on an exchange, that exchange can then do KYC procedures to understand who they are and ask them for the source of the funds. Where did they actually get that ether? And then the moment the person can’t provide enough information, don’t let them interact on that exchange.

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