Years after planning and development, Ethereum is nearing completion of its eagerly awaited major update, which is known as The Merge.
The Merge should be Ethereum’s largest event ever if everything goes as expected. This upgrade will definitely advance Ethereum’s underlying security protocol forever. The main goal of The Merger is to replace the existing Proof Of Work (PoW) system used in the blockchain protocol with a new PoS one. This would allow the blockchain to operate much faster and consume less electricity.
Even though the proof-of-stake chain is live, it doesn’t connect to the rest of the network until after the merger happens. Once the merge does happen, then the old chain becomes part of the new one. After that, we can expect proof-of-stoke coins to start being minted and used on the network.
- Why The Merge?
Ethereum’s development team proposes a move from proof of work (PoW) to proof of stake (PoS) so as to make it more energy efficient.
Ethereum’s current method of producing blocks requires excessive computing resources, which leads to increased electricity usage and greenhouse gas emissions. In addition to that, the process of block production can be very slow, meaning that transactions may take longer to get confirmed and added to the blockchain. That being said, Ethereum aims to improve upon the existing system through the implementation of the Casper protocol.
In Proof of Stake systems, blockchains are secured by validators who receive payments proportional to how much they’ve contributed to securing the network. These contributions can come in the form of coin holdings or simply being online and connected to the rest of the network. Miners earn these payments by offering useful services such as keeping the network running securely.
Anybody can participate in the process by contributing computing resources. Like traditional mining, stakers get paid in exchange for doing work for other people. Because payment comes from the actual services offered and not merely from being part of the community, it does not require trust between parties.
When users put up their own assets as security on the network, they accept the risk that they might lose their own funds if someone else acts maliciously on the network. Thus, there is an incentive for participants to behave positively instead of trying to attack the network. This is the same way that miners have to buy expensive mining equipment and pay for power to mine coins, thus network operators also face costs if they attempt to attack the network.
However, replacing the mining process means that no one can acquire new tokens unless they already own them. In addition, the only way to acquire Ether (the cryptocurrency used within the ecosystem) is through the mining process. So if someone wants to buy something that requires money, they must either buy Ether or mine it themselves. Eliminating the mining process thus removes the need for a lot of expensive equipment.
The Ethereum team believes that, in order to make Ethereum’s blockchain sustainable, they should switch off Ethereum’s proof of stake system. They believe that doing so would save around $0.2 per year per user. This is because, if proof of stake were added to Ethereum’s code, people would no longer have to keep running expensive mining equipment such as ASICs in order to verify transactions. In addition, the average cost of verifying each block would drop from about $4,000 per second to just $10.
- When Will The Merge Occur?
The Merge was finalized on 20 September 2022, said the Ethereum Foundation. The Merge has taken place in two stages, which are Bellatrix and Paris.
Bellatrix took place at 11:34 AM UTC on September 6 and updated the beacon chain to ensure it is prepared for the merge.
In Paris, the blockchain will change from Proof Of Work (PoW) to proof-of-stake (PoS). Experts estimated the transition would occur sometime between August 16th and September 15th. In any case, the new PoS system should provide much lower transaction fees as miners no longer receive rewards for transactions they process.
- How The Merge Was Prepared For
The developers at Ethereum have taken some time to research, plan, and develop Ethereum’s Proof Of Stake consensus algorithm. The progressive evolution towards the upgrade came in two major steps. First, in December 2020, the Beacon Chain project launched itself. This was the starting step in the Proof Of Stake (PoS) transition. Afterward, in April 2021, the second phase began, during which the Beacon Chain would merge with the underlying Ethereum network.
The Beacon Chain has already begun functioning as a Proof of Stake Network, allowing Ether holders to stake Ether, rather than ETH tokens. They also plan to make it possible for people to stake Ether through an external application called “Ether Wallet”.
As part of this first stage, the Beacon Chain started by creating a separate chain for the ‘beacon state’. A beacon chain is a public ledger where all information regarding blocks, transactions, forks, etc., is stored. The beacon chain will store information without updating the main Ethereum chain. Therefore, we can say this is like having a different copy of the Ethereum chain.
The Beacon Chain does not use the typical PoW consensus mechanism but uses the more advanced PoS technology for scalability. As mentioned above, in PoS, the number of validators who participate in the validation of the blocks and transactions decreases over time. It is based on a mathematical formula and takes account of the amount of work done. If you have 10 million dollars’ worth of Ether staked, then you will be able to validate a few hundred times fewer transactions.
This helps prevent long waiting periods before your transactions go through. Also, since the total number of users is smaller, we can expect a higher level of security.
On top of these benefits, PoS allows us to use the same amount of energy to validate many more transactions. This makes the protocol much cheaper and more environmentally friendly.
- Will Ethereum Be More Scalable?
A commonly held misconception is that the merge increases the network’s total throughput; which makes it cheaper to run your application on the Ethereum network. However, this is not correct. The only thing that the merge does is add new blocks to the blockchain, increasing the number of transactions being processed each second. While this might sound great, what’s actually happening behind the scenes?
To put it simply, there are fewer nodes running the network, so fewer transactions are being validated per second. There are roughly 3,000 full-time workers currently working on the Ethereum network. In comparison, Bitcoin has around 25,000 full-time employees. This means there are fewer people available to process transactions.
Therefore, while the current merge does increase the number of transactions being sent across the network, it doesn’t mean better performance overall. The problem lies in how the Ethereum network handles block processing; every node has a set of rules to follow when processing blocks. These rules determine if it is efficient or inefficient to process the new block.
The Ethereum network is still limited by its design, so more blockchains could easily be added to the system. Because the merge is decentralized, no one person owns the entire network, so anyone could potentially create another version of the network.
- How The Merge Will Change Ethereum’s Economics
The coming Merge has political, economical, and social implications too. The Ethereum Foundation faces a big problem if they decide to move towards Proof-of-Stake (PoS) instead of Proof-of-Work (PoW). PoS can cause a lot of problems within the community and we see how much drama has happened recently around ethereum classic. It would definitely lead to an increase in centralization because large mining operations could accumulate enough stakes to influence governance decisions. An increasing amount of hashing power also has the unfortunate consequence of decreasing decentralization and allowing miners to censor transactions they dislike.
As with any change, some people will be negatively impacted. We believe that The Merge is necessary to ensure the health of the ecosystem as a whole. There are economic repercussions too. The blockchain may actually face a cutback in issuance as soon as the new Consensus Mechanism comes into play. For that reason, Ether’s token supply may actually be diminished.
However, it seems like a good time for everyone to take a step back and think about where exactly the network is headed. It’s important to remember that the Ethereum team is aware of all these issues and has already been discussing them internally.
- The Merge is Here, Now What?
In its current state, Ethereum suffers from three main shortcomings: scalability, security, and transaction speed. With the removal of Proof-of-Work, we can expect these issues to be addressed. Proof-of-Stake is a great approach to address scaling issues, but it is not perfect either. Some solutions such as Sharding could help reduce the effects of high transaction fees, but they will come at a cost of increased complexity and potential security concerns.
Also, we can expect The Merge to affect the future of NFTs. In fact, we can expect NFTs – once only regarded as an obscure niche – to become mainstream. Most people see them as no different from physical collectibles such as vinyl records, figurines, and stamps. They also have plenty of potential as a currency for games and virtual worlds. However, technology experts warn of the dangers of fraud and manipulation within the system.
Finally, we can expect the stacked ether on Ethereum to remain locked until the Shanghai upgrade has happened, which will be up to 12 months after The Merge has happened.
