The merge is a significant, upcoming upgrade to Ethereum, a cryptocurrency with the second highest market capitalization, that will change key characteristics of its blockchain. The major change will be the transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
By Nargiza Schmidt
30th August 2022
Guys, it’s simple. Proof-of-Work and Proof-of-Stake are decentralized consensus mechanisms…
Decentralized consensus mechanisms (say that five times fast!) are ways of reaching a consensus about the legitimacy of transaction records sans middlemen, such as banks. The PoW and PoS mechanisms currently exist in parallel, but PoW is on the mainnet, which means it’s the only one that can process transactions. Next month, PoW will merge with something called the Beacon Chain. The Beacon Chain will effectively switch the mainnet to a PoS consensus mechanism. If this sounds confusing, just know that you really don’t need to know the specifics to know what’s going on. However, if you want to know the specifics, check out Ethereum.org.
Proof-of-Work is used to verify many blockchains, including Bitcoin’s blockchain. It’s a tried-and-true method of verifying blocks, and it can be very secure, but it’s expensive to operate and terrible for the environment. For a blockchain to be as secure as possible, it needs many miners from various locations to verify transactions. For a malicious block to be added, a miner must have more than 50% of the network’s computing power or hash rate.These attacks are called 51 attacks.
To verify blocks on the Ethereum blockchain, miners compete using computers to solve arbitrary mathematical problems as quickly as possible. The miner’s computer that completes the problem first will earn the miner a reward of Ether. Unfortunately, Ethereum mining uses A LOT of electricity, so the more miners there are, the more electricity is used and the greater the environmental impact.
Proof-of-Stake isn’t competitive. Haters gon’ hate, validators gon’ validate. *Validators* will *validate* Ethereum based on an algorithm that considers the size of their stake. The bigger the stake, the higher chance they’ll get selected to validate transactions. Rather than getting rewarded Ethereum, they get a cut of the transaction fees. With miners being cut out of the equation, this will slow down the issuance of Ether, so there will be less in circulation. On the plus side, fewer miners mean significantly less energy is expended and the lower the environmental impact.
But now you’re thinking this really must be a POS if Ethereum has lost its only means of security. But it hasn’t! To add a malicious block, a stakeholder must have 51% of the stake in Ethereum, so they must actively have about $15 billion worth of Ethereum. There is still a risk of a 51% attack like there is in PoW, but PoS has much more community defense that can counter the attack and even kick the attacker out and destroy their staked Eth. Now that’s pretty badass.
Here for a good time and a long time
Find you a partner that’s committed to you like Vitalik is committed to the merge. Since the merge was introduced almost two years ago, on December 1, 2020, there have been nine major tests, upgrades, and forks,.
The environment gets a much-needed break
Ethereum has the most used blockchain used for DApps and authenticating NFTs. With the large number of transactions being processed on Ethereum, it needs a lot of miners to verify transactions. Miners uses high-energy processors and that takes a toll on the environment. So introducing PoS, which doesn’t require insanely high processing power, will make the Earth and many humans feel good about transacting on ETH and buying yet another MyBFF NFT(Who can blame them?).
The price tag may seem high but Ethereum will be more accessible than ever
Even with the 32 ETH price tag to the stake, becoming an Ethereum Validator will be more accessible. With the new validating process, anyone can participate if they have the funds – this is different from Proof of Work which requires you to run expensive hardware.
Much information is being circulated about the merge, so we think it’s important to address some misconceptions.
Ethereum Gas Fees will go down
Vitalik remarked that Ethereum transactions could be between $0.02-$0.05, but it’s unlikely to happen any time soon. Gas fees are a product of the network capacity and can only decrease if the network capacity is expanding. Unfortunately, changing the consensus mechanism doesn’t expand the network capacity, meaning we are stuck with the gas fees we have…for now.
Transaction rates will increase substantially
On PoS, blocks are produced 10% faster than PoW, so transaction rates will hasten, but not enough for anyone to notice.
You will be able to withdraw your staked Eth (stETH) immediately after the merge
This is not true. StakedEth will remain illiquid until the next major upgrade, Shanghai. It could take between 6-12 months before that is completed.
Vitalik said that Ethereum will be 55% complete after the merge, which means there will be even more upgrades down the line (The Surge, Verge, Purge, and don’t forget about Splurge!) that will further improve scalability and lower transaction fees. When all these upgrades are done, it will be the mic drop heard ‘round the world for web3. With brow-raising decreases in the environmental impact and transaction fees, Ethereum will make waves, and hopefully, other developers will follow suit in creating more sustainable blockchains. These major changes could lead to more consumer, political, and government backing that hasten the adoption of cryptocurrency worldwide.
Nothing will happen to the Ethereum you have now. It will still be there, so you don’t have to transfer it or swap it for anything. Be extra careful if you see someone posting about buying ETH 2.0 because that is very much not a thing. Ethereum before and after the merge will be called Ethereum.
After the merge, Ethereum’s issuance will decrease by almost 90%, meaning that it could become a deflationary asset. If it becomes a deflationary asset, it can hold more value over time.
Layer 2s are built on an existing blockchain and substantially increase the scalability and use cases of Ethereum. Examples of Layer 2 solutions are Polygon, Optimism, and Boba. The main goal of scalability is to increase transactions per second without sacrificing the decentralization or security of the base blockchain. Increasing transactions per second also helps lower transaction fees. As far as the merge is concerned, the base blockchain AKA Layer 1, AKA the mainnet, won’t become much more scalable until sharding occurs in later upgrades, so it’s unlikely L2s will be affected immediately after the merge. If you want more information on Layer 2s, check here.