Key Takeaways:
- The Ethereum Merge (also known as The Merge or Ethereum 2.0) is the transition of the Ethereum blockchain’s consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS).
- Proponents of The Merge expect it to reduce energy consumption, increase decentralisation, and set the stage for future upgrades that may improve scalability, increase transaction speeds, and lower gas fees.
- Developers have set a soft target date of 15 September 2022 for The Merge, so mark your calendars.
- The Merge faces some challenges, however, including the possibility of delays, as it will be the first time PoS is deployed on such a large scale.
What Is The Merge?
The Merge — previously called Ethereum 2.0 — is the much-anticipated transition of the Ethereum blockchain’s Proof of Work (PoW) consensus mechanism to Proof of Stake (PoS). PoW and PoS are mechanisms for adding blocks that contain transactions to the blockchain, as well as for verifying and reaching a consensus that the transactions are correct. The two most popular blockchains, Bitcoin and Ethereum, currently use the PoW mechanism.
- PoW involves miners competing with each other using computational power to produce blocks that contain transactions. This requires solving a complex mathematical puzzle using specialised computer hardware that is very energy intensive. The first miner to solve the puzzle gets to create a new block and is rewarded with native coins of the blockchain (in Ethereum’s case, ETH). The main disadvantages of PoW are that it is less scalable and more energy intensive when compared to PoS.
- PoS uses validators instead of miners to propose new blocks and verify transactions. To participate in this process, validators must stake an amount of native coins as collateral.
- Instead of competing to create new blocks, an algorithm chooses which validator gets to propose a new block of transactions. Then, once a certain number of other validators have also verified the transactions as correct, the blocks of transactions are posted to the blockchain. Validators are then rewarded with native coins. Those who fail to validate (e.g., by going offline), or validate malicious transactions, may have the collateral they staked taken away.
Ethereum’s transition to PoS is called The Merge because, in practice, it will happen when Ethereum developers merge Ethereum’s mainnet (which is PoW) with the Beacon Chain (a separate PoS blockchain the developers have set up to facilitate the transition).
Why Is The Merge Needed and What Is the Impact?
Setting the Stage for Improved Scalability
- One of the blockchain holy grails is cracking The Blockchain Trilemma, a theory that says blockchains can only achieve two of the following three — security, decentralisation, and scalability — but not all three.
Read more about The Blockchain Trilemma.
- Ethereum is currently plagued by scalability issues — arguably the most important factor for reaching more users. Due to the increasing adoption of crypto and the enormous growth of decentralised apps (dapps) that utilise the Ethereum blockchain (such as those related to DeFi, NFTs, Metaverse, and GameFi), transactions have surged.
- Ethereum’s network capacity, however, has not been able to keep up, plagued by slow transaction speeds. The resulting network congestion has also led to skyrocketing gas fees (Ethereum’s transaction fees), making it impractical for the vast majority of people to use the blockchain.
- Transitioning to PoS is the necessary first step for future upgrades like sharding that are expected to significantly increase transaction speeds and reduce gas fees. The Merge is therefore hoped by many to be the opening of a new chapter in improving the scalability of the Ethereum blockchain.
Reduces Energy Consumption
- Unlike PoW, less energy is consumed with PoS since it does not require a large number of miners to compete with each other using computers that require huge amounts of electricity.
- According to the Ethereum Foundation, transitioning to PoS will result in the Ethereum blockchain slashing its energy consumption by around 99.95%.
Read more about energy consumption in crypto here and here.
Enhances Decentralisation and Security
- Supporters of The Merge say it will increase decentralisation and security of the blockchain because, compared to PoW, the PoS mechanism has lower barriers to entry for validators. PoW has high barriers to entry because it requires miners to invest in expensive computer hardware (also known as mining rigs) and incur high electricity costs as they compete to be the first miner to create blocks.
- Security may also be enhanced, since a lower barrier to entry would potentially reduce the risk of a few validators dominating the validation process .
- Detractors point out, however, that validators with more ETH staked as collateral could have higher odds of being chosen, meaning that those with access to larger reserves of ETH will therefore have an outsized influence on the validation process.
Potentially Impacts Supply, Causing ETH to Become Deflationary
- The supply of ETH coins is mainly affected by the two opposing forces: issuance of ETH (the creation of new ETH coins) and burning of ETH (the removal of existing ETH coins from circulation).
- The current use of PoW on the Ethereum mainnet and PoS on the Beacon Chain means that new ETH coins are issued to reward miners and validators, respectively. However, after the transition of the Ethereum blockchain to PoS, there won’t be a need for PoW mining rewards. Some observers believe that this should result in less total issuance of new ETH coins, and therefore potentially make ETH deflationary; in other words, decreasing its supply over time.
The Timeline: When Is The Merge?
The Merge has been in the making for years, slowly progressing through various upgrades and tests as developers work to resolve issues at each step. Notable milestones on the journey to The Merge include:
- Beacon Chain launch in December 2020
- London hard fork in August 2021
- Altair upgrade in October 2021
- Arrow Glacier upgrade in December 2021
- Kiln testnet merge in March 2022
- Multiple mainnet shadow forks starting in April 2022
- Ropsten testnet merge in June 2022
- Gray Glacier upgrade in June 2022
- Sepolia testnet merge in July 2022
- Goerli testnet merge in August 2022
On 14 July 2022, Ethereum developers announced a soft target date of September 2022 for the Ethereum blockchain to finally transition to PoS from PoW by merging the Ethereum mainnet with the Beacon Chain.
Challenges of The Merge
Development Difficulties
- PoS is challenging to implement, as evidenced by the long development road Ethereum has travelled up to this point in The Merge. 15 September 2022 is a soft target date set by the Ethereum developers, and it is possible that delays could still be announced.
Not Yet Battle-Tested on Such a Large Scale
- Although other competing blockchains are using PoS, none of them have the transaction activity of the Ethereum blockchain. The Merge will therefore be the first time PoS has been deployed on such a large scale, and it remains to be seen whether everything will run smoothly.
Conclusion
The Merge is the most significant upgrade in Ethereum’s history thus far and also one of the most anticipated events in the crypto space. Proponents expect it to set the stage for key improvements in the fundamentals of the Ethereum blockchain, with scalability arguably being the most important one. Developers have set a soft target date for 15 September 2022, so mark your calendars. However, delays could still be a risk to The Merge.
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