The Ethereum Merge is coming and it is one of the biggest blockchain upgrades in the history of cryptocurrency, but what exactly does it mean?
Last week, Ethereum developers announced the most significant and final step to happen before the Merge: Goerli network will merge with Prater network on August 4, 2022, both of which are currently test networks.
Why switch from Proof-of-Work to Proof-of-Stake? What are the benefits? Who does it effect? Below is a brief breakdown to each of these questions.
What is the Merge?
The main idea behind the Merge is to switch from a Proof-of-Work *consensus mechanism to a Proof-of-Stake system. The goal is to make the Ethereum blockchain network more secure and sustainable.
Currently, Ethereum is secured through Proof-of-Work consensus mechanism. This means the network is secured by miners who purchase and run their own equipment. To become a miner, the user must buy and run hardware, which can be very costly. The miner will consume electricity in exchange for block issuance and a portion of the transaction fees from the network.
After the Merge, Ethereum will be secured through the Proof-of-Stake system by validators who stake ETH in order to validate the network. In order to be a validator through PoS, the user must stake 32 ETH into the deposit contract as well as run 3 separate pieces of software. This process is much more energy efficient and accessible for the average user.
*consensus mechanism: how the network agrees on what is true
Why is it called “The Merge”?
The reason this event is called the Merge is because it is combining two separate blockchains that are currently running parallel: the Ethereum blockchain & the Beacon blockchain.
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2-Step Transition: Beacon Chain & The Merge
The Beacon blockchain is essentially an empty chain running on Proof-of-Stake created by the Ethereum developers in December 2020. They launched the Beacon chain in order to test PoS without impacting the existing PoW consensus mechanism.
Since there are no transactions, tokens, or really anything on the Beacon chain besides the PoS system, it can integrate seamlessly with the Ethereum blockchain and replace the PoW consensus mechanism without effecting any other variables. Once the Merge is complete, mining on PoW will no longer be a valid means of block production.
Benefits of the Merge
Sustainability
Post merge, Ethereum will become more environmentally friendly. With the transition to Proof-of-Stake, it aims to eliminate essentially all of its power consumption to secure Ethereum by about 99.5%.
This is huge for Ethereum’s narrative and crypto’s mainstream adoption. Once PoS is in place, institutions will have the approval in regards to ESG guidelines.
Security
The yearly ETH issuance will be reduced from 4.3% to .43% due to the new standard improvements to efficiency with PoS. With PoW, it requires much more overhead to pay out miners for their services.
With a lower barrier to entry to become a validator, the user can essentially become a consensus participant from their own home. This will further decentralize the network and make it even more resistant to attacks. With PoW, the cost of buying and running nodes is expensive and limited to institutions or more sophisticated miners.
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To put it into perspective, I recently saw a great analogy describing the Merge:
“Imagine Ethereum as a car driving on the motorway. The Merge aims at transitioning the car’s engine from gas to electric. A key difficulty is to do so without stopping the car.” - Finematics
Proof-of-Work = Gas Engine
Beacon Chain = Electric Engine
Ethereum Blockchain = Moving Car
Make sense? Check out additional resources below for more information on The Merge:
Thank you for reading and please feel free to provide any feedback, comments or concerns! This is not financial advice.