Everything You Need to Know about the Ethereum Merge

Introduction

Ethereum is the second largest cryptocurrency in the world in terms of market capitalization, only behind Bitcoin, with a valuation that today exceeds $200 Billion. Since its launch, Ethereum blockchain has become the preferred hub for hosting decentralized finance (DeFi) projects, NFTs, and fan tokens, among others. And this year Ethereum will make its most important evolutionary leap thanks to the “Merge”. In this article we will explore what exactly the Merge is and how it plans to revolutionize not only the Ethereum network but the broader crypto space. We will also outline the numerous benefits, drawbacks, and additional consequences that the Merge will bring.

What is the 'Merge' and what Consequences will it bring both inside and outside the Cryptocurrency Market?

The Merge is the name that has been chosen to identify the transition process of Ethereum from the Proof-of-Work (PoW) system to Proof-of-Stake (PoS). The most salient point of this change – at least for the general public – is that the network will no longer depend on miners to add new blocks to the blockchain, but on validators. Let’s take a deep dive into the pros and cons of the Merge:

One of the most clear positives behind the Merge is that Ethereum will abandon mining and drastically cut its energy consumption globally. As a result, ETH miners will be obsolete and a notable drop in the demand for GPUs (the main component in graphics cards) is estimated. Not only will this help to end an 18-month-old GPU shortage, but it may even lead to oversupply in the market that would further drive down the price of GPUs.

Another anticipated benefit of the merge is that Proof-of-Stake will bring faster and less costly transactions to Ethereum. In its current state, Ethereum has received a lot of criticism due to various transactional problems. Transaction confirmation times are longer than usual because of recent network congestion, which has been accompanied by high transaction costs (gas fees). PoS may not entirely solve this issue, but that is still an open question. As advertised by the Ethereum Foundation, the Merge will allow for an increase in transaction per second (TPS) capacity of up to 100,000, as compared to the ~64 TPS currently experienced with PoW.

As for the potential cons or negatives surrounding the Merge, they certainly don’t match up to the positives but are still worth noting. The first main con is that when compared to Proof-of-Work, Proof-of-Stake is a much younger consensus mechanism and has not been subjected to extensive testing. However, numerous other protocols such as Cosmos (ATOM) and Cardano (ADA) have already been using PoS prior to Ethereum’s merge. Despite the fact that all of these projects have seen a considerable amount of network activity, none of them have ever seen as much as Ethereum. This will be the first large-scale test of PoS in the space.

One final drawback to the Ethereum Merge is that some users might have a problem with the collateral system. When a coin is staked, the staker typically cannot move or exchange the coins until the predetermined staking period has passed. Additionally, some argue that the decentralization efforts of Ethereum may be hindered by the large influence that whales and other significant ETH holders may gain over the consensus process. The debate on whether or not Ethereum 2.0 will improve the ecosystem will soon be settled as the launch date draws nearer.

The 'Merge' that will Change Ethereum Forever

We have already established that the Merge is known as the change in the mechanism that Ethereum will face, abandoning the Proof-of-Work model and adopting the Proof-of-Stake. However, this will not happen overnight. This transition has been occurring gradually for some time with different implementations that have occurred in test networks or testnets.

In 2020, the developers of Ethereum launched what is known as the Beacon Chain, the new consensus layer that will replace mining. It works alongside the main network (or Mainnet) of Ethereum, which is the execution layer.

Sometime in the second half of this year, the Beacon Chain will merge with the Ethereum Mainnet; thus, the algorithm in the execution layer will be changed from PoW to PoS. A specific date for this to happen has not been determined, but it has been mentioned for a long time that it would be sometime between this August and September.

So far, the move from Proof-of-Work to Proof-of-Stake in testnets has been successful. In fact, at the beginning of this month the transition of the Ropsten testnet, one of the last ones before facing the modification in the main network, was completed without major inconveniences.

As we have mentioned before, once Ethereum works with the PoS system, mining will be obsolete. From now on, it will no longer be the miners who produce new valid blocks on the blockchain; their place will be taken by the validators, who will have to deposit 32 ETH each — an amount equivalent to about $38,000 at current prices — to unlock the software that will allow them to validate the proposed transactions and blocks.

But the Merge will not force all users to deposit that amount of ETH. This will be only for nodes that want to propose new blocks, replacing the work of miners. Other individuals who wish to bring decentralization to the network will be able to continue running their own "non-block generator" node, as is the case today.

 

Image Source: Cake DeFi

 

When will the Merge of Ethereum take Place?

Everything points to September 19 as the date of the official Merge to PoS, and that seems to have sparked optimism in both the sentiment behind Ethereum and the price of its native token.

A contagious optimism, it seems.

What Comes after the Merge?

After the Merge, subsequent upgrades will increase the capacity and speed of the network by introducing "shard chains". These will expand the network to 64 blockchains. The Merge has to happen first because these shard chains are based on staking.

The Ethereum Foundation noted that the need to scale through shard chains has been offset by layer 2 scaling solutions such as Optimism and Arbitrum.

Layer 2 scaling solutions temporarily transition ETH and ERC-20 tokens to another blockchain, completing the computational work for a fraction of the cost and at a much lower price.

Over time, shards are likely to co-exist with layer 2 technologies. The Ethereum Foundation says the need for "multiple rounds of shard chains" will be metered by the Ethereum community, but could provide "infinite scalability".

Closing Thoughts

Undoubtedly, the Merge has become one of the most highly anticipated events in the blockchain world to date. As we have found, the Merge will have numerous key benefits both inside and outside of the crypto market, most notably being the obsolescence of ETH miners, a drastic reduction in energy consumption, much quicker transaction speeds (TPS), and lower transaction costs for the network. At the time of writing, it still seems as though the most probable date for the official Merge is September 19th of this year, but it may happen later than the set date given Ethereum’s unpunctual track record with ETH 2.0. However, regardless of when the Merge is finalized, it will be very interesting to see how a change to proof-of-stake plays out for the second largest and most congested blockchain network in the crypto world.

By: Jack Nelson, Defy Trends