The upgrade is the most critical update in the history of Ethereum. It will also have major consequences for the rest of the crypto world.
After completing seven years of existence, Ethereum is approaching the expected The Merge, the most critical update in the blockchain's history since its launch in 2015. The arrival of The Merge in Ethereum, scheduled for September, is intended to channel the blockchain's transition to a new consensus, facilitating the path toward compliance and the evolution of the blockchain's roadmap.
Ethereum's leadership within the crypto ecosystem is undoubted, serving as the epicenter for thousands of decentralized applications (DApps), protocols, and platforms. It focuses on various blockchain-based sectors that leverage Ethereum's infrastructure to build solutions in decentralized finance DeFi, non-fungible tokens (NFT), blockchain gaming, decentralized Metaverses, and Decentralized Autonomous Organizations or DAOs.
Understanding The Merge
The Merge represents a decisive scenario for Ethereum but also a potentially disruptive impact on the rest of the industry. We will explain some keys to understanding what The Merge is, why Ethereum needs an update, what The Merge consists of, and the implications it will bring for Ethereum.
What is The Merge?
The Merge or The Merge means the union between:
The execution layer is Ethereum's current core network.
The consensus layer is known as the Beacon Chain.
A Proof of Stake (PoS) based blockchain will mean the blockchain's transition towards PoS.
These three characteristics imply replacing the figure of miners and block production with validators, changing the Ethereum network forever. Production and supply of Ether (ETH), the network's native cryptocurrency, will also change dramatically. ETH is the second largest cryptocurrency in market capitalization.
The upgrade does not mean the launch of a new Ethereum blockchain but replacing the Proof of Work (PoW) network, preserving all Ethereum data so far, and replacing block production with the PoS consensus mechanism. After this, the PoW version of Ethereum will continue to exist, but people expect it to become obsolete over time, although it will all depend on the trust and users left on the blockchain.
It is important to note that with the Merge, all tokens, NFTs, and assets from the current Ethereum blockchain, i.e., PoW, will be duplicated to the new PoS chain, so after The Merge, both chains will have the same amount of assets. Of course, the backing of crypto projects, exchanges, and protocols will go to one of the two blockchains, and the big one chosen so far by the major platforms, and industry participants will be Ethereum's new PoS chain.
The assets hosted on the old blockchain will lose their value and backing unless, as mentioned before, there are enough miners and users to sustain Ethereum's PoW blockchain after the merger, which will no longer have ETH as its native cryptocurrency. ETHPoW, which a community group is driving, emerges as a hard fork that includes many proposals in addition to retaining Ethereum with PoW.
It is essential to clarify that NO new cryptocurrency or token will operate on the Ethereum network in PoS. Still, ETH will continue to be the Ethereum cryptocurrency after the merger into the PoS network, so there is no need to "upgrade" the current ETH by sending it to any platform to "convert it into a new token." Any allusion to that idea is a scam.
The Beacon Chain
The Beacon Chain is a parallel blockchain independent today of Ethereum, which functions as a Proof of Stake network. After The Merge, the beacon chain will become the main consensus engine of the Ethereum network. The Beacon Chain launched in late 2020 and has since received millions of ETH deposits from more than 400 thousand validators, who are preparing to secure the network.
It is essential to understand part of Ethereum's vision to understand The Merge, which has focused on three key areas: scalability, security, and sustainability. Part of the development and ideas point to the blockchain evolution, where the Merge comes into play as a central part of that vision.
Scalability. The need to achieve greater transactional power of Ethereum, which serves to scale the blockchain. In the transition to PoS, the number of nodes and transactions per second in the network will increase. The rollups and the next upgrade phase, Sharding or Fragmentation, will entirely focus on Ethereum's scalability, complementing the second layer or Layer 2 (L2) solutions.
Security. With the change to PoS, a series of incentives will increase the network's security, raising the participants, in this case, the nodes, in favor of raising the safety, particularly of the 51% attacks.
Sustainability. In principle, one of the most relevant points behind Ethereum's vision, and made concrete with The Merge, is that the transition to PoS also seeks to reduce the environmental impact of the blockchain, this being a fundamental step after the merger.
Why upgrade Ethereum?
Ethereum is the most prominent blockchain at the construction level, being a central point of numerous blockchain developments, as we mentioned above. Hence, the need to upgrade arises to ensure that it continues with the leadership while managing to solve network issues. However, not all will get solved with the arrival of The Merge.
In essence, The Merge will be an update focused on changing the block production method, reducing the difficulty of running a node -encouraging more participants to protect the network- and solving the environmental impact of the blockchain.
The need to update Ethereum responds to a greater extent to this and manages to facilitate its operation and decentralization to aim at a more significant and fluid creation of protocols that serve more users for the network, thinking in terms of widespread adoption.
The shift from Proof of Work to Proof of Stake
Thus, Ethereum's transition from Proof of Work to becoming a Proof of Stake blockchain is undoubtedly an unprecedented milestone and a change that will seek to elevate Ethereum's potential. However, it will still face many challenges ahead for its scalable, secure, and decentralized vision to become a reality after the merger.
For Vitalik Buterin, the founder of Ethereum, Proof of Stake offers several key advantages that enhance Proof of Work:
Increased security for the same cost.
Better response and recovery from network attacks.
More resistance to censorship.
Lower entry barrier.
Reduced power consumption
Reducing power consumption could be the main milestone behind The Merge and one of the main reasons behind the upgrade. Despite being considered a robust, secure, and efficient mechanism, Proof-of-Work is energy-intensive in the competition for mining blocks for rewards, which involves high use of computational and energy resources.
In recent times with the growing crypto space and the advent of new technologies, such as different types of Metaverse, NFTs, and other types of Dapps, the narrative and finger-pointing at energy consumption by Ethereum and other networks such as Bitcoin have been the order of the day, particularly for those with the PoW consensus.
At the time of writing, Ethereum's annual energy consumption, according to Digiconomist data, is 78.63 TWh, comparable to Chile's consumption. At the same time, the yearly carbon footprint of 43.86 Mt CO2 is similar to Hong Kong's.
With the transition to PoS, Ethereum's developers intend to have the blockchain significantly reduce energy consumption and carbon footprint. According to estimates, experts expect Ethereum on PoS to reduce its energy consumption by up to 99.95 %, up to 2000 times more efficient than today.
The Merge will not affect Ethereum's gas rates
Undoubtedly, one of the main problems in the Ethereum network has been that its meteoric rise as a leading blockchain for the development of blockchain projects goes hand in hand with increased network congestion and, consequently, an increase in transaction fees or gas tariffs.
There is no direct link between The Merge and a reduction in Ethereum gas fees, as the upgrade is not focused on solving network congestion issues or improving transaction speeds.
Ethereum Gas Fees (Source: VanticaTrading.com)
Instead, the next step in Ethereum's upgrade roadmap, known as Sharding or Fragmentation, as we mentioned above, will target network scalability and is expected to impact by reducing transaction fees. Developers plan the upgrade to take place between 2023 and 2024.
Currently, the PoW consensus requires producing more than 13,000 ETH daily to pay out rewards to miners. In contrast, with PoS, it will take approximately about 1,600 ETH per day, which will then reduce its issuance by about 90%, which added to the system of burning ETH through fees, means an estimated total annual ETH issuance percentage of 0.49% of the total supply of 120 million tokens. You can read more about the impact of The Merge on ETH supply by clicking here.
As a PoS network, it means that Ethereum will replace intensive mining with validation through nodes, giving way to network operation through staking, which implies that ETH holders can use their funds to secure the network and participate in transaction validation in exchange for a reward.
If you plan to become a validator on the Ethereum network, you'll need to have 32 ETH, although it is possible to use services to participate with less. In this case, the move to PoS means a lower barrier to entry for securing the Ethereum network. Users can do Ethereum staking alone, operating a node and having the necessary hardware, software, and Internet, and doing it through staking services, staking pools, or pooled staking and centralized exchanges, such as Binance or Coinbase.
Both staking ETH and its rewards, as well as ETH rewards after The Merge, will remain locked in for 6 to 12 months after the merger until Shanghai, the first Ethereum upgrade after the transition to PoS, arrives. Validators will be able to withdraw ETH progressively after the upgrade, counting on some daily limitations, which will be adjusted to the ETH staked. All this is to avoid a massive exodus of funds disrupting the network and potential malicious attacks by a validator with a blocked balance.
Waiting for The Merge
Undoubtedly, The Merge represents a before and after for Ethereum. Its arrival is part of a years-long process of work and development. At the same time, its realization has necessitated numerous test networks and forks for the network in the quest to ensure that the Merge executes as planned.
Undoubtedly, any problems with the network would mean chaos for the industry due to the magnitude of Ethereum. Not in vain, the developers have taken more time than expected and split the upgrade into two parts, first with the Beacon Chain and now with the Merge, to ensure a stable transition.