The Ethereum Merge, the most important event in the history of cryptocurrency, is coming soon. Today, let’s check out the Merge from A to Z.
What is the Merge?
The Merge is an event through which the Ethereum blockchain transitions from Proof of Work (PoW) to Proof of Stake (PoS).
This shift in consensus is referred to as the Merge because it requires the merge of two independent blockchains that now run in parallel. At the moment, the Ethereum mainnet functions as the Execution Layer that’s mainly responsible for processing transactions and execution, and the PoS-based Beacon Chain will act as the Consensus Layer that coordinates and processes PoS. As such, Ethereum would have officially completed its transition to PoS when the Beacon Chain (the coordination network for the Consensus Layer) merges with the Ethereum mainnet (the Execution Layer).
Launched on December 1, 2020, the Beacon Chain is designed with the sole purpose of “creating a PoS blockchain”.
What is the Beacon Chain?
The Beacon Chain is a fully independent and decentralized network that runs in parallel with the Ethereum mainnet. Instead of PoW, which is Ethereum’s current consensus mechanism, the network uses PoS. Aiming to enable Ethereum’s transition from PoW to PoS, the Beacon Chain is the first step of the Merge.
The Beacon Chain transition started in November 2020 when a one-way bridge started moving the PoW chain to the PoS chain and started accepting deposits. One month later, the Beacon Chain was launched and secured millions of ETH from multiple validators. To date, the Beacon Chain has never suffered any downtime or network interruptions.
What led to the Merge?
PoW has always been criticized for its heavy energy consumption, and Ethereum must break away from this shackle if it wishes to become a super ecosystem in the crypto market. As such, the network has decided to shift to PoS, which will reduce energy consumption by about 99.95%.
Secondly, under PoW, Ethereum has failed to quickly process the interaction requests of the network. Initially, Ethereum 2.0 aimed to scale the network by dividing the mainnet into 64 shards. However, struggling with the complexity of sharding, the Ethereum team chose to complete data sharding via the Rollup solution to improve the network’s TPS.
Consensus security is another concern. Under PoW, miners can stop mining and leave the network at any time. Additionally, mining pools have centralized the computing power of Ethereum, which represents a threat to the entire network. Once it shifts to PoS, if nodes were to launch a malicious attack against Ethereum, the network would confiscate their assets, which creates a cost that all attackers must bear.
Additionally, Ethereum also introduced the “validator committee” to the Beacon Chain, which will be soon merged with the mainnet. This randomly selected committee can easily verify the state of the Beacon Chain through voting-based “authentication”. Apart from that, validators will be changed periodically, which will boost the security of Ethereum’s network consensus.
When will the Merge take place?
On August 12, Ethereum founder Vitalik tweeted that “the terminal total difficulty has been set to 58750000000000000000000. Bordel.wtf predicts the merge will happen around September 15, though the exact date depends on hashrate.”
What changes will the Merge bring?
The annual ETH inflation rate will decrease. After the Merge, the annual ETH inflation rate will go from 4.3% to 0.43%. With PoS, the ETH issuance will be reduced by over 90%.
Possible deflation. The ETH issuance will be reduced after the Merge and the burning ratio will be scaled up at the same time. When Gas fees on Ethereum are 7 gwei or higher, the rate of ETH being burnt is greater than the rate of ETH being issued, allowing the supply of ETH to decrease. Here, it should be noted that such Gas fees (7 gwei) are rare whether in a bull market or a bear market.
Reduced block time. After the Merge, Ethereum’s block time will go from 13.6 seconds on average to 12 seconds, which represents a 12% increase in transaction capacity, and therefore also a 12% reduction in the Gas cost.
A major drop in power consumption. With PoS adopted, the energy cost for Ethereum will equal that needed for running a node — about 2.6 MWh per year, which means that the network will consume 99.95% less energy after the Merge.
Who will be affected?
ETH miners. The Merge will put an end to PoW mining on the Ethereum network. As the transition to PoS will make mining (staking) much more accessible to regular users, new ETH miners will no longer have to meet the demanding hardware requirements. After the Merge, new miners will validate and protect the Ethereum network by staking ETH, which will also earn them the corresponding ETH reward. Existing PoW miners on the network are the most affected group of the Merge. As Ethereum shifts to PoS after the Merge, GPU miners will have to turn to alternative PoW chains, and their mining machines may no longer be used to mine ETH.
Ethereum developers. Common APIs for pre-and-post Merge architectures and the reuse of existing components will ensure a seamless transition. This means low to no rework for existing DApps on Ethereum, most of which can be migrated seamlessly, with little impact on Ethereum developers.
Ethereum advocates. After the network transitions to PoS, the controversial issues of energy consumption and environmental pollution will lose ground. The Merge, which has been repeatedly delayed, is finally here and will become a major turning point for the Ethereum ecosystem. Sharding, the next step following the Merge, will also genuinely boost the network’s performance. According to the current plan released by the Ethereum community, the network will adopt the Danksharding solution. This, coupled with Rollup solutions such as Layer 2, would lead to a massive TPS increase if the solution delivers the expected result.
Retail investors. The huge drop in the ETH supply and the burning of massive transaction fees will very likely turn Ethereum deflationary, which will surely affect the ETH price. Additionally, users will finally be able to directly convert the previously discounted stETH into ETH after the Shanghai Upgrade, which is expected to take place half a year after the Merge. Meanwhile, stETH investors are also keeping track of the progress of the Merge.
The Merge of Ethereum, which is now the №1 public chain, will surely attract the crypto spotlight. Let’s look forward to Ethereum’s transformation.