THE ETHEREUM MERGE

QUICK TAKES:

• The Ethereum merge is finally complete as the cryptocurrency switches to the proof-of-stake (PoS) mechanism for verifying transactions on the blockchain.
• There are concerns now that the SEC could introduce regulations on proof-of-stake cryptocurrencies, which would impact almost the entire crypto space, aside from Bitcoin.
• The price of Ethereum has dropped since the merger due to fears of possible regulation.

Ethereum’s switch from proof-of-work to a system that operates as a proof-of-stake had been a plan in process for many years. Before its Blockchain got deployed officially, the plan was on, as far back as the year 2014.

While the budding process kept pace with the changes in Blockchain, some factors like technical complexity and the huge sum of financial involvement led to its multiple delays. Being a part of what it was previously referred to, Ethereum will not be regarded as “ether 2.0” but — The Merge. During a live YouTube stream, Vitalik Buterin, said:

“This is the first step in ethereum’s big journey toward being a very mature system, and there’s still steps to go,”

With its recent migration from a PoW to a PoS consensus mechanism, the goal of these upgrades is to make Ethereum more scalable and energy efficient. Two principal models are involved in this Merge which are — Ethereum’s mainnet and the Proof of Stake Beacon Chain. Notwithstanding, the Merge is part of a series of major Ethereum ecosystem upgrades. The upgrades include: The Surge, The Verge, The Purge, and The Splurge.

INTRODUCTION

From the time of its launch in 2015, Ethereum has pitched its tent in the blockchain industry as a well known and versed decentralized computing platform, permitting lots of projects to be created on its blockchain. While it remains one of the most important blockchains, Ethereum’s cutting-edge infrastructure cannot scale its operations in a manner that it is able to attend to growing global demand. In order to fight the dearth of scalability, Ethereum chose to evolve.

With regard to what the Co-founder of Ethereum figured out, he referred to the Merge as “the difference between early stage ethereum and the ethereum we’ve always wanted.”

WHY DID ETHEREUM CHOOSE TO UPGRADE?

The idea behind the design of most Blockchains come with a core principle of decentralization, rather than relying on a central authority. Being a new normal, the concept of decentralization is gradually fading away the idea of centralization. Decentralized Blockchains are permissionless, trustless, and more secure.

While the blockchain space keeps growing, emerging platforms have to note that the need to scale up with transaction speeds cannot be over-emphasized. This is known as scalability demands. The failure to achieve this can result in network congestion, which is a state where the Blockchain capacity is overwhelmed by a large number of pending transactions. Oftentimes, it involves higher transaction fees.

In the discussion of scalability demands, Vitalik Buterin defines it more as a scalability trilemma which includes: Decentralization, Security, and Scalability. These three tiers need a cohesive balance. One of the important reasons that adds up to the Ethereum Upgrade stems from the concern which Vitalik had that the Pre-Merge ecosystem lacked the ability to satisfy the scalability criteria because of its consensus mechanism, Proof of work.

With the Proof of Work system, blockchain tends to be more difficult to scale because of some reasons. The first is that the number of transactions a block can validate in a block is limited. The second reason however is due to the fact that blocks have to be mined at a constant rate.

THE ETHEREUM UPGRADE: THE BIG PICTURE

With the successful transition of Ethereum from pre-Merge to The Merge, the new Ethereum blockchain is expected to become more scalable, secure, and sustainable — while still decentralized. This process will not be swiftly discussed without considering the subjects below.

THE BEACON CHAIN

Formerly known as Phase 0, the Ethereum Beacon Chain was launched on December 1, 2020. Ethereum’s beacon was deployed to help users, and it runs in two ways: staking ETH or running a consensus client to secure the network. It currently runs in parallel to the Ethereum mainnet. This move marked the first upgrade in the series of major Ethereum upgrades.

CONSENSUS MECHANISM

The consensus mechanism was predicted to take a particular shape shortly after the merge. Unlike the previous setting, the Proof of Stake consensus mechanism will be the new order. In this sense, instead of mining, blocks will be minted by nodes called validators.

The way it will happen will be such that a node is randomly appointed periodically to validate a candidate block. These validators are incentivized or rewarded to do so with transaction fee tips and staking rewards. More so, since none of the nodes compete to add a new block, the PoS consensus mechanism takes up significantly fewer resources than PoW, making it more sustainable.

MAINNET TRANSACTIONS

For a simplified approach, a Mainnet is the precise term used to explain in detail, a state where a blockchain protocol is fully built and deployed, meaning that cryptocurrency transactions are being broadcasted, verified, and recorded on a distributed ledger technology (blockchain).

Relating this to the Ethereum project, having witnessed the merge, the Beacon Chain will be the primary place of consensus unlike before when it could only process a portion of the network transactions.

“After The Merge, the Beacon Chain will be the consensus engine for all network data, including execution layer transactions and account balances.” — Ethereum.org

WHAT’S BEYOND THE MERGE?

Beyond the merge, Ethereum is set to run a few milestones. The events cut out to take place in the near future don’t have a set date but as earlier stated by Vitalik in a recent tweet, they will include: The Purge, The Verge, The Splurge & The Surge. While these updates are set to happen, it will not elude the process of Sharding which is scheduled to take place by 2023.

SHARDING

Sharding is a scaling solution that requires much time and effort to execute it. If successfully done, it will serve as an enabling factor to the Blockchain ecosystem as it aids scalability to thrive well. In a more broader scope, it will serve as a viable catalyst to Ethereum in scaling up its economy to readily store and access data.

Ethereum will increase scalability with the help of sharding to increase throughput, likely reducing transaction costs and time. To see Ethereum through a more seamless transition, a lot will come into play with the sharding process and it will be multi-phased. In this sense, the version 1’s shard chains will provide more data to the network while the version 2’s shard chains will store and execute code, successfully bringing out a good cross-communication bridge between both versions.

WHY ARE THERE SO MANY SCALING SOLUTIONS?

The essence of building many scaling solutions can be summarized in a few words. It’s more likely that the Ethereum ecosystem is becoming future-proof and this is being seen in its disposition towards its current and promised offerings. With its strides in building user-friendly space, it will more likely experience a surge in terms of mass adoption and having to prepare before that time comes will be considered a wise and better move.

With the predicted mass adoption, the project will have the tendency of experiencing heavy network congestion and this can be leveraged via the multiple solutions on ground. In a situation where a single point fails, another scaling solution can suffice. Lastly, beyond preparing the network for increased transaction speed and throughput, it will also help users to avoid high transaction fees.

APPRECIATE THE MERGE MORE

In order to truly appreciate the Merge, the role played by cryptocurrency miners will need to be understood. To successfully take part in Crypto mining, a lot of activities go into play. The miner begins by setting up a powerful computer which serves as the mining rig to run softwares that attempts to solve cryptographic puzzles.

While the mining process takes place, a miners rig will be engaged in a tug of war where he mines along with hundreds of thousands of miners around the world who are bent on solving the same puzzle. Like a game of chess, when a particular miner unscrambles the cryptography first, he wins the right to ‘validate’ a block. In this sense, the miner can add new data to the blockchain. Bitcoin miners get approximately 6.25 bitcoin ($129,000) for every verified block while Ethereum miners get 2 Ether ($2,400) plus gas.

To have a chance of breaking through in this race, it takes a complete set up of powerful computers which you can’t be sure is even enough because some people set up warehouses full of rigs for the same purpose. This system is called “proof of work” owing to the fact that computers have to prove their energy expenditure via the process discussed above.

Although the blockchain space has witnessed several scams and hacks, overtaking a proof of work consensus mechanism may not be very easy.

Like Bitcoin and Pre-Merge Ethereum, a 51% attack is needed to gain control and execute a hack on the blockchain. This may not also be feasible in the face of the widespread number of miners across the world, operating via their different powerful computers.

More so, such an attack will have to be highly coordinated to a large extent before it can be successful with billions of dollars being spent on the side. It is quite evident that the proof of work system can’t be effective without high energy consumption, enough to power an entire city and it brings the need to examine how much energy is expelled in crypto mining.

WHY PROOF OF STAKE IS A BETTER OPTION FOR ETHEREUM

Considering the amount of energy consumed from blockchain mining, many are feared to have concerns towards what the future will be if this stays as the only available option. Fortunately, the Proof of Stake consensus mechanism operates quite differently from this model and this gives it an edge over the Proof of Work system. According to Forbes, it is estimated that Bitcoin consumes electricity at an annual rate of approximately 127 terawatt-hours (TWh).

This rate of consumption exceeds the sum up annual electricity consumption of Norway and more electricity that what 45 million people in Argentina use. On the other hand, Ethereum’s consumption stands at approximately 72 terawatt-hours (TWh) per annum.

With this indices of massive electricity consumption from the Blockchain behemoths even as it concerns Ethereum more, the Proof of Stake consensus mechanism will rather help in abating the side effects from Proof of Work where miners will no longer have to solve the cryptographic puzzles to verify new blocks.

STAKED ETHEREUM IN PROOF OF STAKE

For Proof of Stake, tokens will be deposited into a pool like a lottery ticket and if a particular number is called, the person has the right to verify the next block and also earn the rewards it entails. To hack this system, like the 51% attack to guarantee a pass in proof of work, a 51% of total staked ether will be needed to over run. The more total ether is staked, the safer the network becomes.