There have been rumours swirling through the crypto verse regarding the Ethereum Merge for months, with just about everyone getting in their two cents. Some boldly claimed The Merge would increase the value of Ether (ETH) while others claimed it would reduce the value. It was even brazenly suggested that The Merge would usher in a whole new era for the Ethereum blockchain, while others insisted that not much of anything would change at all. Whatever the case, The Merge has happened. So, who, if anyone, was right?
More to the point, with all the excitement the average trader is probably simply just asking what exactly was all the fuss about? What was The Merge, why did it happen, and what does it mean for the crypto sphere? Those unfamiliar with the crypto verse might simply still be asking what cryptocurrency even is, and how to buy Ethereum. In which case, it’s probably best to refer to a cryptocurrency guide. This article is intended for those that are already familiar with cryptos and have an interest in the subject.
The good news is that there was certainly nothing negative about the merging process. The Merge has, in fact, been referred to by many as the most positive upgrade in blockchain history. It has even been said that the adjustment was the biggest statement ever made by a blockchain, period, which just about says it all.
In a nutshell, The Merge was the switching out of one blockchain for another. The previous Ethereum Mainnet was swapped with the newer Beacon Chain, effectively creating a whole new entity. To be more specific, it is the way the blockchains work that is most significant. Ethereum Mainnet worked on a proof-of-work system while Beacon Chain worked on proof-of-stake. With the merge now complete and the systems replaced, the Ethereum blockchain is officially a proof-of-stake blockchain.
But what exactly is proof-of-stake, and why is it important? Understanding this is key to understanding why the Ethereum merge was such a big deal.
Let’s first start by asking what is a blockchain? A blockchain is a digital ledger, meaning that a list of all transactions within a banking system is being stored. However, since having a ledger in a single location is dangerous, blockchain distributes the ledger across many storage spaces. Each of these storage spaces is referred to as a node, and each node is responsible for keeping track of the bigger picture. The ledger is, for the sake of simplicity, divided into blocks. Each block is linked together, creating a network between the individual nodes. Hence blockchain.
The key is that no node operates in a vacuum. If a single node is updated, all other nodes must also be updated. So, naturally, if a false attempt is made to try and update the ledger, the other nodes simply won’t agree to be updated. It’s an extremely advanced, and almost impossible to hack system, which is exactly what makes blockchain so appealing.
Additionally, a blockchain is also able to operate without all nodes being operative. If some nodes go down, say due to a power failure, the blockchain will still operate perfectly well. Depending on the situation and how many nodes have been lost, traders likely won’t even know that a problem has occurred.
However, as secure and reliable as blockchain technology is, there are problems that need to be addressed. The first problem is that with a massive increase in transactions, the system will inevitably run into situations where activity is being logged differently by individual nodes. If nodes are logging the same activity, but slightly differently, a failsafe is required to decide which log is accurate. Additionally, if a node is attacked, the same failsafe must ensure that only accurate data is stored and distributed.
Many so-called consensus mechanisms have been developed over the years to solve the problems posed by this situation. Proof-of-work is amongst the most popular, used by Ethereum until just recently. In a nutshell, once nodes have logged enough transactions to form a new block a race is initiated. The nodes race to solve a complex mathematical puzzle, with the winning node being decided as the authoritative block. The authoritative block is then copied over to the other nodes, thus creating the evolving blockchain. This process is also referred to as mining since the winning node is generally given a monetary reward.
The problem that many people have with proof-of-work, simply put, is that the nodes must brute force the puzzle as quickly as possible. This ultimately means that multiple nodes, or computers, must run at near 100% capacity on a constant basis. Perceptions are that massive power consumption is bad for the environment, and there is certainly some truth to the notion. More on this later.
Proof-of-stake has a major advantage, namely that it does not require the brute forcing of any mathematical puzzles. Instead, proof-of-stake calls on nodes randomly to be validators. Validators stake an amount of ETH upfront, with 32ETH being the minimum. It is possible to stake more ETH if validators choose to do so. Either way, the staked sum is tied up permanently in a contract.
When a validator is randomly called to process a block, that node earns a percentage of its stake back; roughly 4.01%. Over time validators will start to make a profit. A second validator is always randomly chosen to verify the work of the first, also earning a reward in the process.
In terms of technical details, a proof-of-stake system processes blocks at regular intervals. A slot is processed every 12 seconds, while an epoch is processed every 6 minutes and 24 seconds. An epoch processes 32 slots at a time.
As of The Merge, Ethereum now operates using the proof-of-stake system.
Despite what some are saying, the decision to merge the Ethereum blockchain, thereby transforming it into a proof-of-stake system, was not done lightly. After it was generally agreed by the community that the change would be desirable, several proposals were put forward. A number of technical issues also had to be dealt with, requiring a great deal of time and effort.
Eventually, a new blockchain model was widely accepted, and thus Beacon Chain was born. But, although sound in theory, the community insisted that the new blockchain be thoroughly tested before being put into practice. On December 1st, 2020, the community launched a test version of Beacon Chain.
For years the new blockchain worked alongside the original proof-of-work system, allowing for thorough testing and bug hunting. Over the course of those testing years over 400,000 validators signed up, with a mind-boggling $23 billion in ETH being staked. Eventually, it was decided that a merge of the systems would be possible. This, more or less, brings us to The Merge.
With all the anxious chatter prior to the Ethereum merge, some expected that the impact on the Ethereum cryptocurrency would be dramatic. However, with a few months now having passed, it’s safe to say that the impact on the coin overall has been rather subdued.
This isn’t to say that there has been no impact at all. The biggest change has been in the issuance rate of ETH, otherwise known as the rate at which the crypto is produced and distributed. The issuance rate was expected to drop by as much as 90% overall, and it has. Prior to The Merge, the issuance rate stood at around 4.5%. After The Merge, the issuance rate dropped to 0.5%. Since the nominal rate is 0.55%, it means that the amount of overall ETH is actually slightly decreasing. This discrepancy was also planned and is expected over time to gradually increase the value of the Ethereum cryptocurrency.
Another expected change was that block intervals would level out, and that has also come to pass. With the proof-of-work system transactions would be processed at irregular intervals, but with proof-of-stake transactions are now processed at regular 12 second intervals.
Perhaps the most noteworthy change is the increase in validators. Since The Merge, the number of validators has increased by a whopping 56,000, around 13%. It was expected that the number of validators would increase, but the actual increase has exceeded most expectations.
The primary purpose of The Merge was to replace the proof-of-work system with a proof-of-stake version. Most in the Ethereum community agreed that proof-of-stake was the better model, hence the consensus that the plan should go ahead. But why, exactly, was it so widely agreed that the change should go ahead?
There are a number of reasons why the newly adopted consensus mechanism is better. Let’s take a look at the main reasons in detail, keeping in mind that there are many more benefits other than those listed here.
As touched on already, the proof-of-work model, although effective, was enormously wasteful. Since the system required that nodes brute force puzzles in order to solve blocks, by extension, miners were encouraged to increase their computational output. The situation resulted in the early cryptocurrency boom, with thousands of hopefuls rushing out to purchase expensive graphics processing units (GPUs.)
Those that are into PC gaming know how power-hungry top-of-the-range GPUs are. Just a single GPU can be a massive drain, but enthusiastic miners are known to have farms of dozens. To look at it another way, at the height of the proof-of-work model the Ethereum blockchain consumed as much electricity as the country of Netherlands.
With The Merge now completed, it is estimated that the required power has been reduced by roughly 99.9%. To be more precise; prior to The Merge, the electricity required on an annual basis was 112 terawatt hours. That number has been reduced to 0.04 terawatt hours.
Most would agree that the reduction in electricity already justifies the change. However, there is another enormous benefit of the proof-of-stake system. Namely that the Ethereum blockchain is now more widely accessible than ever before as far as running costs are concerned.
That running the blockchain is cheaper may seem like a counterintuitive notion, given the requirement of an upfront 32ETH stake. However, it shouldn’t be forgotten just how much top-of-the-line GPUs cost. When taking into account the price of a GPU farm plus the associated electricity costs, 32ETH is by far the more affordable option. To look at it another way, a validator wishing to get involved now needs only a $1,000 laptop, plus the stake. This total cost is a fraction of a stake-of-work GPU farm.
Additionally, the technical knowledge required to run a proof-of-stake operation is also dramatically less. Proof-of-work requires specialised knowledge, including the skill required to build, and operate a GPU farm. Running a proof-of-stake system, on the other hand, takes just a few hours of learning.
Blockchains are all about being decentralised, both in principle and in practice. It was mentioned earlier that blockchains are very resilient to outages, given that the information is distributed across so many nodes. However, when it comes to proof-of-work many nodes are, counterintuitively, actually very centralised.
With so many resources pooled into a single location, a considerable amount of information can reside within a single GPU farm. Should that farm go offline for whatever reason, it means losing a large, productive node. Proof-of-stake models have no such challenge, given how many more nodes are participating in the bigger picture.
Since a primary strength of blockchain is its distribution across nodes, proof-of-stake has another enormous advantage. With so many more nodes, meaning a much wider distribution of information, the blockchain becomes even harder to hack than ever.
To look at it another way, the level of coordination and precise planning required to take control of 50% of the Ethereum blockchain, as it now stands, is almost impossible. It has been estimated that the cash required to pull off such a caper would have been roughly $5 billion with the proof-of-work model. That estimated amount has increased to around $20 billion with the proof-of-stake model.
Now that The Merge has gone ahead, the Ethereum community is logically asking what’s next. Those keeping up with the news already know that The Merge is just the beginning. A number of other blockchain upgrades are already planned, making the future of the crypto an exciting one.
The planned upgrades include Shanghai, the Surge, the Verge and the Purge. It may all sound like science fiction, but each of these upgrades is intended to bring new levels of flexibility and functionality to Ethereum.
The Surge will be an almost inconceivably vast upgrade to the blockchain’s rate of processing. As it stands, roughly 15 to 20 transactions are processed per second, which most consider to be fairly respectable. However, the Surge is designed to implement a system referred to as “sharding”. Sharding is expected to increase the number of transactions per second to a staggering 100,000. The idea is, naturally, to prepare the blockchain for the future.
The Verge is another big update, although won’t occur for some time still. The idea of the Verge update is to dramatically upgrade how nodes operate, introducing a technology referred to as Verkle trees. Verkle trees are a condensed version of the blockchain’s history, meaning that nodes will be able to operate in a far more streamlined fashion. At present each node is required to download the entire history of the blockchain, a time-consuming affair. With Verkle trees, this requirement will be bypassed entirely.
Lastly, the Purge is the final upgrade planned for the future. The idea of the Purge is to delete all old, unnecessary, and obsolete information from the system. This may not sound like a big deal but will, essentially, create a far sleeker and more versatile blockchain.
Together the updates represent the biggest coordinated changes to any blockchain in operation. They will result in the most advanced, and most refined cryptocurrency system in the world, putting Ethereum at the tip of the digital asset revolution. No doubt the community, and the world, will be eager to see how it impacts the crypto sphere at large. Whatever happens, it is certainly an exciting time to be a part of the crypto future.
During the Merge of the Ethereum blockchain, the Mainnet proof-of-work system was effectively transitioned into the Beacon Chain proof-of-stake system. This means that, in a nutshell, the Ethereum blockchain is now a proof-of-stake stake system. Prior to The Merge the community universally agreed that the change would be for the better.
The change to the proof-of-stake protocol came with many benefits, including increased security, broader decentralisation, and dramatically reduced overall power consumption. Reduced power consumption is perhaps the most impactful benefit, with the amount of electricity needed to keep the blockchain running reduced by as much as 99.99%.
There was, for a while, a push by the Ethereum Foundation to rename the Ethereum cryptocurrency after The Merge. The proposed new name was ETH2, or Ethereum 2.0. The name change was meant as nothing more than an indication that The Merge had occurred, thereby helping the community adjust to the new proof-of-stake protocols. However, after a great deal of confusion, it was decided that the crypto’s name would stay the same.
To be clear, there is no new currency being created, and there are no plans to create a new currency besides the existing ETH.
There was no impact of The Merge on any currencies, NFTs, or other digital assets. All assets held in wallets, or at the Ethereum blockchain, were not impacted in any way. The Merge went smoothly, meaning that no disruptions of any kind were experienced.
Prior to The Merge, many in the community had invested in expensive mining farms. But now that the blockchain is no longer based around mining, the community feared that their mining farms would be completely redundant.
However, although the Ethereum blockchain is no longer based on mining, it is still possible to mine ETH. A separate blockchain emerged in 2016 and still operates on the mining protocol. This means that miners can still mine for ETH the old-fashioned way, with the separate blockchain being referred to as Ethereum Classic.
It was not expected that any downtime would be experienced during The Merge, and none was. The blockchain remained perfectly functional throughout, demonstrating just how stable a properly functioning blockchain is.
With the new proof-of-stake system nodes are referred to as validators. Validators are required to stake a minimum of 32ETH upfront, after which they become a part of the blockchain. When a block is processed a validator is chosen at random to do the work, after which they receive a percentage of their original stake as a reward.
A second validator is randomly called in to verify the work of the first, after which the new block is logged and made official.
At present, once ETH is staked by a validator the contract is permanent. There is no way for the stake to be withdrawn. However, plans are that in the Shanghai update validators will be given the option to withdraw their stake.
There are a number of future updates already planned, including Shanghai, the Surge, the Verge and the Purge. Each upgrade will make significant changes to the blockchain, pushing the system forward into the future. By the end of the planned upgrades, Ethereum will arguably be the most advanced, secure, and stable blockchain in the world.