The most significant shift to Ethereum in its seven-year history is expected to happen in a few weeks. The “proof-of-work” security mechanism used up until now to protect the Ethereum blockchain uses more energy than Belgium as a whole. Adopting a new “proof-of-stake” technique will reduce Ethereum’s energy use by 1,000 starting next month..
However, what exactly is the “merge”? Those who keep up with the crypto news have probably heard about it and know it signals a switch to “proof of stake.” However, there are few in-depth descriptions of the technical procedure and the significance of the integration for the greater crypto community.
What Exactly Do People Mean By The Merge?
Ethereum 2.0, Eth2, ETH 2.0… Although the project has gone by various names in the past, the Ethereum community decided to “merge” early this year. The merge represents an update to Ethereum’s network that has been long awaited. Although such updates are common, this one is particularly significant since its success will allow programmers to add various capabilities to the network.
The present Ethereum mainnet, or the main public Ethereum blockchain utilized by everyone, will be merged with something called the Beacon Chain during the merge. Both chains are active at the moment. However, only the Ethereum mainnet currently employs the proof of work algorithm in processing transactions. After the merge is finished, the Ethereum mainnet will switch to the Beacon Chain’s proof-of-stake algorithm rather than proof-of-work.
What’s Proof Of Stake?
A consensus mechanism other than the conventional proof-of-work (PoW) is called proof of stake (PoS).
A Consensus, What?
Ethereum and other blockchains determine the legitimacy of transactions posted to their networks using a consensus mechanism. It’s how a blockchain manages its governance.
A distributed database of nodes, or machines that execute software to validate blocks and the transaction data they contain, can be considered Ethereum. Most nodes must agree for the network to establish consensus and make a decision, and the consensus method used affects how they do so.
So, How Does Proof Of Stake Work?
Following the merge, Ethereum will switch to a proof-of-stake consensus method, relying on vetted parties called validators to validate transactions and add new blocks to the blockchain. A validator will be randomly selected every 12 seconds or so post-merge when a new block is to be added.
Anyone who runs the most recent software and deposits 32 Ethereum (about $61,000 at mid-August rates) can apply to be a validator. They must also maintain their software.
Prospective validators will then be added to an “activation queue that controls the rate of new validators joining the network,” according to the Ethereum Foundation. A validator can evaluate and approve new blocks that the Ethereum network wants to add to its blockchain once it has been “activated.”
Validators will receive Ether as payment for protecting the network. There are sanctions for dishonest or malicious validators, in addition to the 32 Ether staked as collateral, which is a significant incentive to act responsibly. In particular, they may suffer a loss of all or part of their deposit as punishment. The Beacon Chain has over 415,000 validators even though the merge has not yet occurred.
And What’s Proof Of Work?
Since the beginning of the Ethereum mainnet, proof of work has been another consensus mechanism. It is still used by other older blockchains, most significantly Bitcoin.
Mining, where miners use energy as computational power, is the “work” in proof of work. Even though proof of work is adored by its advocates (mainly Bitcoiners), who claim it to be the most secure mechanism, the process is incredibly awful for the environment, which has been a major driver behind Ethereum’s switch to proof of stake.
Why Is The Merge Such A Big Deal?
For starters, Ethereum powers Ether, the second-largest cryptocurrency with a $202 billion market cap, making it the most widely utilized blockchain. Numerous decentralized apps (dApps) and decentralized finance (DeFi) protocols are also maintained by Ethereum, which also validates the validity of millions of non-fungible tokens (NFTs).
This means that the conclusion of the merger will have an impact on a large number of companies and services that depend on the Ethereum blockchain as well. Given Ethereum’s scale and significance, the outcome of the merger will probably have implications for the more significant cryptocurrency sector.
However, the bulk of the Ethereum community and beyond view the end of the mining as beneficial for the environment and Ethereum’s reputation, even though the merging is bad news for miners. According to Preston Van Loon, an Ethereum core engineer, “the transformation from proof of work to proof of stake [will] cut the overall energy consumption of Ethereum by 99.9% or more.” That is not funny.
Successful integration will also result in a decrease in the production of new Ether. According to Lucas Outumuro, head of research at blockchain intelligence company IntoTheBlock, Ether will probably become “the greatest deflationary currency” after the merger.
Outumuro predicts that the amount of fresh Ether issued will decrease by roughly 87% because the cryptocurrency will no longer be given to miners in his most recent newsletter. According to data from the past three months, “ETH’s net issuance is now predicted to range between -1.5% and 0.5%, compared to -4.5% to -0.5% using Q1 to Q2 numbers,” he said Aug. 19.
According to a report released on Aug. 12 by the research firm FSInsight, this drop in issuance suggests that over the next 12 months, Ethereum’s market cap may surpass that of Bitcoin.
To sum up, the merger is an essential step for Ethereum’s overall development. The network is currently roughly 40% complete, and following the merger, “Ethereum can move up to being 55% complete,” according to Ethereum creator Vitalik Buterin.
The “surge, verge, purge, and splurge” phases, which aim to make Ethereum significantly quicker, safer, and more decentralized, are also on Ethereum’s roadmap and are taking place concurrently. “Ethereum will be a considerably more scalable system at the end of this road map… Ethereum will eventually be able to perform 100,000 transactions per second, according to Buterin.
Why Is The Merge Controversial?
The majority of the Ethereum community strongly favors the merger, while a vocal minority calls it a gross mistake. Even though some of this opposition stems from self-interest—specifically, miners worried about lost income—there are also ideological problems.
Critics cite the dominance of a small number of corporations holding staked Ether as evidence that proof of stake would make Ethereum more centralized and less secure (Ether deposited on the Beacon Chain). Lido Finance, Coinbase, and Kraken collectively hold 14.7%, 8.5%, and a staggering 31.2% of all staked Ether on the Beacon Chain, according to data firm Messari.
The concerns about centralization still exist despite Lido and others’ significant positions, which reflect the reality that they function as custodians for thousands of smaller Ether holders and don’t truly control much of what they possess.
Among these worries is the possibility that law authorities will single out validators for censorship or surveillance. On Twitter, Buterin raised this issue. If asked by American officials, he expressed support for destroying the stakes of any validators that censor the Ethereum protocol.
Anthony Sassano, the co-founder of EthHub, tweeted on August 16: “I think the Ethereum community is powerful enough to fight off base-layer censorship.” Bitcoin is prone to the same censorship risks as Ethereum is—it doesn’t matter if it’s PoS or PoW.”
Even the CEO of Coinbase, Brian Armstrong, said on August 17 that he would prefer to cease the cryptocurrency exchange’s staking operations over complying with any future censorship regulations. Maximum Extractable Value, also known as Miner Extractable Value, and potential MEV-Boost problems following a merger are another area of worry.
A miner or validator can earn money by choosing, excluding, or rearranging certain transactions within blocks. This is known as MEV. MEV-Boost is a piece of add-on software designed for Ethereum proof-of-stake. To increase their compensation and outsource block generation, validators can sell block space to so-called block builders, essentially outsourcing some of their validating responsibilities.
MEV and MEV-Boost have benefits, but malicious groups can potentially abuse them. Some members of the Ethereum community are specifically concerned about the censorship of MEV-Boost “relay operators,” or organizations that, among other things, connect validators to block builders.
Numerous users on crypto Twitter have become increasingly preoccupied with questions regarding MEV and MEV-Boost post-merge, to the point where it was even brought up during the most recent Ethereum Core Developers meeting. Although they are aware of the issue, developers are optimistic that MEV-related problems, particularly those involving censorship, won’t pose a significant danger and are continuing to work on making Ethereum a censorship-free system.
Other concerns about proof of stake remain, most notably the possibility of a 51% assault, in which malicious actors band together to seize control of more than half the network’s computational capacity and manipulate the blockchain to steal tokens. With proof of stake, an attacker would need to own most of the staked Ether to succeed, which would be very difficult to acquire.
We need to get past the myth that it’s *fatal* if one entity gets enough to 51% attack PoS. The reality is they could attack *once*, and then they either get slashed or (if censorship attacks) soft-forked away and inactivity-leaked, and they lose their coins, so they can’t attack again. https://t.co/utash1hUDU
Buterin does not see a 51% attack as “fatal,” The Ethereum community has also minimized the issue by pointing out that it is possible to reduce a validator’s stake, among other things.
Will The Merger Lower The Gas Fees Everyone Complains About?
The price of completing a transaction on the Ethereum blockchain is referred to as gas costs. Because there is a greater demand for transactions to be completed at busy times, gas prices usually increase during these times and are denoted in gwei, the smallest unit of Ether.
Users of Ethereum complain a lot about gas costs. This is not surprising given that Ethereum’s gas prices can reach hundreds of dollars during its busiest times, rendering the network unprofitable for many. Although the merger won’t increase network capacity, it will convert Ethereum to proof of stake. As a result, it won’t affect the cost of gas expenses.
Buterin believes that gas prices will eventually decrease. Due to roll-ups, a so-called Layer 2 technology that “rolls-up” several transactions off-chain, processes them, and then records a compressed version on the primary Ethereum blockchain, he predicts that in time, after the merge, gas prices might be as low as $0.002 to $0.05. The move to proof of stake, according to the Ethereum Foundation, is a crucial step toward making this a reality.
Any Other Big Misconceptions About The Merge?
There are a lot.
One of the drawbacks of the merger is that it won’t accelerate the speed at which Ethereum processes transactions. According to the Ethereum Foundation, there won’t be a significant enough shift in scheduling for fresh block creation and settlement (or finality) after the integration for users to notice. Another misconception regarding the merger is the window of opportunity for investors to withdraw their staked Ether following the upgrade.
The Ethereum Foundation states that investors will have to wait until the Shanghai upgrade, which is “the next significant update following the merge,” before they may withdraw their staked Ether. This indicates that newly minted ETH will be locked and illiquid for at least six to twelve months after the merge, albeit accumulating on the Beacon Chain.
According to Tim Beiko, an Ethereum core engineer, the most common misunderstanding about the merging is that a node requires 32 Ether to operate. You do not. It costs nothing to run a node, he explained. As stated, “Thirty-two Ether is just required to run a validator.”
Okay, So What Technically Happens To Pull This Off?
Developers use the Ethereum test networks (testnets) to trial running code before deploying it on a mainnet in order to get ready for the merge and any other Ethereum update, for that matter. In order to prevent bugs or security flaws from affecting the Ethereum main blockchain, developers can run tests on testnets that are sufficiently close to the mainnet. Testnets Kiln, Ropsten, Sepolia, and most recently, Goerli, have all undergone the shift to proof of stake in preparation for the forthcoming integration.
In order to prepare the blockchain for the merge, Ethereum developers also implemented a number of hard forks, including the so-called London hard fork in 2021. London served several objectives. By permanently deleting (“burning”) a portion of transaction fees, it intended to stabilise those costs by removing the associated Ether from circulation. The so-called “difficulty bomb,” a method designed to encourage the network to abandon proof of work by exponentially raising the difficulty of the puzzles needed for mining and rendering continuing mining unprofitable, was also postponed by the London hard fork. After London, more forks such as Arrow Glacier and Gray Glacier further pushed the difficulty bomb off and altered its boundaries. Altair was another; he improved the Beacon Chain.
Additionally, 10 “shadow forks” of the mainnet were run by the developers using a limited number of nodes. Due to the shadow fork process’s limited impact on the mainnet and usefulness in identifying any potential problems before the major mainnet merge, this proved to be advantageous. More shadow forks are being planned by developers as they continue to make preparations for the merge. According to Christine Kim, research associate at Galaxy Digital, the mainnet merge activation procedure itself is complicated and has three major parts.
How Could Things Go Wrong?
Despite years of practice and testing, a lot may go wrong and it’s hard to predict.
In the end, the merger is not guaranteed to go well. A number of problems could occur, some of which are so complicated that they can be challenging to plan for, such as problems with clients or software that verifies transactions, application breakdowns, and others. The procedure might also be attempted to be sabotaged by bad actors. However, Ethereum’s developers and engineers insist that they are prepared and are trying to be ready for any potential issues.
Do I Need To Do Anything With My Ether?
No. If somebody tries to convince you otherwise, be very cautious.
According to the Ethereum Foundation:
For instance, a group of miners is preparing an Ethereum hard fork after the merging to form “ETHPoW” in an effort to maintain the proof-of-work chain and their income. However, despite the fact that this project’s name and sound partly like Ethereum, it is unrelated to Ethereum and, if it succeeds, will have its own currency and applications.
When To Merge?
The merge is scheduled for the week of September 15 with a TTD of 58750000000000000000000.
However, a lot of things could cause that time frame to vary. The timing is an estimate, and nothing is set yet, the Ethereum developers made clear. But it’s safe to argue that Ethereum is now more accessible to proof of stake than ever before. Ethereum won’t be fighting the “desire, the want to merge,” as artist Jonathan Mann sings on each developer call following a successful merge test.