The second biggest blockchain, Ethereum, is expecting to fully transit to a new transaction system. Ethereum is going to shift from proof-of-work (PoW) to proof-of-stake (PoS) very shortly, However, shifting timelines, devote plans and mixed messages from Ethereum’s core developers make NFT holders ask fundamental questions about the position of Ethereum and Ether in the market.
Here, we try to have a closer look at this merge.
What is the Ethereum merge?
The merge is an upgrade to the Ethereum platform where the Ethereum Mainnet merges with the Beacon Chain, marking a transition from proof-of-work to proof-of-stake. Therefore, the merge causes Ethereum to upgrade from traditional mining, which includes having powerful computers solve math puzzles to run the network and create new coins, and switches to a system where ETH owners can stake it (proof-of-stake) in order to power the network.
There are some advantages to the merge. First, computers that consume a lot of electricity to power Ethereum are out, and new computers that consume dramatically less electricity replace them. So, Ethereum’s power consumption decreases significantly and the merge makes Ethereum a lot greener, leaving Bitcoin as the only major blockchain that still relies on proof-of-work.
As the energy consumption with Ethereum reduces by 99.95% following the merge, there will be no more talk about NFTs not being green. The merge seems to provide many important upgrades that should make Ethereum more scalable and cheaper to use.
Proof-of-stake (PoS) or proof-of-work (PoW)? What is the difference?
Proof-of-stake (PoS) and proof-of-work (PoW) are different in the right to record the next “block” of transactions on the network. PoW uses a large number of computers as miners to compete to publish blocks by racing to solve cryptographic puzzles, just like in Bitcoin.
On the other hand, in PoS system, validators that stake at least 32 ethers with the network are randomly selected to create blocks. The larger amounts of ether one stakes are more likely to be selected.
In both systems, the miner/validator that wins a block is rewarded with a mix of transaction fees and newly minted ether (ETH). PoS validators also receive rewards for doing other activities to help secure the network.
When is the Merge happening?
According to the Ethereum original site, the merge is expected around mid-September 2022. The merge is scheduled to take place once the number of all mined Ethereum blocks reaches a certain number, called the “total terminal difficulty” (TTD).
In August, Ethereum’s core developers set the TTD at 58,750,000,000,000,000,000,000, which is planned to be there around Sept. 14 or 15. Though, it is just an estimate because block difficulty and issuance rate may vary during this time.
Are there any potential risks with the merge?
Experts believe that the results of the merge are not guaranteed to be positive, and there can exist some uncertainty. The following can be some issues to consider:
Proof-of-work advocates argue that a smaller number of ETH holders will have all the control in hand, while proof-of-stake expositors state that there will be a safer system if more investors control the network.
It is still not certain if the new Stake-based model can attract many node operators. PoS requires the tokens to be purchased before they can be staked as collateral; compare it with simply burning energy in Proof-of-Work. Experts also believe that staking requirements could eventually lead to more long-term price stabilization.
The new staking model seems to make Ethereum run faster and cheaper. However, transactions cannot go as fast. Some experts are concern if this new model can keep the market share of Ethereum. Others say that Ethereum will improve its market share as it gets faster and super cheaper. Therefore, it will be more adaptable to users. As the result, there will be a chance for Ethereum to compete with other rivals, like Solana.
The merge may also attract wider adoption from institutional investors. Analyses show that the significant reduction in energy consumption may encourage traders who were previously prohibited from investing in tokens built upon a proof-of-work framework to invest in the platform.
Besides, the merge is the pioneer for the Surge, a second planned upgrade for Ethereum aimed at increasing scalability and minimizing gas fees.
These all suggest that the merge can end in widespread adoption for the Web3 ecosystem.
How to prepare for the merge?
Ethereum merge is one of the biggest events in the cryptocurrency industry, which definitely causes main changes in the market. However, users and holders of ETH do not need to do anything with their funds or wallets before the merge.
In fact, nothing changes regarding the entire history of Ethereum after the transition to PoS. All funds in wallets will still be accessible after the merge, and users and holders need to take no action to upgrade.
Besides users and holders, the Ethereum ecosystem contains node operators. The operators of a staking node are to first run a consensus layer client and an execution layer. Both layers need to be authenticated with a shared JWT secret so that they can communicate securely. Also, node operators require to set a fee recipient address to receive the transaction fee tips received.
The serious structural changes to Ethereum by the merge, on the other hand, may motivate DApp developers to take a look at articles on Ethereum’s Application Layer and read about some of the most common scams related to Ethereum 2.0. It gives the developers a brighter vision of the merge.
Ethereum After the Merge
Ethereum 2.0 promises scaling, and that the network will process 100,000 transactions per second all after the merge. It is the first stage of five indicated in the protocol’s incoming development. The five stages are:
- The Merge or transition from Proof of Work to Proof of Stake following the merge of Ethereum’s current mainnet with the Beacon Chain.
- The Surge is a scaling solution that tends to break the network into separate partitions called “shards.” The shards are designed to spread the computational load on the mainnet.
- The Verge refers to the introduction of “verkle trees” which involves an upgrade to Merkle proofs and is intended to optimize data storage for Ethereum nodes.
- The Purge concerns data storage for validators and aims to reduce hard drive space required for the validators, streamlining network congestion.
- The Splurge is considered the last upgrade of the process and intends to deliver a set of miscellaneous updates that are made to ensure the overall smoothness of how the network runs.
Can the merge fail?
Ethereum’s transition from proof-of-work to proof-of-stake is the very first experiment in the history of cryptocurrencies. For the merge to be successful, a massive work of engineering and human coordination is needed. Therefore, the failure of the merge will deface billions of dollars in value as well as a significant decrease in market share of Ethereum.
The merge is believed to be moving forward due to lots of successful tests and merge stimulation done by core developers and other stakeholders. Although there might be a chance that the Merge might fail, such an outcome seems extremely unlikely.
A final word
Results from any changes within the extremely dynamic space of cryptocurrencies could be unpredictable. It is hard even for Ethereum’s leaders to predict the network’s long-term future with and without a big change such as a merge. Ethereum, however, provides an outline of the five stages of its development, starting with the merge and promising to offer a better network run. Attempts are made to predict the results of merging Ethereum from PoW to PoS by lots of tests and merge stimulations. Although the results seem to be promising, ETH holders need to be curious and follow the news.