ethereum merge

This article aims to provide an overview of the Ethereum Merge. It references blockchain technology, consensus mechanisms, and cryptocurrencies. If you are unfamiliar with decentralized finance (DeFi), do read our introductory articles on DeFi, crypto, and Ethereum before reading this article. You might also want to read about proof-of-work vs. proof-of-stake here.

What Is “The Merge”?

The Merge is the most significant upgrade in the history of Ethereum, completed on 15 September 2022. It involves a full transition from the Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus mechanism by incorporating the Beacon Chain into Ethereum’s Mainnet

Read more about it on our Twitter thread here!

The Beacon Chain

The Beacon Chain is a Proof-of-Stake (PoS) chain that was used to run parallel with Ethereum’s mainnet before The Merge. It acts as the “consensus layer” which is responsible for the PoS mechanism, while the mainnet acts as the “execution layer” which processes transactions and handles smart contract interactions. 

From Proof-of-Work (PoW) to Proof-of-Stake (PoS)

Prior to The Merge, Ethereum 1.0 used the PoW consensus mechanism. It is the original consensus mechanism that was first used by Bitcoin. The process requires miners to go through a series of trials and errors to solve complex mathematical equations. This requires highly specialized computational devices which use a lot of computational and electrical power to run. 

The upgrade signals Ethereum’s move to PoS, which allows users to validate transactions according to how many coins they lock up in the network. Compared to PoW, the PoS framework relies on validators’ “staking” rather than miners solving complex mathematical problems to add blocks to the chain. 

Learn more about the differences between PoW and PoS here

5 Common Questions About The Merge

1. What Are the Environmental Impacts of The Merge?

The Proof-of-Work (PoW) consensus mechanism previously required massive amounts of electrical energy which is highly unsustainable for the environment. According to the Ethereum Energy Consumption Index, approximately 93TWh of electricity is expended for Ethereum mining annually, which is comparable to the power consumption of Chile. 

Instead of using large amounts of computing power and electricity, the PoS model requires validators to “stake” or lock up a fixed amount of crypto to validate transactions. This switch from PoW to PoS was reported to reduce energy consumption by approximately 99.95%, significantly ameliorating the negative environmental consequences of crypto mining.

2. Will The Merge Reduce Gas Fees and Increase Transaction Speeds?

Contrary to popular belief, Ethereum’s transition to PoS will not significantly increase transaction speeds immediately. However, it lays the foundation for the launch of sharding in 2023. Sharding is a process that involves splitting the network into 64 individual “shards”, increasing scalability as validators can validate a larger amount of transactions simultaneously. Furthermore, validators would not need to store the data of an entire network but rather, only that of their individual shard. With Layer-2 scaling solutions such as rollups, Ethereum will be able to process a significantly larger number of transactions and increase throughput, thus, reducing congestion in the network. 

3. What Will Ethereum Be Like Without Miners?

With the transition to PoS, there will no longer be miners but validators instead. Any user can open a validator node with a minimum stake of 32 ETH. Pre-merge, the annual mining rewards for ETH was said to add up to over 5M ETH. Since there is an expected increase in the number of validators due to lower barriers to entry, the annual staking rewards are expected to fall to 1M ETH. This reduces ETH’s selling pressure which was substantially made up by miners who wanted to cover their electricity and hardware costs under PoW.

4. Will The Merge Lead To Risk of Centralization?

The PoS mechanism favors users who stake a larger amount of tokens. Since the likelihood of being selected as a validator increases with a larger amount of staked ETH, it is inherently unfair for smaller stakers if the whales are in their competition. Additionally, this increases the chances of centralization within the network, which goes against the ethos of Web3 and DeFi.

5. Will The Merge Compromise Security?

One of the biggest concerns that come with the change in consensus mechanism is security. The staking mechanism in PoS makes it easier for users to control more than 50% of the staked cryptocurrency or network, especially if it is one with a low market capitalization, making it highly vulnerable to the 51% attack

However, this is unlikely because Ethereum remains the second largest cryptocurrency by total value locked (TVL). Nonetheless, the switch from PoW to PoS does increase the chances of the network being controlled by groups or individuals with malicious intent. 

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Disclaimer

This publication is provided for informational and entertainment purposes only. Nothing contained in this publication constitutes financial advice, trading advice, or any other advice, nor does it constitute an offer to buy or sell securities or any other assets or participate in any particular trading strategy. This publication does not take into account your personal investment objectives, financial situation, or needs. Treehouse does not warrant that the information provided in this publication is up to date or accurate.