A deep dive into the Ethereum Merge

eth merge

wiredshut2

August 16, 2022

The current Ethereum Mainnet will soon transition from the Proof of Work mechanism to Proof of Stake. This is the most critical milestone in Ethereum’s history after its launch in 2015. Read on to find out what the “merge” is and what the future holds.

Key takeaways:

· The shift aims to pave the way for future scaling upgrades, including sharding. 

· The Merge will also make Ethereum more eco-friendly by reducing its energy consumption by 99.95%.

· High yield staking rewards

What is the Merge?

The Ethereum Merge is the fusion of the existing execution layer (the Mainnet currently in use) with the new proof-of-stake consensus layer – the Beacon Chain. The new network secures itself using staked ETH rather than energy-intensive mining. At press time, the Ethereum Merge is scheduled for September 19, 2022. It aims to realise Ethereum’s vision of a scalable, secure and sustainable blockchain solution. 

Proof of Work Vs Proof of Stake

These are the two basic consensus processes used by cryptocurrencies to validate new transactions, add them to the blockchain, and produce new tokens.

Virtual miners all around the globe compete to solve a math challenge first to protect and validate in proof-of-work blockchains. The winner gets to update the blockchain with the most recent confirmed transactions and is paid with a fixed amount of cryptocurrency by the network.

It is an energy-intensive operation that may struggle to scale to match the large number of transactions that smart-contract compliant blockchains like Ethereum may create.

On the other hand, in a proof of stake system, a node is chosen to add the most current batch of transactions to the blockchain and collect rewards in exchange. 

 Ethereum now has proof-of-stake. As stakers, users will be responsible for running node software that processes transactions and adds new blocks to the chain.

 History of the Merge 

 Since its inception, Proof-of-work has secured the Ethereum Mainnet. This Ethereum blockchain we’re all familiar with—it records every transaction, smart contract, and balance right from the beginning. Proof-of-work requires mining that necessitates substantial initial investments in sophisticated gear and energy usage, leading to economies of scale and favouring centralisation. Mining also does not require locking up assets as collateral, which limits the protocol’s capacity to penalise bad actors after an attack.

 As a result, developers have been working to make the eventual transition to Proof Stake as it provides a solid foundation for utility and scalability. Subsequently, the Beacon Chain was founded on December 1, 2020, and has since operated as a separate blockchain to Mainnet, functioning in parallel.

 The Beacon Chain

The Beacon Chain does not process mainnet transactions. It merely acts as a parallel consensus layer. However, following the Merge, the Beacon Chain will be the consensus engine for all network data, including execution layer transactions and account balances.

The Beacon Chain introduced the Ethereum ecosystem to proof-of-stake. It will serve as the network’s coordination and consensus layers for future scaling enhancements such as sharding. 

The Merge marks the official adoption of the Beacon Chain as the engine of block manufacture. Mining will no longer be used to generate valid blocks. Instead, proof-of-stake validators will take up this function, assessing the authenticity of all transactions and proposing blocks.

It is noteworthy that no history will be lost. When Mainnet and the Beacon Chain are combined, the whole transactional history of Ethereum will be integrated. Hence, users’ funds remain intact after the Merge is completely executed.

 Goerli ETH

The Ethereum merge is carried out in multiple phases consisting of three critical testnets. Goerli (named after a Berlin railway station) is one of the largest and most active Ethereum testnets, and it was the last to switch to PoS. It is the third and final trial run before the mainnet fusion with Ethereum’s proof-of-stake Beacon Chain. Before Goerli, the Ropsten and Sepolia testnet merging was successful, becoming online in June and July of 2022. The success of all three testnet merges gives the green light for Ethereum’s switch to PoS, possibly the most anticipated upgrade in blockchain and cryptocurrency history.

Pros of the Merge

  • Reduces energy consumption
  • It will also prepare the way for shard chains in 2023, which are projected to eliminate data congestion and expensive gas (transaction) fees while enabling the next generation of layer 2 scaling systems.
  • According to the Ethereum website, the APR for stakers is expected to increase post-merge.

Pitfalls

  • The Merge itself will be tricky and complicated with exchanges and definitions protocols not allowing trading in case of a system failure. 
  • Miners may flee the network before the Merge and could cause a drop in hash rate and leave the network open to hacks. 

Conclusion

The primary purpose of the Ethereum transition is to accelerate the shift from proof-of-work to proof-of-stake. Once the Merge is complete, developers will work on a few more phases: the Surge, Verge, Purge, and Splurge. These will continue to improve the scalability and security of Ethereum’s proof-of-stake network.