Ethereum Merge 1: What Is The Ethereum Merge?

One of crypto’s most anticipated events is finally here: The Ethereum Merge. In this article, we take a closer look at what the merge is as well as how it benefits the environment and lays the foundation for greatly improving transaction output and gas fees on Ethereum Mainnet.

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@enter.artPUBLISHED 9TH SEPTEMBER 2022

🎧 The article is also available as a podcast. Give it a listen at the bottom of the article / Read part two here


At a fateful Saturday lunchtime meeting in Zug, Switzerland, on June 7, 2014, eight young men—including a precocious Vitalik Buterin— gathered in a rented house in the woods, dubbed “the spaceship,” to co-found Ethereum and decide the future of what was to eventually become the world’s second-biggest (and arguably its most important) blockchain. 

They never did sign any document incorporating Ethereum, which was their grand experiment for a new financial revolution. Eight years and seven departures later, their brainchild, Ethereum, has championed this new financial revolution. 

However, this brainchild has not been without its limitations. In the quest to smoothen its rough edges, developers at Ethereum - led by the only founder still working on the blockchain, Vitalik Buterin, have remained committed to improving the blockchain. The latest of these improvements, The Ethereum Merge, is currently planned to occur on Sept. 15. 

Why Is It Called 'The Merge'?

The Ethereum blockchain that is currently in use is known as "Mainnet," to distinguish it from the various testnet blockchains that are used only by developers. In December 2020, developers at Ethereum created a new network called the Beacon chain, meant to be a frontrunner to the new PoS blockchain (often known as Eth 2.0). 

The Beacon chain is a proof-of-stake chain that has been chugging along on the sidelines since its creation. Validators have been adding blocks to the Beacon chain, but these blocks have contained no transactions or data. In essence, Beacon chain has been put under various stress tests ahead of the Merge.

The Merge will see the data held on Ethereum's mainnet transferred to the Beacon chain, which will then become the prime blockchain on the Ethereum network. In the run-up to the Merge, developers at Ethereum have been stress testing the new blockchain by running transactions and data through it on various Ethereum testnets. 

The Ethereum merge will cause the blockchain to transition from proof-of-work (PoW) consensus mechanism to proof-of-stake through the merging of two blockchains. 

Proof-of-stake is a consensus mechanism (currently being used by many protocols such as Avalanche), which is powered by users staking their coins in exchange for the ability to validate transactions carried out on the network. Once the requirements of the network are met by these validators, a new block is created and validators are awarded some Ethereum for their assistance in validation transactions on the network.

Under the new PoS mechanism, Ethereum will be secured by validators and not miners. These validators will create blocks when chosen by the blockchain and confirmed by others, thereby helping secure the network. When a new block is added to the network, rewards will be distributed in ETH. Each validator’s rewards will be proportional to their stake. 

Although it will require significant technical knowledge to run an Ethereum validator, validation mechanisms will be made accessible to many investors through staking in a pool or via third party. The network will require every validator to stake at least 32 ETH in order to participate in the validation mechanism.

While it will only take 32 ETH in order to be a network validator, the more ETH that is staked by a validator, the greater the chance of being selected by the network. When a validator is chosen by the network, that staker will earn a reward generated through transaction fees.

These transaction fees paid to validators are the “gas fees” that users pay in order to transact on the Ethereum blockchain. Part of the PoS transition will introduce sharding – a technical upgrade that splits the Ethereum blockchain network into different pieces in order to increase transaction speed and reduce network fees. This update is not expected until at least 2023. The sharding of the Ethereum blockchain is expected to lower costs and increase transaction speed. Together, the creation of the Beacon chain, the forthcoming Merge, and the sharding of the network are the 3 phases that make up Eth 2.0, an initiative undertaken by Ethereum’s developers to eliminate the blockchain’s deficiencies. 

Environmental Considerations With Respect To The Merge

Say you are a miner who wants to mine cryptocurrency. You have set up a powerful computer system (called a mining rig) to run software that attempts to solve complex cryptographic puzzles. Your rig competes with thousands of other miners around the world trying to solve the same puzzle. If your computer solves the puzzle before other miners, you win the right to "validate" a block -- that is, you win the right to add new data to the blockchain. Doing so gives you a reward: Bitcoin miners get 6.25 BTC for every block they verify, while Ethereum miners get 2 ETH plus gas, which are the fees users pay on each transaction.

It takes powerful computers to stand a chance in this race, and miners typically set up enormous amounts of rigs for this purpose. The idea is that this system allows the blockchain to be decentralized and secure at the same time.

This is called the Sybil Resistance Mechanism. Every blockchain needs to operate on a scarce resource, one that bad actors can't monopolize. For PoW blockchains, that resource is power – in the form of the electricity required to run mining operations.

To override the Ethereum architecture right now, bad actors would need to control at least 51% of the network's power. The network is made up of hundreds of thousands of computers around the world, meaning these bad actors would need to control 51% of the power in this vast mining pool. Doing so would cost tens of billions of dollars. 

This means that the system is secure. Although cyberattacks are common in crypto, neither the Bitcoin nor the Ethereum blockchains themselves have been compromised in the past. The downside, however, is evident. As cryptographic puzzles become more and more complicated and more miners compete to solve them, energy expenditure soars.

.Although renewable energy contributes about 57% of the total energy used to mine Bitcoin, the carbon footprint is extensive. Ethereum is estimated to emit as much carbon dioxide as Denmark. This is ultimately harmful to the environment. 

If the Merge is successful, the blockchain's massive energy consumption will fall by over 99.95%. The energy consumption levels for Ethereum post-merge will be tiny even compared to traditional payment networks (0.4% of Visa’s energy consumption). More importantly, unlike what obtained with the PoW consensus mechanism, validators won't need to sell their ETH to cover electricity costs anymore. 

That is of huge importance. Crypto critics argue (correctly) that coins like Bitcoin and Ethereum consume enormous amounts of energy that hurts the environment. In an era when more people than ever view climate change mitigation as one of the world’s highest priorities, the carbon emissions of Bitcoin and Ethereum are too conspicuous to ignore. 

Furthermore, the environmental baggage that accompanies Ethereum’s energy consumption levels has hindered its case for institutional adoption. With environmental concerns becoming a stakeholder consideration in the modern era, blockchains that operate environmentally sustainable models have an advantage over other chains. With The Merge, Ethereum could easily see more institutional adoption.

Use Case Benefits of the Merge

The Merge will have several significant implications on the crypto markets. First, Ethereum’s transition from Proof-of-Work to Proof-of-Stake will prove that a decentralized and permissionless network can operate in an energy-efficient manner. Successful transition to PoW will take away one vital weapon in the arsenal of the crypto doubter.  More importantly, transitioning to PoW will likely cause a renewed interest in Web3 projects aiming to build on top of the Ethereum network.

There are two major concerns currently stalling Web3’s development: (1) a lack of energy-efficient blockchains that are secure and decentralized enough to build upon, and (2) trouble recruiting talent and developers to the space to help build these innovative and ambitious projects.

In other words, the current Ethereum blockchain is ill-equipped to handle additional high-volume projects due to the high transaction fees and the environmental concerns with the current PoW mechanism.

The Ethereum Merge will likely address these concerns in a way PoW networks have so far been unable to, allowing many Web3 companies to build their projects on an incredibly energy-efficient and secure network. The increased efficiency of the network will provide a solid foundation for these projects to build upon.

The Merge will improve almost all metrics of the Ethereum blockchain, paving the way for future innovation, applications and experimentation. Ethereum’s smart-contract functionalities have been used to create thousands of dApps, have attracted millions of users, and have generated several billions of dollars for investors and users.

Because of these capabilities, we have seen the creation of many significant projects including:

  • Decentralized finance (DeFi)
  • Decentralized autonomous organizations (DAO)
  • Initial coin offerings (ICO)
  • Non-fungible tokens (NFT)
  • Security token offerings (STO)
  • Stablecoins

Over time, more usage of the Ethereum network will mean more $ETH burned, causing it to become a deflationary asset. $ETH as a newly deflationary asset, in tandem with increased staking, will reduce the circulating supply, likely resulting in a price increase.

Will Ethereum flip Bitcoin as crypto’s most valuable coin? 

One thing Ethereum has going for it is network effect. If the Merge - as well as other future changes - can onboard new users (which they probably will, due to cheaper fees and faster speeds likely to come after Sharding), then price is sure to follow. From the image below, one can observe that the price growth correlates 1:1 with address growth.

Ethereum still needs to multiply its market cap 2.2x to reach the market cap of Bitcoin, which is unlikely in the short term if Bitcoin continues to gain adoption. However, long term it is conceivable that Ethereum competes for top spot, considering network effect and institutional adoption, as more projects in web3 continue to build on Ethereum.



This article is written by 
Chidera Anushiem as a part of enter.blog's bounty program. Do you have an interesting topic, series or subject you think would be fitting for enter.blog? 

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