The Ethereum Merge refers to Ethereum’s transition from a proof-of-work consensus mechanism to one that uses proof of stake, resulting in a 99.95 percent drop in energy consumption.
Tech blog Digiconomist equated the energy savings to Finland shutting down its entire energy grid. Prior to the Merge, the open-source protocol consumed 113 terawatt-hours per year, sharing shoe sizes with Singapore in terms of its carbon footprint, and burning enough energy in one transaction to fuel a U.S. household for nearly nine days.
“The Merge is the most significant Ethereum upgrade and most talked about events in the crypto space because it completely reshapes how Ethereum functions,” said Jake Boyle, COO of cryptocurrency brokerage Caleb & Brown. The standout upgrade resulting from all of this: a sustainable framework. “The transition significantly reduces energy usage, offers greater crypto-economic security and makes it simpler for anyone to participate in securing the Ethereum network.”
What Is the Ethereum Merge?
The Ethereum Merge refers to a software upgrade that swapped the platform’s consensus mechanism from a proof-of-work protocol to a proof-of-stake system. Taking effect on September 15, 2022, the Merge reduced the Ethereum blockchain’s energy consumption by 99.5 percent.
What Is the Ethereum Merge?
The Ethereum Merge is essentially a change in the blockchain’s verification system. To better understand this, let’s backtrack to blockchain basics.
The purpose of a blockchain is to eliminate the need for a middleman to facilitate a transaction, such as a bank in a centralized system. Instead, all exchanges are publicly posted on an immutable digital ledger distributed among and regulated by peer-to-peer networks. Still, there needs to be a way to validate transactions in a decentralized manner — this is where consensus mechanisms, the automated protocols that verify each transaction on a blockchain, come into play.
Proof of Work vs. Proof of Stake
While developers in the Web3 space have since implemented a variety of methodologies, proof of work was the first on the scene, beginning with Bitcoin in 2008.
Also known as crypto mining, proof of work depends on an army of miners, or validators, to verify transactions while solving complex puzzles encoded in cryptography. The reward for verifying these transactions is ownership of a newly created block on the blockchain. Anyone can throw their hat into the mix, as long as they have access to the correct software and an energy source — but the process is extremely energy-intensive.
Proof of Work vs. Proof of Stake
Proof of work: Proof of work relies on miners to verify transactions, thereby adding blocks to a blockchain. This consensus mechanism is more like a race, with a network of computers competing to solve complex puzzles. It is also referred to as crypto mining.
Proof of stake: Proof of stake removes miners, instead relying on users to verify transactions by either investing a certain number of Ether or chipping into a pool to access software that grants validator privileges. It works similar to a randomized lottery, with users winning the chance to verify a transaction. The higher the amount staked, the higher the chance of winning.
Until recently, Ethereum operated on a proof-of-work protocol modeled after Bitcoin. The Merge changed all of that, implementing a proof-of-stake consensus mechanism that does away with miners altogether as well as reduces energy consumption.
Proof of stake trades out the competitive race for the prize for a randomized lottery pool. How it works: A user must first invest or “stake” a designated number of Ether, or chip into a pool to access software that grants validator privileges. With the deposit, validators enter a sort of lottery. If selected, the user wins the opportunity to verify the transaction, which comes with an awarded amount. As with any raffle-like scenario, the higher the investment, the likelier the chance of winning may be. Validators are active community members who, in addition to processing trades, are responsible for storing data and adding new blocks to the blockchain.
The Ethereum Merge was Planned Around 2014
Ethereum co-founder Vitalik Buterin dreamt up the proof-of-stake conversion around 2014.
With several false starts, the alternative verification system didn’t actualize until December 2020, when developers launched a sidechain known as the Beacon Chain.
The actual “merge” refers to the integration of the Beacon Chain with Ethereum’s mainnet as one.
As noted on its website, Ethereum’s implementation of a proof-of-stake protocol was in the blueprint from the start. The years run as a proof-of-work platform helped establish Ethereum as a legitimate network while evenly distributing its native token, Ether, without compromising security or decentralization, according to the website. Ethereum has since grown into the second-largest blockchain, holding a total market value of $150 billion, with a coin value second only to Bitcoin. Since crypto’s inception, thousands of platforms have sprouted — many of which operate on a proof-of-stake system, thus supplying a live proof of concept for a more eco-friendly consensus mechanism.
The impetus for Ethereum’s transition really came down to pulling the trigger at the right time, once each moving part came into alignment.
“The need for a sustainable solution for Ethereum was a key driver and the biggest hurdle for those looking to build with the chain. Culturally, it was a huge roadblock,” said Hall Carlough, vice president of Invisible North, a creative marketing agency specialized in Web3. “The ecological need for a sustainable Ethereum was critical for the chain to continue to hold its place in the market as the chain for builders.”
How Will the Ethereum Merge Impact Crypto?
As Ethereum retires its miners and employs a new class of “stakers” the crypto world watches as the aftermath unfolds. Most notably, users are anticipating a stark drop in the value of Ether, or ETH.
“While the Merge completely reshapes the Ethereum network, it also has major consequences for ETH as an asset,” Boyle said, noting how the Merge impacts economics of Ethereum’s native coin in three major ways: cutting back on the coin’s issuance, reducing its total supply through burn mechanisms and, of course, staking.
“For investors and traders alike, this change in ETH dynamics is likely the most significant aspect of the Merge,” he said. “This is why some members of the Ethereum community nickname the Merge as ‘the triple halvening,’ because the supply shock to ETH is equivalent to three Bitcoin halvings — an event that programmatically occurs roughly every four years where the supply issuance of Bitcoin per block is cut by 50 percent.”
Increased Block Production, Reduced Verification Time
Since transitioning to a proof-of-stake consensus mechanism, however, data recorded on the blockchain continues to show improvements to the Ethereum network, Boyle said. He estimated that the new protocol has brought about an 18 percent increase in blocks produced per day alongside a 13 percent decrease in verification time.
“An improvement in both blocks-produced and block-time could see total throughput and transaction speed increase on the network overall,” he said.
Gregory Keogh, senior vice president of customer success at Curios, a white-label NFT marketplace, sees the transition playing out in favor of Ether holders.
“Since the new way of recording information involves locking up cryptocurrency, a lot of Ethereum investors are speculating that Ether will become deflationary in the process, thus driving up its value,” said Keogh, who is also a creative design engineer.
As seen in today’s numbers, it’s full steam ahead for natives and newcomers to the platform. Investors have staked nearly 15 million ETH into the network, a rough estimate of $19 billion, at the time of writing.
“This would be similar to switching every existing vehicle from running on gasoline to running on electricity immediately, without any mistakes.”
Whether the market swings up or down, Keogh is impressed that the core team could even pull off such a stunt.
“It was a very large technical accomplishment to move something as complicated as the entire Ethereum network into a different way of working,” he said. “This would be similar to switching every existing vehicle from running on gasoline to running on electricity immediately, without any mistakes.”
Whether Ethereum’s swap to a proof-of-stake system is a viable and secure method for the sizable platform is yet to be determined. For better or worse, the next few years will provide a lot of insight. Now more user-friendly, a post-Merge Ethereum will likely onboard a new generation crypto enthusiasts as it pushes into the mainstream, Keogh said.
“But for now,” he said, “The effects are completely unknown.”
The Pros of the Ethereum Merge
The merge marks a new era for the crypto giant. Users are hopeful that it will restimulate the crypto market, populate the decentralized finance ecosystem and reroute Web3 for the better.
“People across the globe watched the chain evolve in a moment. For the blockchain, it was an unlocked moment of innovation,” said Carlough. “It is significant in its forward-looking hope for greater possibilities in a decentralized world.”
Per ConsenSys, the blockchain tech company building Ethereum, the Merge has brought several crucial improvements to the open-source blockchain.
Sustainability
Old ways had each transaction burning enough energy to fuel a U.S. household for nearly nine days. Now, it’s a matter of making a pot of coffee — essentially eradicating its own carbon footprint overnight, according to the ConsenSys website.
Security
Safety across the platform has been fortified, instantly increasing the difficulty to hack fivefold. Each new validator who onboards to protect the protocol dilutes any concentration of power, making the system itself hard to manipulate. On a staking system, insider attacks are less likely given the nature of a staking system — rogue users would need to consider that it’s their own money they would be jeopardizing.
Decentralization
At the time of writing, there are more than 467,000 validators network-wide, with new slots reopening every 12 seconds. Each investor contributes to decentralization by wide spreading the network’s distribution.
Scalability
Two mechanisms were implemented in order to fuel the platform’s expansion: sharding and rollups. Sharding stores a sizable database across multiple servers, or nodes. The latter, rollups, are a processing technique that bundles transactions by performing them on a sidechain, then rolling them up into one record before reporting the data to the mainnet after the fact. This will theoretically result in cheaper gas fees, which peaked at $200 during the gas wars, once fully rolled out in 2023.
The Cons of the Ethereum Merge
At the same time, there are valid concerns.
In terms of decentralization, it is entirely possible that shifting from a proof-of-work to a proof-of-stake system at this time would enable a greater concentration of power, opposite of the ethos backing the Merge. Decrypt reported that, ahead of the Merge, almost two-thirds of Ether could be traced to one DeFi staking pool and three centralized crypto exchanges. Although it is fair to observe that this imbalance was created within proof-of-work conditions, a proof-of-stake switch could exacerbate any present disparity.
Since the process is no longer as objective as a computational math problem but rather an exercise of chance relative to the wealth of stakers, community members within this camp see the transition as a step away from decentralization.
Other issues include a slowed influx of new coins, intentionally reduced by 90 percent since mining rewards, which are enormous in size to staking rewards, are no longer paid out.
Scams are also on the rise, and gas (or transaction) fees haven’t budged.
What’s Next for Ethereum?
When co-founder Buterin addressed the audience during an Ethereum Community Conference in July, he noted that “Ethereum 2.0” would still only boost the platform from 40 percent to 55 percent completion. Unveiling the roadmap ahead, he foreshadowed what’s to come for the platform post-Merge.
The Surge
Scheduled for 2023, the Surge refers to a mass scaling solution by way of sharding, which will increase network speed. Currently, Ethereum processes about 15 to 20 transactions per second. This will increase to over 100,000 after the Surge is integrated into the mainnet.
More specifically, this transition will keep layer-2 blockchains at low cost, allow more affordable rollups (or bundled transactions) and provide ease of use in nodes operational, ensuring a more secure network, according to the Ethereum Foundation.
The Scourge
With the aim to improve censorship resistance and retain the integrity of the platform’s decentralized structure, this phase focuses on building a consensus layer that does not discriminate against any one user. It involves going up against front-running users that extract and manipulate the order of data within a block using miner extractable values, or MEVs.
The Verge
By way of “Verkle trees,” mathematical proofs that act as data storage units, and stateless clients, users will be able to leverage their locked-up (or staked) Ether to become validators — forgoing the responsibility of having to store an extensive amount of data on their machine.
The Purge
Wishing good riddance to old network history, the Purge aims to simplify the protocol over time in order to eliminate technical debt. While streamlining the network involves reducing the amount of hard drive space node operators must reserve for storage in the meantime, the final destination is to alleviate some nodes from keeping any permanent data history at all.
The Splurge
As Buterin put it in his speech, the Splurge is “all of the other fun stuff.” This stage will fine-tune issues that arise from or were left out of the previous development phases.
