What is Ethereum's Merge? This is Everything You Need to Know
The Ethereum Network is currently preparing to merge, or combine its current proof-of-work Ethereum mainnet with the upgraded proof-of-stake beacon chain. Now, I know that’s a lot of technical talk, but stick with me till the end, it’ll all make sense, I promise.
Currently, Ethereum runs on what’s known as a proof-of-work model. Within this model, network transactions are “validated” by supercomputers, otherwise known as miners, who are competing to solve a complex computational puzzle in order to validate a transaction and earn rewards. Once that puzzle is solved by one of the miners, the data is deemed valid and is added as a new block to the blockchain. The miner who solved that puzzle is rewarded with the cryptocurrency of that blockchain, which in this case is Ethereum. This system was created to make decentralization possible, by theoretically allowing anyone to become a miner, but ironically enough, it has actually created a fairly centralized system when it comes to validating transactions. This is due to a few major shortcomings of this system. First, the difficulty of these puzzles increases with more miners. This causes miners and mining companies to have to invest in higher-end computer software to remain competitive in verifying transactions. This means that with each new miner trying to get their slice of Ethereum, everyone has to spend more money to have a chance at winning, which prohibits a lot of smaller miners from ever having a chance at beating the big wigs in the mining industry. The other main issue is the extremely large amounts of electricity needed to mine Ethereum. I’m talking about 112 terawatt-hours of electricity per year, which, for reference, is more power consumption than what the entire country of the Philippines uses in a year. So, yeah... a lot. This extreme amount of energy consumption has a plethora of environmental consequences that have put a bad taste in the mouth of environmentalists who want crypto mining to be outlawed. For all of these reasons, the Ethereum network is moving to a proof-of-stake model, which promises to be the cleaner, more efficient, and more scalable version of the network. So now let’s break down the proof-of-stake model.
Under this model, the validation of blocks is completed by users who have “staked” their Ethereum in the network, essentially locking their coins in as collateral for the validation process. For each transaction, Ethereum will randomly select a validator out of the users who have staked their coins, and that person is now responsible for validating the transaction. Once the transaction is successfully validated, they are rewarded with Ethereum. However, they must be careful, because if their validation is dishonest and shows any kind of deliberate misbehavior, their stake can get “slashed,” or essentially, they’ll lose the tokens that they initially staked. This is for security reasons and to keep the network as safe and honest as possible. Now, this model is good for a few reasons.
1. It’s much more environmentally friendly, cutting the energy consumption of Ethereum mining by around 99.95%.
2. It’s much more scalable than proof-of-work, because you don’t need some crazy expensive hardware to be a miner, so more regular people can stake their coins, validate transactions, and help to secure the Ethereum network in a much faster and much more efficient way.
However, one problem that it still doesn’t solve is that of decentralization. This is because under the proof-of-stake model, users who stake more coins will be given the chance to validate transactions at an exponentially higher rate than users with less coins. This is because of the way in which Ethereum chooses the validator for each transaction. Think of the validator selection like a raffle, in which people can buy tickets to have the chance to win a prize. All of those tickets are thrown in a hat and one winning ticket is picked at random. If 500 total tickets are sold, but 400 of them were bought by a single person, that person will obviously have a much higher chance of winning than anyone else. The proof-of-stake model is very similar in that the odds of getting randomly selected as a validator increases with the more coins that a user has staked. And with each successful validation, their number of staked coins increases, which creates an exponential cycle for large whales, and potentially could lead to some network dominance. This will undoubtedly be the biggest hurdle for Ethereum as they make this transition.
So now that we’ve got an understanding of what these two models are, and why Ethereum is moving to the cleaner, more efficient, and more scalable, Proof-of-stake model, let’s talk about what changes you’re going to see to the Ethereum network. Unfortunately, this new model is not going to instantly speed up transactions, nor will it lower gas fees. As a run-of-the-mill investor, your daily trades, purchases, and transactions will look pretty much the same as they always have. The real changes are in the background of all of this and have much more of a long-term impact. As I’ve mentioned many times in this video, the proof-of-stake model will significantly reduce the energy consumption that results from Ethereum mining. A 99.95% consumption reduction is absolutely mind-blowing and it is an incredible step towards environmental friendliness for crypto, which will result in a much better look to the public, which will hopefully lead to a lot less scrutiny towards the crypto space. This will allow Ethereum, and other networks, to scale to new heights, bringing in more investors, and in turn, hopefully increasing the value of their tokens.
This merge has been in the works for years behind the scenes and is just now being realized by the general public. It is a 5 step process, and we are in the final moments of step 1, which just so happens to be the most important, and most dangerous step of them all.
Step 1 is known as The merge. This step consists of everything I've already talked about, with Ethereum moving from proof-of-work to proof-of-stake. This step really began in 2020 when Ethereum launched its Beacon network which has been a trial run for the proof-of-stake model. In these past two years, Ethereum developers have tested and tried to troubleshoot any and all issues with this model so that the merge will be as seamless as possible. Although, they are on record saying that this merge is like trying to change a tire of a car while it's going 60MPH down the highway… so this is obviously no easy feat. They are attempting to merge one network with another with both continuing to run at normal speed which provides a number of challenges for developers. However, if and when the merge is successful, we will transition to step number 2, The Surge.
During this step, Ethereum’s network will increase scalability and enable faster, cheaper transactions via a process called sharding, which essentially divides large pieces of data into smaller shards, making it easier for layer 2 blockchains like polygon to operate more efficiently within the network.
Step number 3 is the verge, which will allow all users to become network validators, which will be huge for keeping the network as decentralized as possible.
Step number 4 is the purge, which will remove the old network history to ease network bottlenecks and further reduce the amount of hard drive space required for validators.
Lastly, step number 5 is the surge. This step will consist of final tweaks to the previous steps. And, according to Ethereum founder Vitalik Buterin, this step is the fun part that will make Ethereum into a much more powerful system.
The first step, the merge, is set to happen on September 19th, 2022 as long as there are no further delays in the process, and that is essentially what you need to know about Ethereum’s transition from the proof-of-work to the proof-of-stake model.
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