Ethereum Merge was one of the most anticipated events in the crypto industry. There was a lot of buzz surrounding the event and understandably so, because Ethereum is one of the largest and most important blockchain networks. The Merge is described as the most significant Ethereum upgrade and marks a fundamental shift in the way Ethereum functions.
ETH Merge was implemented in 2022 and is a major event in the history of blockchain technology. But what exactly does Ethereum Merge signify for the average trader? What is ETH merge all about? What will happen to Ethereum after Merge? This article will answer all these questions and more for you.
What is Ethereum Merge?
Ethereum Merge is a network upgrade that joined the Ethereum mainnet with the Beacon Chain. It shifted the Ethereum blockchain from the mining-based Proof-of-Work(PoW) consensus mechanism to the staking-based Proof-of-Stake(PoS) mechanism. Ethereum Merge represents a transition from the energy-guzzling PoW system to a more sustainable PoS mechanism.
Proof-of-Work vs. Proof-of-Stake
To understand Ethereum Merge and its implications, it is first important to understand the importance of creating consensus in blockchain transactions and the two most common methods of establishing consensus- Proof-of-Work(PoW) and Proof-of-Stake(PoS).
As blockchains are decentralized ledgers running on a peer-to-peer network, participants or nodes need to verify transactions before a new block is added to the existing blockchain.
There are certain protocols for validating a blockchain transaction and these protocols are known as consensus mechanisms. Most blockchain networks including Bitcoin use the PoW mechanism though PoS is increasingly being seen as a better alternative to the former.
In PoW, participants or miners compete with each other to solve complicated puzzles so that they get a chance to validate a transaction. Miners use specialized equipment to compete against each other for the mining reward. PoW, however, is a very energy-intensive system that is not ecologically sustainable.
In the PoS system, there are no miners but validators or stakers. It replaces the competitive aspect of the PoW mechanism with an incentive-based system. Broadly, validators have to stake Ethereum(ETH) as collateral to get a chance to validate transactions and add new blocks to the chain. Validators are rewarded for their efforts after the transaction is completed.
PoS is more scalable and energy-efficient than the PoW mechanism. The former is expected to bring a 99% reduction in Ethereum’s energy consumption.
What happens to Ethereum after Merge?
Ethereum Merge was a major event in the crypto world with widespread implications not just for the Ethereum network but for the whole crypto industry. It has significantly changed the shape of the Ethereum network and also affected ETH as an asset.
The introduction of staking, changes in the burn mechanism, and a general reduction in coin issuance are major changes associated with The Merge that would affect crypto traders and investors.
At the same time, The Merge has helped Ethereum reduce transaction verification time and increase the speed at which new blocks are added to the chain. This will in turn lead to an overall increase in the transaction speed- a departure from the time Ethereum was known for network congestion and high gas fees.
As blockchain and cryptocurrency have long been infamous for being energy-guzzling technologies, The Merge is expected to significantly bring down Ethereum’s energy consumption making it more sustainable and scalable. Ethereum will also be more cost-effective as the electricity costs would come down.
In a way, Ethereum Merge would also help in making blockchain more accessible as people don’t need specialized equipment for mining operations and don’t have to bear heavy electricity costs for running said operations. Plus, the technical barriers to entry are far lower in PoS systems making it possible for the average person to easily get started as a validator or staker.
Why is the Ethereum Merge Good?
The Merge is a major upgrade for Ethereum as it is expected to steer the network in new directions. Let us now discuss a few reasons why the Ethereum Merge is good for the network and the crypto industry.
Reduced Energy Usage
Ethereum is known for being one of the least energy-efficient cryptocurrencies. As per a Crypto Carbon Ratings Institute(CCRI) report, shifting to the PoS consensus mechanism will reduce Ethereum’s energy usage and carbon footprint by 99%.
Insider attacks are way less likely on a PoS network. This is because every new validator that is added leads to a dilution of power on the blockchain making it hard to manipulate the system. It is, therefore, very difficult for a hacker to co-opt the minimum 50% of the network needed for a fraudulent transaction on a blockchain network.
Increased access to Ethereum will help in reducing centralization on the network. PoW-based blockchains generally are more centralized because miners often pool their resources and form large groups to increase their chance of winning the mining reward. This is eliminated in the PoS system as new validators can easily be added.
An important goal of Ethereum Merge is scalability. This is mainly achieved by the implementation of sharding and roll-ups. In sharding, the database is horizontally split and transactions are parallelly processed to increase network speed.
Using roll-ups, transactions are bundled and processed on the sidechain before they are reported to the mainnet. This reduces the load on the mainnet and, therefore, brings down the gas fees.
After the implementation of Ethereum Merge, the rate at which new coins are issued is lower than the rate at which coins are burned. Staking further removes coins from circulation and while new coins are issued as staking rewards, the rate is far lower than the one issued for miners.
This is expected to help counter inflation and maintain the value of ETH by regulating its supply.
Cons of Ethereum Merge
Despite its ambitious nature, there are some concerns surrounding Ethereum Merge that we need to discuss:
Despite claims of more decentralization, critics are worried that The Merge may lead to even more centralization of Ethereum. Most casual investors are not going to stake 32 ETH to become a validator leaving control in the hands of a small group of big players.
Shifting to PoS makes the network more vulnerable to denial-of-service(DoS) attacks as network proposers are known ahead of time. PoS is less “battle-tested” than PoW increasing the risk of unexpected and hitherto unseen cyber attacks.
The Merge is often known by the moniker “ETH 2”. This confusion regarding original ETH and a supposedly new cryptocurrency called ETH 2 can lead to a proliferation of scams where scammers steal users’ ETH by taking advantage of this confusion.
The Bottom Line
Ethereum Merge is a major upgrade that will make the network faster, more efficient, and cost-effective. However, the introduction of new features does not stop with The Merge. There are other phases such as Surge, Scourge, Verge, Purge and Splurge planned that would significantly up Ethereum’s game.
The Merge does not affect Ethereum traders or the way apps function on Ethereum. It is simply a transition towards a more sustainable framework that reduces energy usage, improves cost-effectiveness, and makes it easier for people to participate in the Ethereum network.