Table of Contents
- What Exactly is The Merge?
- What’s Proof of Work?
- How is Proof of Stake Different?
- The Removal of Ethereum Miners
- Why The Merge Matters
- A New Era for ETH
The mythical merging is finally happening. And after a rough year for the crypto world, Ethereum’s long-awaited software update could give the Web3 space a much-needed boost while also helping the environment in a big way.
The change has been in the works for years. It is technically complicated and has caused a lot of debate. It is likely to be the biggest event in the crypto
space for a long time. So, let’s talk about the merge, why it’s important, and what it means for the crypto space’s future.
What Exactly is The Merge?
The Ethereum blockchain is the technology that makes it possible for many crypto projects to existing. At its most basic level, the merge is an update to the Ethereum blockchain that will reduce its impact on the environment, make the network more secure, allow Ethereum developers to add new features, and make the chain more scalable.
So, just what is merging? The update will bring together the Ethereum mainnet and the Beacon Chain. The Beacon Chain is a separate blockchain made in 2020 and has been running alongside Ethereum since then.
Developers call the execution layer of the blockchain network the Ethereum mainnet. Execution layers make a place where applications can live and where transactions related to those applications can be handled. You can think of this as the technology that allows data to be moved on the blockchain. You can do a transaction with the help of execution layers.
The consensus part of the system is the Beacon Chain. The clue is in the name: this layer is in charge of enforcing network rules and ensuring that transactions that “want” to happen in the execution layer are valid. Because blockchains are decentralized public ledgers, they need a way to verify or invalidate the transactions within them.
Most computer computers have to agree that the transaction is real to do this and make sure that no one fakes a transaction on the public ledger and steals cryptocurrency that doesn’t belong to them. This is how a blockchain runs without any outside help.
Right now, transactions on the Ethereum mainnet are checked by a system called Proof of Work. By joining the Beacon Chain, Ethereum can replace its Proof of Work consensus system with Proof of Stake. And that means a lot.
What’s Proof of Work?
Proof of Work is why blockchain technology has a bad reputation among environmentalists. The combined electricity consumption of the Bitcoin and Ethereum blockchains is more than 317 TWh hours per year, which positions them precisely in the middle of the electrical energy consumption range between Italy and the United Kingdom.
The Proof-of-Work (PoW) consensus mechanism uses a lot of energy because it is hard to compute and takes time. This is called “mining.” Nodes in the network, which are often big servers that can take up whole warehouses, use cryptographic algorithms to solve complicated math problems and do the mining.
The process is designed to use a lot of energy. People are less likely to try to mess with the ledger if they have to use many computer resources.
How is Proof of Stake Different?
The Beacon Chain will introduce Proof-of-Stake consensus to Ethereum, orders of magnitude less energy-consuming than Proof-of-Work consensus or 99.5% less intense. PoS makes this possible because nodes in the network don’t have to do complicated math. Instead, it ensures the network is safe by making users stake some of their cryptocurrency in the hopes that the system will pick them randomly to be a block validator.
The Removal of Ethereum Miners
One of the main reasons many people liked The Merge was that it immediately affected how much electricity the network used. The website for the Ethereum Foundation says that the amount of energy used did go down by more than 99.95%.
The Merge took away all of the economic reasons to mine on the main Ethereum network, but it didn’t take away the reasons for mining equipment to point its servers toward other networks that work the same way. Ethereum Classic (ETC), created after a network split in 2017 and still used as an alternative to Ethereum with proof-of-work, is one place where the hash rate has temporarily gone up.
Many people will say that the movement of hash rate to other networks shows that Ethereum may not have cut down on how much energy digital asset networks use, but it seems likely to work in the long run. Graphics Processing Units (GPUs) can be used for a lot of different things, so the mining equipment that’s already out there will likely find other uses. However, there’s much less reason to make more GPUs for digital mining assets.
Why The Merge Matters
As of this writing, Ethereum is, along with Bitcoin, one of the most popular blockchains in the world, with a market cap of almost $190 billion. Aside from the millions of NFTs it verifies, the blockchain is also used by many other decentralized apps and financial systems. Millions of people care a lot about what happens to the network.
In addition to being better for the environment, switching to proof of stake benefits people who want to join the staking community by making it easier for them to join. Crypto mining requires expensive equipment to solve problems that have to do with cryptography. Staking, on the other hand, has nothing to do with that. Even a laptop made just for the job could do the job. This could mean that more people could be validators in Ethereum, making it less controlled by a few people.
Another problem is safety. There are reasons to think that the merger will make Ethereum safer, but every crypto coin has two sides. It’s hard to say that one thing is more secure than another because it depends on your threat model, and security is a complicated topic. But the proof of stake will change the way Ethereum’s security works a little bit. This could be good in some ways and bad in others.
Counteracting this risk is a practice known as “slashing,” in which a validator loses its staked tokens. If a group has 51% of the staked ETH needed to start messing with the ledger, which would be very expensive to do, the network can cut their tokens, making the whole thing pointless. Proof-of-work systems don’t have this way to reward good behaviour because you can’t “slash” someone’s GPU crypto mining equipment.
The blockchain also stands for the whole crypto movement. A successful merge could be just what an ecosystem is going through; yet another crypto winter must get back on its feet. But not everyone is happy about the merger, even though many people see it as a big win for Ethereum and its effect on the environment. The switch will have a direct effect on the thousands of ETH miners around the world who make money by doing PoW calculations. The merge will make it, so they don’t need to exist anymore.
A New Era for ETH
The Merge was a big technical achievement and one of the most important things to happen in the history of digital assets. Its effects on the Ethereum network and the ether asset probably won’t be fully known until the current macro headwinds die and a new cycle of crypto adoption, innovation, and possible price growth begins. Even though there are concerns, especially about centralization, there are a lot of new ideas and improvements that can’t be fully understood until people start using these networks again. The shift toward using less energy and being more friendly to ESG could have big effects on the flows of ESG-sensitive assets, but this may take time. A new adoption cycle could increase the demand for block space, leading to higher yields for validators and a net decrease in ether due to higher base fees and more ether being burned. No matter how these possibilities turn out, ETH is in a new era after the Merge.
