Ethereum

The Ethereum Merge: What You Need To Know

Ethereum 2 on whiteboard

L1 smart contract platform Ethereum was first launched in 2015 by a 21-year-old named Vitalik Buterin. The Ethereum whitepaper was released in 2014 and Ethereum is second to Bitcoin in market capitalization. While Bitcoin has undergone much scrutiny for its energy consumption (Bitcoin mining consumes more energy than Belgium), Ethereum will now consume far less energy than Bitcoin and other POW coins with the upgrade to proof-of-stake. The upcoming September network upgrade will reduce Ethereum's energy consumption by a formidable 99.5%. One of the most anticipated network changes to date, Ethereum going to proof-of-stake, will have a significant impact on the future of the crypto industry.

Ethereum is calling this process ‘The Merge’. According to Ethereum’s website,

“The Merge is the most significant upgrade in the history of Ethereum. Extensive testing and bug bounties were undertaken to ensure a safe transition to proof-of-stake.”

What changes in POS?

If you’re not familiar, proof-of-work is a concept invented in 1993 to deter DOS attacks and other service abuses by requiring work from a service requester, usually processing time by a computer. It is widely utilized in cryptocurrency mining for validating transactions and mining tokens. Proof-of-stake only requires validators to hold and stake tokens. Currently, 10% of all gas fees being paid are currently going to miners in the form of a tip, while the rest is burnt. In proof-of-stake, transaction fees will start going to validators instead of miners. Proof of stake implements randomly chosen validators to make sure the transaction is reliable, compensating them in return with cryptocurrency.

Ethereum has already been using proof-of-stake in the beacon chain, which initially came in 2020 separately from the mainnet. The Ethereum mainnet continues to be secured by proof-of-work, even while the beacon chain runs in parallel using proof-of-stake. There are no recorded transactions on the beacon chain.

The approaching merge is when these the mainnet and beacon chain finally come together, and proof-of-work is replaced permanently by proof-of-stake. The beacon chain will act as the engine of block production. Mining will no longer be required to produce valid blocks. Instead, proof-of-stake validators will assume this role and will be responsible for processing the validity of all transactions and proposing new blocks. Basically, Eth1 and Eth2 will be merged into one chain, where Eth1 is the execution layer which handles transactions, and Eth2 is the consensus layer, which handles proof-of-stake. The Merge is proposed to be released on September 19, 2022, but this could change depending on the results of the trial run taking place in the near future.

Stakers must deposit at least 32 Ethereum to become a validator. However, there are serious consequences for stakers that are dishonest or sloppy. This means that if you show in any way that you have ill intentions, you could lose all your deposited ETH. This is known as "slashing." Proof-of-stake has a penalty-system not seen in proof-of-work. Ethereum is planning to secure the network through incentives rather than hardware.

You can use your laptop to put down a stake—a certain amount of crypto locked in the network. In layman’s terms, this gives you the chance of being selected by a random process to validate a block and earn crypto rewards and fees. If you try to play the system, it will punish you and destroy or slash some or all of your stake.

Wired mentions the concept of “sharding”. Sharding will:

“Segment the network into many parallel chains. This will unclog the network, which currently only supports 30 transactions per second and charges users large transaction fees. If all goes planned, Ethereum should eventually reach an output of 100,000 transactions per second.”

This will inevitably reduce the energy consumption and possibly set a positive goal for other projects. It is unlikely that Bitcoin will adopt proof-of-stake because of its ethos and emphasis on security, though, many other altcoins like Zcash likely will. In other news, Vitalik Buterin has a book titled “Proof of Stake” being released in September. I wonder if this is a coincidence...

Cryptohopper