Table of Contents
What is the Ethereum Merge?
Ethereum is about to undergo perhaps its most transformative upgrade since its inception. The Merge is transitioning from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism, which is used for authenticating transactions.
The transition is expected to occur on September 15th, 2022. The Ethereum Mainnet, which is the current execution layer of Ethereum, is secured by proof-of-work even while the Beacon Chain runs in parallel using the proof-of-stake mechanism. The Merge, as the name suggests, means that Ethereum Mainnet run by PoW is merging with its new PoS consensus layer, the Beacon Chain.
The transition of Ethereum from one mechanism to another is no easy feat and requires extensive multi-step testing. Currently, the Beacon Chain is, however, not processing transactions and is only being used as a staging ground for the PoS upgrade — reaching consensus on its own state by agreeing on active validators and their account balance. The Beacon Chain will become fully operational once the Merge is completed. In the future, the Beacon Chain will coordinate the entire network and act as a precursor for forthcoming scaling upgrades. Read more about the Beacon Chain here
Figure 2: The Ethereum Merge
Image Credit: ethereum.org
2] Difference between PoW and PoS
Cryptocurrencies do not depend on centralized entities to verify the validity of new transactions added to the blockchain network, instead they rely on a distributed network of miners to do so. PoW is a consensus mechanism used to verify and add new validated transactions to a blockchain. To this end, virtual miners around the globe compete to publish new blocks of transactions by being the first to solve cryptographic puzzles using high-powered computers.
Under PoW, each block of the transaction has a hash attached to it. For a block to be validated, the miner has to generate a target hash that is less than or equal to that of the block. The miner first to generate this target hash will be able to update the blockchain and receive the reward. PoW has some significant advantages such as increasing the power and security of the network. On the flip side, however, PoW is energy-intensive PoW, can lead to scalability issues, and makes the transaction process more costly.
This transition could not be more timely given the surge in DeFi platforms and dApps, rising stablecoin usage, and the escalation in NFT minting and sales. The transition to PoS will overcome the deficiencies in the PoW mechanism, especially the scalability issues plaguing Web3’s ecosystem including network congestion and rising gas fees.
Akin to PoW, PoS is a consensus mechanism processing transactions and adding new blocks to the blockchain. However, PoS, does away with the miners, and passes the network’s control to validators, attributing mining power to them based on the number of coins they stake. While PoW requires miners to solve complicated cryptographic puzzles, PoS, on the other hand, requires validators to hold the coins and offer them as collateral for the chance to validate blocks. Those with staked coins become validators.
To become a validator, a specific number of coins have to be staked. For instance, in the upcoming PoS system, validators that stake at least 32 ether with the network are selected to create blocks. The validators for each block transaction are selected using an algorithm. The amount of stake and validation experience, the number of coins staked, and the length of time those coins are in the pool are among the dedicated variables. The more ether they stake the more chance they have of being selected. The miner receives a transaction fee once the block is verified and added to the blockchain.
Figure 1: Difference between PoW and PoS
Image Credit: Investopedia
3] Why is Ethereum moving towards PoS?
Ethereum is moving towards PoS to bring the network closer to realizing its vision of being more scalable, secure, and sustainable. Some of the reasons why Ethereum is moving to proof of stake include:
There is an expected 99% reduction in energy costs associated with processing Ethereum transactions. The energy efficiency increases as dependency on PoW computation decreases. In addition to being an energy-intensive process, PoW generates electronic waste as well, reportedly, computer servers used for crypto mining often become obsolete in 1.5 years and they end up in landfills.
Lowered barrier to entry
PoS will also lead to lower barriers to entry and reduced hardware requirements as validators, unlike miners will not have to repeatedly purchase expensive mining equipment and pay the running costs. In the case of PoS, block validations can actually happen on a typical laptop.
Increased throughput and scalability
There is an expected increase in throughput and transaction speed by a maximum of 10%. In theory, validators can be chosen faster in the PoS model, as they are chosen on the basis of tokens they hold and stake, and not on the basis of solving cryptographic puzzles
In addition, PoS is more scalable compared to PoW as it does not depend on computation requirements. PoS can also potentially resolve scalability issues by introducing new scaling solutions like sharding. Sharding basically splits an entire network, such as Ethereum, into smaller partitions called shards, each with its own transaction data, thereby, decreasing the pressure on the main blockchain, increasing the throughput, and bringing down the gas fee
PoS advances Ethereum crypto-economic security. For instance, under PoS economic penalties for misbehavior make 51% of attacks exponentially more costly for an attacker compared to PoW.
In a 51% attack, a miner or a group of miners attain enough hash power to take control of more than 50% of nodes on a blockchain network. This confers on them the power to alter a blockchain and double spend the crypto involved. In PoS miners will not only have to hold the 51% of staked currency, which in itself is expensive but once they revert a block through the majority they stand to lose all their staked coins - thereby creating a powerful incentive for miners to act in good faith.
4] Implications of the Merge
Users and holders
Despite transitioning into PoS the entire history of Ethereum will remain unchanged and intact, therefore, users or holders of ETH or any other digital assets on Ethereum such as Bancor or Status won’t be required to take any actions related to the funds sitting in their wallet. Though some exchanges may have suspended the trading of certain ETH and ERC20 tokens, all the funds sitting in the hot and cold wallets will become accessible after the Merge.
Staking node operators and providers
Those operating a staking node will have to take into consideration the following three points:
- Before the Merge, the consensus and execution layer were separate networks, with all transactions and user activity on Ethereum happening at what is now the execution layer. At this time it is possible to run an execution client by itself. However, this may not be possible post-Merge. Therefore, Node operators will be required to run both consensus and execution client layers together to ensure users have access to the Ethereum network. Read more about it here.
- Authenticate both execution layer and consensus layer clients with a shared JWT secret so they can securely communicate.
- Set a fee recipient address to receive the transaction fee tips.
Non-validating node operator
The key actions here are to install a consensus layer client aside from the execution layer client. Once again, you should authenticate both clients with a shared JWT secret so that they can communicate with one another secretly.
dApps and smart contract developers
According to Ethereum.Org though the Merge has been designed to have minimal impact, smart contract developers and dApps should make the changes to following into account — block structure, slot/block timing, opcode changes, sources of on-chain randomness, and the concept of safe head and finalized blocks.
5] How will the Merge affect Merkle Science partners and clients?
The Merkle Science team is pleased to support this update and ensure a smooth transition for our clients and partners. We do not expect any impact on our users' ability to use or access our platform.
There is no action required, no configuration changes, and no scheduled maintenance or downtime planned at this time. We do not expect this event to impact other networks or cryptocurrencies that run on Ethereum, i.e. AVAX, COMP, LINK, MATIC, SHIB, and UNI.
The nature of the Merge allows us to seamlessly integrate and support the upgrade with minimal changes required. That being said, we will continue to monitor and maintain transparency throughout the process.
6] Will Merkle Science support any crypto assets created as a result of the Merge?
In the event that an ETH proof-of-work fork occurs after the Merge, our team will review the asset(s) with the same evaluation process we use for any digital asset listed on our platform, which includes:
- Customer usage based on the number of searches
- Technical feasibility and support for the future roadmap
- The commercial viability of supporting the asset
7] Learn More
We will continue to inform you about any changes related to the Ethereum Merge event. Should you have any questions please feel free to reach out to us. We thank you for your continued support as we build the infrastructure necessary to ensure Web3’s safe and healthy growth.