Ethereum The Merge: everything you need to know about the merger that will shake up crypto

The Merge is a major change for the Ethereum network, which is abandoning its Proof-of-Work transaction authentication system similar to Bitcoin for the Proof-of-Stake mechanism. This new system could bring many benefits, especially regarding the impact on the environment. However, it could also wipe out hundreds of billions of dollars. Find out everything you need to know about this merger that will shake up the cryptocurrency world!

Ethereum is the second most popular blockchain behind Bitcoin, and many cryptocurrencies are based on this network. However, with The Merge, this blockchain is about to undergo a drastic change

Table of contents

What is The Merge?

The Merge refers to the transition of the network Ethereum to proof-of-stake (PoS) Ethereum’s new authentication system for crypto transactions, also called ” consensus mechanism “.

This new system will replace the “Proof-of-Work” (PoW) currently used. Initially introduced by Bitcoin, this mechanism has the disadvantage of consuming much more energy.

Since 2020, Ethereum has already a PoS network called Beacon Chain. However, this network is not yet used to process transactions. It is mainly used to allow the computers making up the Ethereum network to prepare for the big upgrade to PoS.

This transition therefore requires a fusion between the Beacon Chain acting as a layer of ” consensus and the main PoW network serving as a layer ” execution “. That is why this change is called The Merge “(the merge).

Proof-of-Stake (PoS) vs. Proof-of-Work (PoW): what are the differences?

Proof-of-Stake (PoS) and Proof-of-Work (PoW) systems differ in the way they decide who gets to register the next block of transactions on the network.

With the PoW system currently in use, Ethereum miners are in competition to publish blocks in a race to solve cryptographic puzzles. This system can be found in other cryptocurrencies, starting with Bitcoin.

With the future PoS system, the validators betting at least 32 ethers (or about 50 000 dollars) with the network will be randomly selected to create blocks. The chances of being selected increase proportionally to the number of validated ethers.

In each of these two systems, the miner or validator wins a block is rewarded with a combination of transaction fees and newly minted ETH. In addition, PoS validators also receive rewards for other activities that help secure the network.

Advantages and disadvantages of PoS

According to the Ethereum Foundation, the non-profit organization funding the development of the Ethereum ecosystem, the PoS system will reduce the energy consumption of the Ethereum to about 99.95%.

In addition, PoS supporters believe that PoW mining centralizes control in the hands of a handful of individuals able to afford powerful crypto ASIC mining rigs. With PoS, control belongs to those who bet crypto with the network and attacks are economically impossible.

In contrast, PoW advocates claim that PoS staking has its own risks centralization and security risks. According to them, this new system potentially allows malicious actors to “buy” control of the network directly.

In addition, they point to the fact that PoS has not yet been tested. On the contrary, PoW has already proven its resilience as it is used by the two largest blockchain networks…

What will be the impact on Ethereum?

The impact of The Merge on Ethereum will be numerous. First of all, this new mechanism will allow to slightly accelerate the speed of transaction of the network.

While Ethereum blocks are currently created every 13 or 14 seconds on the PoW system, PoS blocks will be created at regular intervals of 12 seconds after The Merge.

This is a tiny improvement, which most users won’t notice. The Ethereum network will remain behind its rivals like the Solana and Avalanche blockchainsbut well ahead of Bitcoin, which has a new block mined every 10 minutes on average.

Unfortunately, this system change will not reduce transaction costs. Future upgrades to the network, such as danksharding and proto-dankshardingon the other hand, could contribute to this. However, they are only planned for 2023 at the earliest.

For the time being, the best way to reduce Ethereum transaction fees is to use rollups These third-party networks such as Arbitrum and Optimism group transactions and process them separately from the main network.

It is not known for the moment if The Merge will cause the price to increase of the Ethereum token. There are many variables and unknowns that prevent any prediction.

For several years, the Ethereum community has been waiting for The Merge as a massive improvement to the network’s core technology. In particular, it could address environmental impact issues, and introduce a new form of utility for the ETH token with staking.

This merger will also bring about changes in the frequency at which ether is produced and the way it is distributed. These upheavals can be perceived positively or negativelyand there is no guarantee that they will cause the price to rise. Furthermore, it is possible that The Merge is already factored into the ETH price by speculation…

Rest assured: the current ETH owners will not need to claim their “PoS ETH” or “ETH2” tokens. The balance will remain intact, and the network can be used as if nothing had changed.

On the other hand, Ethereum software providers and operators of network nodes will need to update their software to ensure that they are communicating with the most recent version of the network.

What consequences for Ethereum miners?

After the merger, Ethereum miners will no longer be able to mine new blocks on the network. This can be frustrating, especially for people who have invested in expensive computers optimized for mining.

Many of them will abandon mining and “bet” ether to receive rewards on the PoS network. Those who wish to continue using their mining hardware will have to turn to another PoW network like Ethereum Classic.

A number of Ethereum miners, resistant to the change in mechanism, have announced a “fork” project. Their plan is to form a new network from the Ethereum PoW chain, cloning the main blockchain to continue operating their own PoW versions of Ethereum after the merger.

People with ETH before the merger could automatically receive a certain balance of tokens on these new PoW forks. The process for claiming these tokens may differ from channel to channel.

Centralized exchanges like Coinbase will need to list forked tokens to allow them to be claimed, but it is unclear if they plan to do so. However, Ethereum community leaders are calling for be careful with these PoW forks which could be large-scale scams…

Towards a failure of The Merge?

Ethereum’s transition from Proof-of-Work to Proof-of-Stake will be a big first. If successful, this merger will constitute a feat of engineering and human coordination.

On the other hand, in case of failure, hundreds of billions of dollars could disappear. Recall that the market capitalization of Ethereum reaches almost $ 200 billion, and many other tokens are based on this network.

In any case, the developers of the Ethereum network have conducted more than a dozen tests and simulations of The Merge with success. The risk of failure remains, but is highly unlikely.

How to become an Ethereum validator or staker?

Anyone who “bets” 32 Ether can become a validator. In fact, it is already possible to bet and earn rewards by validating the Ethereum Beacon Chain PoS.

Increasing the stake will allow you to receive larger rewards. However, it will impossible to withdraw until an update scheduled between six and twelve months after The Merge.

The staking requires technical skills. In the event of an error or disconnection, the bet can be “slashed” which means that it will be reduced.

People who do not have enough blockchain expertise can bet through centralized services like Coinbase or Kraken. In addition to taking care of the technical part, these services allow you to start staking with less than 32 ETH in exchange for a portion of the rewards.

There are also liquid staking tanks such as Lido and Rocket Pool allowing to start betting with less than 32 ETH. Users of these services receive “Staked ETH” tokens that are priced slightly lower than regular ETH.

The ether bet will remain locked on the network for six to twelve months after the merger. It will then be possible to withdraw the ETH bet, and the rewards earned.

Why is The Merge important for all cryptocurrencies?

The Merge is not only important for Ethereum holders. Any The cryptocurrency industry has its eyes on on this event, as its impact will be resounding.

First of all, the hash rate of the Ethereum network will plunge to zero since Proof-of-Work mining will cease. This may put even more public pressure on Bitcoin’s colossal energy consumption. Similarly, Bitcoin will now be the only cryptocurrency in the crosshairs of regulators targeting energy-intensive PoW blockchains.

Early September 2022, a report from the White House on cryptocurrency and its energy use praised Ethereum and sounded the alarm on Bitcoin.

According to the report, ” Bitcoin accounts for 60-77% of energy consumption total cryptocurrencies globally, compared to 20% to 39% for Ethereum. There have been repeated calls for PoW blockchains to adopt less energy intensive mechanisms. The most prominent response was the promise of the launch of Ethereum 2.0 using a PoS mechanism “.

Furthermore, The Merge will undoubtedly have an impact on Cryptocurrencies described as “Ethereum Killers”. such as Solana, Cardano, Avalanche or Polkadot.

For now, as the merger approaches, these Proof-of-Stake cryptos seem to be enjoying the hype and their value has increased over the last few days. However, most of them have so far presented themselves as green alternatives to Ethereum. They will therefore lose their main advantage following The Mergesince Ethereum will also use PoS.

Finally, The Merge could be spoiled by regulation. While the U.S. Securities and Exchange Commission still refuses to see Bitcoin as a security, it does not give its opinion on Ethereum. Even if the merger is successful, an attack by regulators on ETH and other tokens based on this blockchain would have serious consequences…

Date of The Merge

The Merge should take place around September 15, 2022. It is however impossible to give a fixed date.

Each block in the PoW Ethereum network carries a difficulty numberindicating how difficult it will be for miners to add it to the network. The merge will not take place on a specific date, but when the cumulative difficulty of all mined Ethereum blocks reaches a certain number : the ” total terminal difficulty “(TTD) or total terminal difficulty.

In August 2022, the Ethereum core developers set the TTD at 58,750,000,000,000,000,000,000,000. This number is expected to be reached around September 14 or 14, 2022but the difficulty and frequency of creating blocks varies over time.

As soon as the final PoW block is mined, The Merge will occur automatically. The network will then continue to operate with the creation of the first PoS block. Users will not need to intervene.

On Google, a countdown appears when one types “Ethereum Merge” in the search bar. A black panda and a white panda are slowly approaching, and will become one when The Merge takes place. The fact that Google has created a countdown specifically for this event is a testament to its critical importance…

The future of Ethereum after The Merge

After the merger, Ethereum developers will continue to work on the open-source network. From improvements are planned in the coming months and years for transaction costs, speed and security.

One of the priorities of the developers will be sharding, aimed at improving the rhythm of Ethereum transactions and reduce costs by spreading network activity across multiple “fragments”. This system can be compared to the multiple lanes of a highway.

Another planned change on the roadmap concerns Proposer Builder Separation (PBS)and aims to separate the “builders” or constructors adding transactions to blocks from the “proposers” who put them forward to receive network approval. The purpose of this modification is to solve the problem of the maximum extractable value of Ethereum.

Originally, these enhancements were to accompany The Merge and form the “Ethereum 2.0” or “ETH2” update.. However, they were postponed following the success of third-party rollups to temporarily remedy the problems.

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