All You Need to Know About the Merge of Ethereum
During the developer conference call on July 14, the primary developer of Ethereum, Tim Beiko, confirmed that the Ethereum merge would be completed around September 19, while the third and final Goerli testnet merge is expected in the second week of August.
As of now, Ethereum is the largest and the most complex blockchain ecosystem in the world. The Merge is an unprecedented and important Ethereum upgrade. If it goes smoothly, Ethereum will complete the conversion of the consensus mechanism from PoW to PoS for the first time, and will also provide a valuable example for other blockchains. As an investor, understanding the Merge of Ethereum can pave the way for future investment decisions, allowing us to flexibly respond to the opportunities and challenges brought about by the Merge. This article will introduce in detail the sectors that need to know in the Ethereum Merge, so that you can quickly clarify the concepts.
What is Ethereum Merge
"Merge" is the name of the process that the Ethereum blockchain transfers from using a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism. It is called the Merge because it is a merge of two separate blockchains currently running in parallel: the Ethereum mainnet and a special-purpose blockchain called the "Beacon Chain".
The Beacon Chain was launched on December 1, 2020, and its sole purpose is to be a proof-of-stake (PoS) blockchain. There are no transactions, tokens or Defi applications on the beacon chain, and actually it is an empty chain that can merge with the Ethereum blockchain and replace the original PoW consensus mechanism.
How do we understand the process of Merge?
Since its launch, the beacon chain has been running in parallel with the Ethereum mainnet and staying independent of each other. The beacon chain is a blockchain based on the PoS mechanism. The nodes responsible for block generation and transaction verification are randomly selected from the validators who staking ETH. Therefore, from the first day of launch, the beacon chain supports the function of ETH staking (stake) and storage (deposit). By staking 32 or more ETH, you can become a validator and obtain staking income. The currently staked ETH will be in a locked state, and the withdrawal of funds will not be available until the Merge and upgrade are officially completed.
At this stage, the functions of the beacon chain are very simple, including pledging ETH, randomly selecting nodes to generate blocks and verify transactions, and rewarding and punishing/slashing nodes. These functions only allow to maintain the normal operation of the network, and functions such as smart contracts are not supported. In contrast, the Ethereum mainnet is already a fairly mature PoW chain, with tens of thousands of applications and a large amount of funds on the chain. When the beacon chain is merged into the Ethereum mainnet, the PoW consensus layer of Ethereum will be replaced by the PoS beacon chain. The beacon chain may assume the responsibilities of transaction execution and data availability, and the transaction status is inherited from the original Ethereum mainnet.
The picture comes from the official website of Ethereum
From the current actions, Ethereum wants to improve the performance of the mainnet by transforming the consensus mechanism (PoS), optimizing the efficiency of data storage and verification, and technologies such as Rolllup and sharding will also be further applied. In order to promote the transition of the consensus mechanism from PoW to PoS, Ethereum has also set up a "difficulty bomb". The "difficulty bomb" will increase the difficulty index of PoW calculation, thereby dissuading miners and ensuring that Ethereum becomes a pure PoS chain after the Merge.
What's the reason for Ethereum Merge?
- Prepare for sharding technology in Ethereum
Sharding technology can divide the blockchain network into several sub-networks. Each sub-network will contain a part of nodes. The data storage and transactions in the network will be randomly allocated to each shard for processing. In this way, each node only needs to handle a small part of the work, and transactions on different shards can be carried out at the same time, thus the transaction speed of the entire network is faster. Using the coordination of the beacon chain, Ethereum's network load will be distributed among 64 independent shards, and these shards process information at the same time, making the overall transaction time faster and more efficient.
- More friendly to the environment
PoW has very high requirements for machines (miners) and electricity. Taking Bitcoin as an example, the annual power consumption of the Bitcoin network is about 121.36 billion terawatt-hours (TWh), which exceeds the annual power consumption of Argentina, the Netherlands, and the United Arab Emirates. After the Merge, the Ethereum network using PoS will reduce power consumption by more than 99.95%.
- Better security and decentralization
Compared with the complex machine configuration, operation and maintenance of PoW, the participation threshold of PoS nodes is lower, especially after more and more platforms support ETH staking, people who do not plan to invest high amounts of money can also become part of the node. In terms of security, Vitalik has issued a document to demonstrate that the attack cost of PoS network is higher than that of PoW network, and the recovery ability of PoS is also better than that of PoW network after being attacked. However, these existing views need further exploration in future practice.
What's the impact of Merge for ETH investors
The Merge changes the ETH economy mainly in two aspects: one is to reduce the issuance of ETH, and the other is that ETH will gradually transform into a stable asset.
PoS can provide the highest level of blockchain security at a low cost, and will reduce the amount of ETH issued to maintain security (that is, the cost paid to miners), allowing Ethereum to decrease the proportion of ETH issued each year from 4.3% to 0.43%. Because PoW miners usually tend to sell most of the rewards they receive immediately, and over time, the portion sold accounts for almost 90% of the total mining volume, PoS can change this status quo and reduce new ETH issuance by more than 90%.
A decrease in new ETH issuance generally means that the price of the currency will rise, and the fees now paid to miners will be transferred to the staking/validator, making the staking yield higher. IntoTheBlock calculates that, with fee incentives, the current 3.8% annual return will rise to 7.4%. Combining these factors, the demand for ETH will further increase, becoming a stable income asset.
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