The Merge (Ethereum)

What is The Merge (Ethereum)?

The Merge refers to the Ethereum blockchain’s transition from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism.

Advertisements

The Merge was completed on 15 September 2022.

Techopedia Explains

To understand The Merge, we first need to understand the PoS consensus mechanism.

PoS consensus mechanism is a process where blockchain nodes (computers validating and recording transactions) reach an agreement on the state of the ledger.

In a PoS system, block validators deposit (also known as stake) a certain amount of cryptocurrencies into a smart contract. This deposit acts like collateral that can be destroyed if a validator act dishonestly.

Validators replace miners, which are used in PoW blockchains. Validators are selected at random to create new blocks. After a new block is created, the validator is rewarded with new crypto tokens.

Beacon Chain to PoS Mainnet

The Merge was a multi-year process. The first major step was the creation of the beacon chain on 1 December 2020. The beacon chain was the initial PoS blockchain created to run alongside the original PoW Ethereum blockchain.

At the time of its creation, Ethereum was still running with the help of PoW miners. The beacon chain was not processing mainnet transactions – instead sandboxed to reach consensus on its own state using real-world data.

Over the next two years, the beacon chain was tested rigorously to ensure that Ethereum’s transition to PoS consensus was seamless.

On 15 September 2022, the PoS beacon chain merged with the main net, and PoS permanently replaced PoW. Hence, the process was dubbed “The Merge.”

Here is an analogy from the official Ethereum website to understand how The Merge works:

“Imagine Ethereum is a spaceship that launched before it was quite ready for an interstellar voyage. With the Beacon Chain, the community built a new engine and a hardened hull. After significant testing, it became time to hot-swap the new engine for the old one mid-flight. This merged the new, more efficient engine into the existing ship enabling it to put in some serious light years and take on the universe.”

Why Did The Merge Happen?

Reducing energy consumption and improving scalability were the two main reasons behind The Merge:

  • Energy consumption

The PoW blockchain industry has faced heavy criticism for its energy-intensive operations, so much so that European legislators tried to ban PoW cryptocurrencies in 2022 (the proposal was ultimately rejected). The New York Times reported in 2021 that Bitcoin – the biggest PoW blockchain in the world – consumed more electricity annually than Finland.

Ethereum’s shift to PoS significantly reduced its carbon footprint, making it a greener and more environmentally-friendly blockchain.

  • Scalability 

Achieving mass scale is the dream of public blockchains like Bitcoin and Ethereum – but high gas fees and low transaction throughput on PoW Ethereum were hindering its scalability progression.

Hence, Ethereum developers saw a transition to PoS consensus as a way to set up Ethereum for future scalability upgrades that are not possible on PoW blockchains.

What Were the Positive Effects of the Merge?

Staking

The Merge introduced staking on the Ethereum blockchain. Today, anyone with ETH can lock their tokens in a staking contract and earn interest on their deposit. Think of it like a saving account in your local bank. 

Earning interest on your idle PoW cryptocurrencies (e.g., bitcoin, ethereum classic) is not as seamless and easy. On the PoS blockchain, the staking mechanism is there by default and is at the heart of the blockchain.

ETH holders can stake their tokens in various ways: solo staking, pooled staking, via staking services, and via centralized crypto exchanges. At the time of writing, the current ETH staking yield was at an annual percentage rate of 4.3%.

Ease of Participation

Ethereum’s transition to PoS made it easier than ever to participate in the day-to-day operations of the blockchain. PoW networks like Bitcoin require high investment in the form of mining rigs, electricity, and a workplace to become a miner.

In contrast, a user can become a validator on Ethereum by depositing 32 ETH ($59,405 at the time of writing) and running three separate pieces of software. More importantly, the software does not require specialized computers and can run on personal computers and laptops.

Reduced Energy Consumption

Before, Ethereum depended on miners to keep its network secure. Miners used specialized mining rigs, which required constant energy to function and to get the chance to earn block rewards.

Today, due to the elimination of miners, the energy consumption of the Ethereum network has been reduced by over 99% compared to its PoW version.

Future Scalability

The Merge set the stage for Ethereum to scale in ways that are not possible on PoW blockchains. 

Ethereum is now preparing for its next chapter, dubbed “The Surge” where scalability becomes the priority. Ethereum has earmarked rollups as the go-to solution to achieve mass scale while maintaining decentralization and security.

EIP-4844, or proto-danksharding, is the immediate next step for Ethereum. The network will introduce temporary data blobs to each block which is expected to lower gas fees and increase throughput.

Following the completion of proto-danksharding, Ethereum is expected to work towards full chain sharding.

Drop in ETH Issuance and Lower Circulation

The drop in ETH issuance was a side-effect the market was most excited about. It was estimated that the ETH emission would reduce drastically under the PoS system compared to its former PoW system. 

According to ethmerge.com, Ethereum issued 4.3% of the total ETH supply every year. This figure was estimated to drop from 0.3% to 0.4% under the PoS system.

Moreover, the introduction of staking is said to have lowered the volume of circulating ETH in the market, as more ETH is locked in staking contracts. The lower ETH emissions and reduced circulating volume after The Merge are expected to support ETH market prices by reducing supply.

The Bottom Line

The Merge was not just a technical upgrade. It represented Ethereum’s commitment to sustainability and progress.

By doing so, Ethereum solidified its position as the leading smart contract blockchain in the world by executing a seamless transition from PoW to PoS.

Most impressive of all? How “uneventful” and smooth the Merge event was.

Advertisements

Related Terms

Mensholong Lepcha

Mensholong Lepcha is a financial journalist specializing in cryptocurrencies and global equity markets. He has worked for reputed firms such as Reuters and Capital.com. Fascinated with blockchain technology, NFTs, and the contrarian school of investing, Mensholong has expertise in analyzing tokenomics, price movement, and technical details of Bitcoin, Ethereum, and other blockchain networks. He has also written articles on a wide range of financial topics including commodities, forex, central bank monetary policies, and other economic news.