The Ethereum Merge is Coming
The final steps of the eagerly-awaited upgrade are nearly here
2022 has already proven to be an eventful year for crypto, from the massive collapse of the Terra ecosystem, worldwide talks on regulation, and increasing public adoption in various forms—from the rise of move-to-earn decentralized applications (dApps), to circumventing government sanctions in war-torn states. And yet, the latter half of 2022 still holds one of the most awaited events for the global decentralized community.
“The Merge” also previously known as “Ethereum 2.0” is an event of unprecedented scale as far as blockchain development goes. The move entails shifting the entire Ethereum network’s consensus protocol from a proof-of-work (PoW) system, to proof-of-stake (PoS) in order to address scalability, security and sustainability issues.
It’s not merely a case of forking a network, since changing a network’s main protocol is practically like changing a car’s engine from internal combustion to electric. Add to that the fact that Ethereum is the second largest blockchain next only to Bitcoin in terms of market capitalization—hosting practically more than half of the entire global dApp industry, as well as a near monopoly of the NFT industry—and you can begin imagine how big the implications are for such an undertaking.
Subscribe for free to receive new posts and support our work.
What is The Merge?
Ethereum has been running two parallel systems for quite a while now in anticipation of The Merge. One system—the Ethereum Mainnet—is the blockchain’s original PoW network and is the Ethereum that we know and transact with. The other system called “Beacon” was shipped in December of 2020, and has since been testing Ethereum’s soon-to-arrive PoS system. As the name implies, The Merge is when these two networks converge into one, with PoS gradually taking over all of the PoW functions.
The Merge was previously marketed as “Ethereum 2.0” or “Eth2” but due to misconceptions arising from the name, decisions were made to scrub it altogether. Specifically, there was the tendency for people to assume that Ethereum 2.0 was to be launched as an entirely new network, a misinformed notion which scammers have been quick to take advantage of—coming up with schemes that fooled some people to swap their Ether for bogus “ETH2 tokens”. With “The Merge” as the now-official terminology, perceptions will be clearer that Ethereum will remain as one blockchain and will be using the same cryptocurrency.
“Eth1” and “Eth 2” terms have thus been replaced with “execution layer” and “consensus layer” respectively across all official documentation and community groups. The Ethereum Mainnet is the execution layer which is to be the site of The Merge, with Beacon as the consensus layer which will be applied and merged with the Mainnet.
The Merge has actually been part of Ethereum’s roadmap from the beginning, something which may come as a surprise to most people. But during the early years of Ethereum, developers had been working on scaling issues and the transition to PoS systems separately, and it was only in 2018 when they were combined under one project banner. Fast forward to 2022 and the project is relatively still on track with the Merge testnet happening on June 8 as announced by Ethereum founder Vitalik Buterin.
The Merge will bring together the Beacon’s Proof-of-Stake network onto Ethereum’s Mainnet to ease out its Proof-of-Work protocol.
What problems will The Merge solve?
Ethereum, for all its popularity, has some pretty large drawbacks due to its PoW protocol that is already quite outdated by today’s standards. Foremost among these problems are its high gas fees. “Gas” is the term used for the fee paid out to miners for processing transactions and in Ethereum in particular, the more gas you are willing to pay, the faster your transactions can be picked up by miners and processed. But during peak hours of network activity, these gas fees can become so disproportionately bloated that sometimes the fee can turn out to be more expensive than the amount being transferred.
Such fees are a result of network congestion because Ethereum has not been able to scale proportionally to its massive growth. Ethereum is only able to process 15 transactions per second (TPS), which was fine during its early years when the network was still small, but with almost 300,000 validator nodes today, such slow speeds means your transactions could be queued for minutes, if not hours, especially if you’re not willing to spend the extra gas.
This is an inherent flaw among legacy PoW blockchains because their consensus protocol requires all of their validator nodes to participate in checking the legitimacy of each block as it is added to the chain. As more and more nodes are required to provide computational power to the growing network, the amount of data being transferred back and forth between all the nodes—for them to arrive at a consensus—also grows exponentially, while the bandwidth remains the same.
In fact, it is Ethereum’s scalability issues that have led to the development of Layer-2 sidechains that are built onto the Ethereum Mainnet to simplify protocols and make certain applications run faster, cheaper and more convenient for users. Polygon (MATIC) is one such sidechain that has capitalized on the need for scalability on Ethereum, while others like Ronin (RON) and Immutable X (IMX) were designed to sidestep the huge gas fees on Ethereum to make play-to-earn (P2E) games more feasibly profitable for gamers.
Scalability has also been the driving objective for the range of competitor Layer-1 blockchains that were developed after Ethereum, most notable among them Cardano (ADA), Solana (SOL), Binance Smart Chain (BSC), Avalanche (AVAX), Harmony (ONE), and NEAR Protocol (NEAR), all of which avoided the PoW route precisely because of the lessons learned from Ethereum.
PoW consensus mechanisms likewise are heavily criticized for their environmental impact, due to the high energy requirements for mining. Currently, Ethereum consumes over 100 terawatts of energy per year, exceeding the energy requirements of countries like Colombia and the Czech Republic. Mining in its simplest sense, is a competition between the network nodes which are tasked with solving cryptographic puzzles, and is that which accounts for “work” in the “proof-of-work” system. Successfully solving the puzzle equates to the privilege of adding a block to the network’s ledger and earning the block rewards which were paid for by the gas fees. This means that as the network grows, the number of nodes using up electricity to compete for blocks also grows. This competitive setup in PoW blockchains like Ethereum and Bitcoin is so stiff that there is currently a global shortage of high performance GPU processors due to the huge demand for mining.
How will Proof-of-Stake solve these problems?
PoS is a huge improvement over PoW in many departments. For one, PoS validators will no longer be required to use up energy resources and bandwidth for heavy number-crunching processes but instead need only to have a financial “stake” in the network in order to participate. Instead of racing to compute cryptographic puzzles, validators now only need to position themselves with larger stakes to be guaranteed of more opportunities to add blocks and earn rewards. This in turn incentivizes node operators to uphold the network protocol since acting maliciously will be penalized by having their stakes “slashed” resulting in severe financial loss.
With less computational upkeep, PoS systems are thus more energy efficient—by as much as 99%—compared to PoW blockchains. This naturally leads to less network congestion, faster transaction speeds and thus proportionately lower fees.
Furthermore, with less hardware requirements, PoS networks also have significantly lower entry barriers which can only result in encouraging more sustainable network growth.
When it comes to network security, PoS systems are also virtually impenetrable to such vulnerabilities such as a 51% attack. Simply put, a 51% attack occurs when malicious actors are able to take control of more than half of the network nodes to influence network consensus. But since influence in a PoS network is determined proportionately by the amount of staked assets, the financial requirements are so astronomically high to cover for 51% of the nodes that they effectively offset any potential gains to be made from such an attack.
What is “Sharding”?
Another huge advantage of PoS is that it allows for a programming technique known as “sharding” which can address Ethereum’s scalability issue, and is a feature already being implemented in other Layer 1 blockchains such as Harmony and NEAR. Sharding is basically splitting up a blockchain into smaller, more manageable pieces or “shards” which has the effect of further reducing the computational workload and increasing the overall computational capacity for the entire network.
With the implementation of sharding, Ethereum will effectively be split into 64 shards, with the original Ethereum Mainnet being just one of these shards. This means that the overall computing power and capacity will also be extended 64-fold—that is, Ethereum—but with the power of 64 blockchains.
Consequently, sharding will also leverage Ethereum’s security, as malicious actors will find it exponentially more difficult to collude across separate shards.
And since sharding drastically reduces computational throughput, this will also reduce the hardware demand on validators, and may make it possible to operate a validator node on even a laptop or a mobile phone. Shards will also allow dApps to “rollup” transactions, which means the ability to “bundle” data off-chain to make them even smaller before sending them for processing.
All in all, these cumulative reductions in necessary computing power are estimated to increase Ethereum’s network speed to 100,000 TPS, for a 666566.66% efficiency improvement.
How will The Merge take place?
Though the shift to PoS is the main highlighted feature, Ethereum’s transformation to a more efficient and economically-friendly blockchain is a more elaborate process that extends further after the transition to PoS and the addition of sharding. The completely new Ethereum of the near future will in fact, undergo a five-stage process:
The Merge - the shift from PoW to PoS with the proof-of-stake protocol to be supplied by Beacon while retaining smart contract capability from the original Ethereum Mainnet
The Surge - the addition of sharding and rollup capability
The Verge - the replacement of Merkle trees with “Verkle trees” which are more efficient commitment schemes for network nodes
The Purge - an additional step in making Ethereum less data-heavy by eliminating the need for validators to store the entire blockchain history (or block height) and only requiring historical data from a one-year period; thus also increasing every node’s operational capacity and potentially attracting more participants to the network
The Splurge - a series of smaller miscellaneous improvements which may include among other things: the additional of ZK-Snarks (zero knowledge proof) capability
The complete Ethereum Roadmap showing the levels of completion for The Merge as well as further stages.
It is also interesting to note that a “difficulty time bomb” will be used to facilitate the shift from PoW to PoS, to further encourage miners (who may be hesitant to accept the network changes) to transition to staking. A difficulty time bomb is similar to Bitcoin’s halving process, which makes it gradually harder and harder to compute blocks over a given period of time in order to mitigate supply. Ethereum’s on the other hand, will be conducted in such a way that it will eventually make it completely impossible to mine Ether at all, and PoW miners will have no recourse but to adopt the PoS system.
How will The Merge affect ETH Tokenomics?
Ethereum currently has a circulating supply of 121 million ETH as of writing and has never had a specified maximum supply. Supply is affected by two opposing metrics: the ETH awarded for miners, and the amount of ETH that is burned as gas for processing transactions. Demand for ETH meanwhile has been at a consistent high, especially with the DeFi and the NFT boom of 2020 and 2021.
The shift to a PoS system is expected to make the supply deflationary, as the 4.8% supply that is currently handed out to miners may be reduced to within the 1% range once staking is fully implemented—a shift that is estimated to be equivalent to two Bitcoin halving events happening at the same time. Furthermore, overall available supply is also expected to dwindle with more ETH being locked in validator nodes and staking pools, further increasing demand.
As such, analysts are generally bullish on the effect of The Merge to Ethereum’s price, though the eventual outcome will depend on the reception that the Beacon receives once The Merge is actually on its way.
According to Buterin, if testing is immediately successful, The Merge could be executed by as early as August, though September and October may be more probable. The current bearish market sentiments however, makes it more complicated to gauge how The Merge will actually affect Ethereum’s price movements, with some analysts saying that volatility could drive prices by as high as 400% before the year is over.
Over a longer period however, The Ethereum Merge is expected to live up to its expectations. After all, Ethereum dominates the cryptocurrency sphere—arguably even more so than Bitcoin —due to its numerous utilities across DeFi, play-to-earn, NFTs and metaverse applications—that it is almost inconceivable to imagine a world without Ethereum. It should also be noted that Ethereum just recently took the worst of what the Terra meltdown could throw at the entire blockchain industry, and still came out with a market cap well above $200 billion.
And despite the emergence of numerous other blockchains across the years, self-proclaiming themselves as “Ethereum killers”, none have actually lived up to the claim. However you put it, Ethereum remains as the only blockchain after Bitcoin that we can safely say has stood the test of time, and it seems like it's just about to show the world what more it could be with its next reiteration.
FINALLY! Vitalik Updates Ethereum 2.0 Release Date!
Ethereum Validators Near 300,000 as Amount of ETH Staked Surpasses 9.5 Million
Ethereum energy consumption worldwide from May 2017 to January 10, 2022
Crypto-miners are probably to blame for the graphics-chip shortage
Merkle Tree Structure
Difficulty Time Bomb Definition
Ethereum and its Transition to Ethereum 2
Experts Predict How High Ethereum’s Price Could Go in 2022, a ‘Make-or-Break Year’
Thanks for reading Coinvision Research! Subscribe for free to receive new posts and support my work.