The historic upgrade replaces the miners who had previously powered the network’s record-keeping function with promises of enormous environmental benefits.
The massive Ethereum redesign known as the Merge has finally taken place, switching the digital machinery at the center of the second-largest cryptocurrency to a system that uses a significant less energy after years of development and delay.
It was no easy task to move from proof-of-work to proof-of-stake, which is like replacing the engine in a running automobile. The reward could be tremendous with Ethereum now likely consuming 99.9% less energy, which was previously required to keep the blockchain running and accounts for 0.2% of global energy usage.
The network, which supports a $60 billion ecosystem of cryptocurrency exchanges, lending organizations, non-fungible token (NFT) marketplaces, and other apps, will become more secure and scalable, according to Ethereum’s developers.
The idea that Ethereum, the second-largest cryptocurrency after bitcoin (BTC), would eventually make this switch was present from the onset. The current market value of its ether (ETH) token is close to $200 billion. However, the transition required a difficult technological effort, one that was so dangerous that many questioned whether it would even succeed.
Crypto investors, enthusiasts, and skeptics have been eagerly watching the update, which reduces the network’s dependency on the resource-intensive process of cryptocurrency mining, for the effects it is anticipated to have on the larger blockchain sector.
The fact that the update may have been one of the biggest open-source software projects in history and required collaboration between dozens of teams and hundreds of individual academics, developers, and volunteers added to its complexity.
Au revoir to miners, Bonjour to stakers
Ethereum, introduced in 2015, built upon the fundamental ideas of Bitcoin with smart contracts, or computer programs that effectively exploit the blockchain as a global supercomputer, recording data onto its network. Decentralized financing (DeFi) and NFTs, the key drivers of the most recent crypto bubble, were made possible by this breakthrough.
The Merge ends Ethereum’s proof-of-work protocol, which lets cryptocurrency miners compete for rewards by solving cryptographic puzzles in order to add transactions to the network’s ledger and write transactions to it.
This mechanism, which was invented by Bitcoin, is what made Ethereum consume so much energy and is to blame for the blockchain industry’s image as a threat to the environment.
The new proof-of-stake Ethereum mechanism completely eliminates mining. Validators, who “stake” at least 32 ETH to an address on the Ethereum network where they can neither be bought nor sold, take the place of miners.
These staked ETH tokens function similarly to lottery tickets: A validator’s chances of having one of its tickets picked and being able to add a “block” of transactions to Ethereum’s digital ledger increase with the amount of ETH they risk.
The Beacon Chain, a proof-of-stake network that Ethereum launched in 2020, served only as a staging location for validators to prepare for the switch up until the Merge. The Beacon Chain and the Ethereum main network were combined in order for Ethereum to switch to proof-of-stake.
The new Ethereum system adds a new set of incentives for those in charge of these computers to adhere to the rules as specified, protecting the ledger from any unauthorized alteration.
“Proof-of-work is a mechanism by which you take physical resources and you convert them into security for the network. If you want your network to be more secure, you need more of those physical resources,” according to Tim Beiko, Ethereum core developer. “On proof-of-stake, what we do is we use financial resources to convert to security.”
In proof-of-stake, power over the network is determined by the amount of ETH one stakes, not by the amount of energy one uses. Supporters of proof-of-stake argue that this makes attacks more expensive and futile because attackers risk having their staked ETH decreased in retaliation for trying to disrupt the network.
Critics contend that the previous power actors will simply be replaced by new ones, despite the fact that control of the Ethereum network will no longer be primarily held by a small number of publicly traded mining syndicates.
On Ethereum’s proof-of-stake chain, Lido, a sort of community-run validator collective, has more than 30% of the stake. Another 30% of the network’s ownership is held by three of the biggest cryptocurrency exchanges: Coinbase, Kraken, and Binance.
What comes next?
The co-creator of Ethereum, Vitalik Buterin, commented on the Merge on a live webcast and said, “This is the first step towards Ethereum being a very mature system, but there are still steps to go.
The update did not address Ethereum’s relatively high fees and slow speeds, which continue to be a barrier to its user base expansion much as environmental concerns once were.
Sharding is one of the next steps Buterin has outlined for the network. This technique should help address the network’s slow transaction times and high fees by distributing transactions across “shards,” similar to adding lanes to a highway.
That upgrade was originally planned to coincide with the switch to proof-of-stake, but it was given lower priority as a result of the success rollups, a type of third-party solution, have had in addressing some of the same problems.
Rollups hint at the likely direction of Ethereum development, where community solutions, as opposed to updates to the chain’s core code, will be key to enhancing the chain’s functionality.
The Merge has the potential to persuade people who are intrigued by Ethereum but wary of its potential negative environmental effects to come and try it out, which, in the long run, could add a tremendous amount of value to the network ecosystem.
Since at least mid-July, traders have been speculating about The Merge, initially anticipating that it would spur a sharp increase in the price of ETH. ETH was trading around $1,594 in the hours following the Merge, down roughly 0.81% over the previous 24 hours.
How the markets will respond in the short term to a successful merger cannot be predicted with precision. The upgrade has been on Ethereum’s roadmap since its inception, so there’s the probability that it has already been priced in by the market.