Ethereum’s Merge is due to happen soon, and it might impact both Ether and the larger crypto market in a big way. Here’s what the Merge is, in simple terms. 🤓
- Ethereum’s proof-of-work chain will merge with its proof-of-stake chain soon
- The Merge could reduce Ethereum’s energy consumption by 99% and Ether’s supply by 95%
- The Merge will set Ethereum ecosystem up for a scalable future
POW vs POS: What’s the difference?
Before explaining what the Merge is, here’s how proof-of-work (POW) and proof-of-stake (POS) consensus mechanisms differ:
- POW: Think of a gigantic sudoku in which whoever finds the right answer gets allotted a block to mine. Miners do this to earn Ether (ETH) as a reward as well as gas fees. As soon as the first person wins the others start solving the next question to win the next block.
- POS: Take out the sudoku. Now all the contestants have to put in money to participate and every so often someone will be picked to get a reward based on how much they’ve put in.
What about Ethereum specifically?
Ethereum is a blockchain aiming to act like a giant supercomputer. Ether is the cryptocurrency used to make transactions in the ecosystem. For now, Ethereum operates on a POW consensus mechanism – similar to Bitcoin.
So why Merge?
Powering a supercomputer like Ethereum requires tons of POW resources. That’s why, in December 2020, the Ethereum community launched a new chain. It’s called the Beacon Chain and is based on POS.
So, for the past 20 months, the Beacon chain has operated as a functioning test chain. It doesn’t host any smart contracts yet, so you can’t use it to trade NFTs, buy or sell tokens on DeFi protocols, play video games, or do any of the fun on-chain Ethereum things you can do on Ethereum’s POW mainnet. What you can do on the Beacon chain is stake ETH to help validate transactions and earn ETH as a reward. And so far, there is over 13.2M ETH staked on the Beacon Chain from approximately 78,000 wallet addresses.
- Ethereum’s proof-of-work chain is called the Mainnet
- Ethereum’s proof-of-stake chain is called the Beacon Chain
Having two different Ethereum blockchains is redundant though. So, at some point, they need to be merged into one chain. That’s why it’s called “the Merge”. 💡
Now, in order to merge, there have been multiple rounds of testing. The developers have identified multiple problems until this year when most of the testing has been completed successfully. There is one more test left to go and the two chains could be merged as early as September 2022 if things go as planned. 👀
Why do people care?
Everyone in the Ethereum community is talking about the Merge and how it will have profound effects going forward. Here’s what they’re most excited about:
- Energy consumption: The switch to POS could reduce Ethereum’s energy consumption by 99.95%(1)
- Supply decrease: After the Merge, the amount of ETH issued per day will go down and a big percentage of ETH in circulation will be burned. This should bring about a total drop in new ETH issuance of ~90%(2)
- Scalability: The Merge could bring the Ethereum ecosystem one step closer to a more scalable and secure state than the one originally outlined by its founders.
Misconceptions about the Merge
The Merge is a complex process and it sometimes inspires some misunderstandings:
- “Gas fees will go down”: The Merge is a consensus layer update. That means it only upgrades the process of agreeing about the validity of a block and about new block creation. Gas fees, on the other hand, are associated with the demand for settling a transaction vs the capacity of the network during a particular time. So, no: Don’t expect gas fees to go down because of the Merge.
- “Transactions will be faster”: Also no. The time to be included in a block and the time for that transaction to be settled will go up slightly but nothing that will make a huge difference
- “You need 32 ETH to run a node”: It’s complicated. Anyone with a computer can run a node without any ETH but to be a validator, you have to stake 32 ETH to be able to propose new blocks and validate transactions. There are multiple platforms and DeFi pools, however, which will let you stake any amount of ETH with some APY as a reward. Just be aware that at this point there is no timeline for when those funds can be withdrawn.
If you’re interested in the future of Ethereum, here’s two next steps you can take:
- Level up: Read this piece for an in-depth look at the Merge.
- Get involved: Buy Ethereum or set up a recurring buy.
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