The second-largest cryptocurrency’s blockchain is preparing to transition to a ‘proof-of-stake’ protocol, which is expected to make the network more efficient, sustainable and scalable.
As many outside the blockchain world know, the recent crypto market crash has seen top cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) tumble from their all-time highs.
At the same time, a lesser known, albeit tectonic shift in the cryptoverse known as ‘the Merge’ is set to take place in the coming months.
The Merge is set to transition the second-largest cryptocurrency Ethereum to its next phase (formerly known as Ethereum 2.0) as the network’s entire blockchain moves to a new system which proponents say will make it more efficient, sustainable and scalable.
It will be a complex multi-step process, as no blockchain of this scale has ever overhauled its consensus protocol, until now.
Here is how it will happen and why it's a big deal.
Why is Ethereum’s upgrade significant?
Essentially, Ethereum is changing the method it uses to process transactions.
Like Bitcoin, it uses a consensus mechanism called proof-of-work (PoW), which requires users to solve complex mathematical problems to validate transactions and secure the network.
Although this method is effective, it isn’t very efficient. People who solve these problems, known as miners, must invest massive amounts of energy and equipment to have a chance at mining the transaction blocks and earning rewards.
Why is this bad? Well, if only a few people can use Ethereum, it defeats the purpose of its existence – decentralisation.
Companies with huge computing power can take control of over half of the validator nodes, leading to much higher security threats to Ethereum. By definition, a decentralised blockchain can’t afford to have central points of failure. The Ethereum founders realised this and included a transition to another consensus mechanism called proof-of-stake (PoS).
PoS replaces the process of block mining that PoW employs by using validation to maintain the network.
Here is how it works: Users commit their ETH by setting it aside, or ‘staking it’, to win the right to create a block. Based on their stake, one of the users is chosen to be the validator. Once a participant has validated a block of transactions, other contributors can attest (or confirm) that the block is valid. When enough attestations are made, the network adds a new block, and rewards are distributed in the blockchain’s native currency, ETH, in proportion to each validator’s stake.
However, if a user attests a malicious block, they risk losing their entire stake through a process known as ‘slashing’.
Despite the technical expertise required to become a validator, anyone can join if they meet the minimum requirement of having 32 ETH. Those who can’t meet the threshold can still contribute by staking their ETH in a pool to receive a portion of the rewards.
Overall, PoS eliminates the need for expensive equipment and cheap electricity, making it easier for the average user to participate.
Furthermore, the environmental toll that the PoW governance system uses often ends up being one of the main criticisms of cryptocurrencies. Comparatively, the move to PoS is predicted to reduce the energy consumption of the Ethereum network by 99.95 percent.
What are the phases of the upgrade?
The Merge is only one part of the Ethereum 2.0 upgrade. The entire plan consists of three main phases.
First is the launch of the Beacon Chain. This is a PoS blockchain that the Ethereum network will switch to when it transitions out of PoW. The Beacon Chain went live in December 2020 and runs parallel to the main Ethereum chain called Mainnet.
The second phase is the Merge, where the Mainnet and the Beacon Chain will combine and the Ethereum network will begin operating as PoS. Testing for the Merge has already begun.
The final phase of the upgrade is called ‘sharding’, which is expected to eliminate data congestion, high gas (transaction) fees, and support the next generation of layer 2 scaling systems.
Expected to be introduced sometime in 2023, sharding will see the main Ethereum blockchain broken up into several smaller chains for different parts of the data set. When that happens, Ethereum will be able to handle thousands of transactions per second – compared to the 7-15 transactions per second it can handle now.
This will solve the network’s scalability problem, putting it on par with centralised payment processors like Visa. It will also lower the entry barrier, as validators will only store or run data for a subset of the entire blockchain. This will make it possible to run the Ethereum node from a laptop or a phone, making it even more decentralised and secure.
When is the Merge expected to happen?
Ethereum co-founder Vitalik Buterin earlier this year said the Merge will take place in August, when the Beacon Chain is expected to mark its official transition from PoW to PoS.
Given the upgrade’s history of delays, however, Buterin’s timeline is likely to be tentative.
Earlier this June, Sepolia testnet Beacon Chain went live, setting the stage for its Merge dress rehearsal to give Ethereum network developers valuable technical insights. Sepolia was eventually merged with the network on July 7.
The final trial of the Merge is set to occur on the Goerli network, which is scheduled for the second week of August. After its merger, the official Merge would then be slated for September.
ETH has gained nearly 30 percent over the past week following developers floating September 19 as a potential date for the highly anticipated Merge.