One of the most anticipated events within the Ethereum ecosystem is the Ethereum Merge, which will allow the current Ethereum mainnet, known as ETH1 and which is based on the Proof of Work consensus protocol, to join the Beacon Chain, a chain of blocks that at the moment has worked laterally using the Proof of Stake consensus protocol and which is known as ETH2.
EThis union or Merge process will allow Ethereum to go from being a Proof of Work network (with miners using the ETHHash algorithm) to being a Staking-based network.
With that, the Ethereum developer team seeks to evolve its blockchain, make it more energy efficient and create the foundation for scalability through sharding, a blockchain network slicing technology that could lead Ethereum to scalability of over 1000 transactions per second (TPS) in its early days.
Of course, all of this without giving up the Ethereum Virtual Machine (EVM), without interfering with the operation of all the protocols and smart contracts deployed, and without losing any tokens or balances in the process. In fact, all the history that is part of the current Ethereum (ETH1) will be an integral part of ETH2 and the union will be transparent to everyone.
Certainly, it is a titanic work that has taken Ethereum more than 4 years of development and that, for now, has a plausible date to become a reality: the 19 September 2022.
This date will be maintained if the test event on Goerli (an Ethereum testnet network) is successful, and if it fails, Ethereum Merge will be delayed again. Without a doubt, this event is currently the most relevant in the Ethereum ecosystem and if it takes place, a new episode in the history of Ethereum will begin to be written.
Importance of Ethereum Merge
The importance of Ethereum Merge goes hand in hand with the technological evolution of Ethereum and its vision of becoming a highly scalable, secure and reliable network.
Firstly, Proof of Stake will allow developers to make the network more energy efficient, leaving behind concerns from the community about Ethereum's high energy consumption. Currently, the energy consumption of the Ethereum network is about 110 TW/h per year, which is equivalent to the energy consumption of some countries, such as the Netherlands. You can learn more about the different types of mining in this article from combined mining or merged mining.
The arrival of the Proof of Stake network enables a new form of tokenomics in which staking is the central axis. With this new protocol, the new validation nodes of the network must stake at least 32 ETH to be part of the set of nodes that will be in charge of taking transactions from the network and validating them if they are chosen to carry out that action. . Thus, PoW mining will no longer be the network's verification and consensus generation mechanism, so these miners will have to migrate to other networks (eg Ethereum Classic).
On the other hand, the update also makes the Ethereum infrastructure more flexible to develop the sharding or fractionation of its network. Thanks to sharding it will be possible to create small “networks” that will connect to the main Ethereum network, having its own resources that will ultimately join the main network and enable a means of scaling the network.
Basically, the “shards chains” are sidechains integrated within the same Ethereum protocol. These work natively and together with the network to later recreate the same distributed ledger. With this structure, shards chains can be created to execute certain smart contracts and DApps and make network resources dedicated to this procedure, making this allocation more efficient and allowing it to scale according to usage requirements.
With all this, there is no doubt that Ethereum Merge will be a highly relevant event in the ecosystem and will open the doors to the future for this network.
Risks around Ethereum Merge
Now, the arrival of Ethereum Merge is not without risk, not only during the event, but also after it. For example, during the Ethereum Merge event any error could occur, which, depending on its severity, can be simply ignored or “break” the history of the blockchain and have to rollback it.
Of course, for this there are the tests that are carried out in the testnet network, the last one being the one that will be carried out in the Goerli testnet network. Such an event can be tracked using this link. If all goes well, the Goerli event will be the last test and the next event will be done directly on the mainnet.
Another risk of Ethereum Merge is the conversion of Ethereum PoW to Ethereum PoS. Proof of Stake is a well-proven protocol and its security is high, however, most Proof of Stake networks lack a high degree of decentralization and have additional difficulty in generating full nodes within the network.
For example, if you want to be part of the Ethereum network and participate in current PoW mining, all you have to do is buy a simple PC and the GPUs to mine, an expense that can reach €8.000 for a moderately powerful mining rig.
However, if you want to participate in the PoS protocol you only have two options: use a third party (such as LIDO or other services) or directly create a node with 32 ETH locked (an investment of around €58 thousand today). It is clear that this increase in the cost of starting a node with the option of validation will make the network tend towards centralization, since with the revaluation of ETH that cost per node will grow more and more.
Likewise, people who seek to participate in staking (and do not have enough for their own node) will inject all that liquidity into centralized services and in the end this can largely mean the final centralization of Ethereum if other measures are not taken to avoid it.
The problem is not minor and, in fact, it is already visible, since more than 50% of the staking is in the hands of only three platforms: LIDO, Coinbase and Kraken. In fact, most of the staking within the network is within third-party services, which is far from the reality of decentralization.
Another problem that many in the Ethereum community try to downplay is that converting from Ethereum PoW to Ethereum PoS not only centralizes the network, but also disrupts the governance and tokenomics of the network, and this has a direct impact at the regulatory level, since there is the possibility that Ethereum PoS could be seen as a utility token. If this situation were fulfilled, the impact on the ecosystem would be enormous, and that is why there is enormous interest in clarifying this situation.
Other curiosities about Ethereum Merge
With the arrival of Ethereum Merge and the mainnet activation of ETH2, the network will be completely different from ETH1 at the protocol level, which will lead us to certain curiosities, among which we can mention:
- The cost of gas, and therefore the commissions within the network, will not be affected by the event and the change to ETH2. That is, ETH2 will not change or make the operations you can carry out on the Ethereum network cheaper, since these values will remain unchanged.
- The arrival of PoS is generally seen as an element that will help make Ethereum faster. The reality is that the scalability of Ethereum with the arrival of ETH2 will not change, since the production of blocks and their size will not change at all. The scalability of ETH2 will depend on the “shards chain” and those will arrive at least by 2024.
- Current ETH2 staking participants will have to wait for the Shanghai update to be able to withdraw the profits made during the operation of the Beacon Chain. All those who participate in the staking after the Merge will be able to stake directly and will receive their rewards immediately. The Shanghai update is expected to arrive in mid-2023.
- The update of the EVM in ETH2 and the arrival of Swarm are still works in progress for which there is no clear and specific roadmap. In fact, the next updates of Ethereum 2.0 still lack well-defined dates, so we will have to pay attention to its official website to see its evolution.
Certainly, the Ethereum Merge will be a huge event, one that will define the future of Ethereum and the second largest crypto ecosystem in the world.