Ethereum Merger: Crypto’s Most Anticipated Update

Talking to MIT researcher Lex Fridman in June 2021, ethereum co-founder Vitalik Buterin said that “ethereum’s future” would become more “scalable and sustainable” by becoming a “proof-of-stake system”. Like so many crypto promises, the “merger” took “longer” than expected. After years of delays, the most ambitious crypto project attempted since the launch of bitcoin in 2009 will launch on Thursday.

The merger refers to ethereum transition from a proof-of-work consensus mechanism to a proof-of-stake system. Merge specifically describes the moment when the Ethereum blockchain will merge with the Beacon Chain, a proof-of-stake blockchain that was unveiled in late 2020.

In non-technical terms is The Ethereum Foundation explains: “Imagine that ethereum is a spaceship that is not quite ready for an interstellar journey. With the Beacon Chain, the community has built a new engine and a hardened hull. After extensive testing, it is almost time to replace the new engine with the old one. mid on the plane.”

What is Ethereum?

Ethereum is the second largest cryptocurrency by market capitalization ($213 billion) and the most widely used blockchain – a public ledger and shared database – in the crypto space. Launched in 2014 by Vitalik Buterin, Gavin Wood, Charles Hoskinson, Anthony Di Iorio and Joseph Lubin, ethereum’s founding team has included some of crypto’s biggest names.

To put it simply, ethereum is trying to be the blockchain equivalent of Apple’s app store. Just as the app store provides a platform for users to buy and download games, news and fitness programs, Ethereum is trying to do the same in crypto. However, there are some important differences.

The Ethereum ecosystem is built on blockchain technology, so Buterin and his co-founders had to solve the problem of blockchain interoperability. As new as blockchains are, each blockchain has its own infrastructure and set of protocols, making them non-interoperable.

According to research from crypto wallet provider NGRAVE, bitcoin’s blockchain accounts for 40% of the market’s activity, with ethereum in second place at 19%. This means that more than 40% of the crypto space runs on less isolated blockchains.

Realizing that blockchains were fragmented, ethereum expanded on the idea of ​​”smart contracts,” first proposed by crypto pioneer Nick Szabo in 1998. Smart contracts are self-executing contracts where the terms and conditions between a buyer and a seller are written in code.

Smart contracts allow blockchain engineers to build NFTs and other decentralized finance (DeFi) applications. Not only did ethereum introduce operational smart contracts to crypto, but it also built protocols or standards called Ethereum Request for Comment (ERC). ERC standards streamline and increase usability for and between ethereum-related projects.

By making the blockchain more interoperable through smart contracts and ERCs, the ethereum blockchain has become the most compatible blockchain in crypto. So, just like the Apple Store, blockchain projects can be launched on the ethereum blockchain, creating an ecosystem consisting of hundreds of projects accessible to users.

Proof of work

Ethereum has its cryptocurrency, ETH, currently valued at $1,720, and like bitcoin, it currently runs on a “proof-of-work” (PoW) consensus mechanism – the oldest type of blockchain processing system in crypto. But before we dive into PoW, a quick overview of blockchain technology is needed.

Blockchains consist of several blocks that act as storage units for pieces of information. For example, a block may contain patient records, logistical records, ballots or registers of transactions between counterparties. The more pieces of information that are recorded, the more blocks are needed and a blockchain is formed.

Each block also has its digital fingerprint known as a “hash”. The hash value of one block is a unique mathematical puzzle and only equals the hash of the next block. This is a security mechanism built into a blockchain so that cybercriminals cannot tamper with the information that a block contains.

Source: Velotio

Under a PoW consensus mechanism, a decentralized network of computers tries to solve the mathematical puzzle to discover the hash of the following block and then confirm the information on the block. When a computer solves a hash, other computers confirm that the information is indeed verified, creating consensus on the blockchain. The computer that solves the puzzle first gets a block reward – this process of solving for a block’s hash is known as mining.

The problem with PoW is that it has become very power-intensive. According to the European Central Bank, the energy consumption involved in crypto mining corresponds to the same energy consumption as years of energy consumption in countries such as Spain, the Netherlands and Austria.

Researchers suggest that ethereum is carbon emissions alone is comparable to the entire energy use in Finland in a given year.

As Buterin told Fridman, “You just have to burn all this electricity that’s just running 24/7, so it uses a huge amount of energy and hardware.”

Source: ECB

Proof of effort

As regulators grow weary of the energy costs associated with PoW mining, the merger marks Ethereum’s transition to a less energy-intensive and more efficient proof-of-stake (PoS) consensus mechanism.

In a PoS system, the burden of verifying transactions and achieving consensus passes from the computer’s processing power to individuals who “stake” or deposit their ETH. Staking refers to when a user agrees to unlock an amount of cryptocurrency in exchange for validating new blocks of information added to the Ethereum blockchain. Users who want to bet on the Ethereum blockchain must deposit 32 ETH ($60.00) at minimum.

By staking their ETH, individuals pledge their money to a smart contract and thus gain access to a digital lottery. Each time a transaction occurs, a participant who has staked ETH is randomly selected to confirm the transaction. Those who have staked more ETH earn proportionately more rewards. Currently, over 14.3 million ETH have been staked by 425,181 validators who earn approximately 4.1% interest on their deposits.

According to the Ethereum Foundation, by moving to a PoS system, ethereum’s blockchain will be faster, more scalable and 99 percent more energy efficient.

Source: Ethereum Foundation

Despite the merger signaling a greener direction for ethereum, the transition from a PoW to a PoS has not been without criticism. Users unhappy with PoS claim that it creates inequality among validators since not many individuals have $60,000 or more in ETH. This is a fair claim. Over the past decade, the crypto space has become an institutionally driven market, a far cry from the former retail driven market.

Much of the anger has come from PoW miners who would naturally be cut off from the lucrative PoS system. So strong has their anger been that they have proposed a hard fork, which means that Ethereum’s blockchain will be split in two – a PoS and a PoW blockchain.

Prominent figures outside the crypto space, such as Tron founder Justin Sun – an ethereum competitor – and ethereum miner Chandler Guo have voiced their support for a PoW hard fork. In addition, exchanges such as Sam Bankman-Friends FTX and Poloniex will list the Ethereum PoW tokens on their exchanges.

Buterin tells Fridman: “The next evolution of ethereum is proof-of-stake, I’ve liked proof-of-stable for years.”

This story was originally published on AltFi

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