What is the Ethereum ‘Merge’ and how will it make the blockchain greener? – Osborne Clarke

Ethereum is the basic blockchain system that supports a significant proportion of applications, including non-fungible tokens (NFT), smart contracts and decentralized finance (DeFi). It also has its own cryptocurrency, Ether, which (in addition to the payment functions it performs for the Ethereum system) is traded as an investment asset in its own right.

As climate change has come to the forefront of societal priorities and corporate agendas, a major criticism of the Ethereum system (and other blockchain structures including Bitcoin) has been its intensive use of energy – often compared to the levels of use in a small country. The Ethereum system is currently estimated to use as much energy as Finland. While not all blockchain systems have a heavy carbon footprint, Ethereum has certainly been in that category. “The Merge” is intended to shift how new blocks on the Ethereum blockchain system are built, from “proof of work” to “proof of stake”.

At the time of writing, the merger is expected to take place on September 15, 2022, or by September 20, 2022.

Proof of work

Proof of work was first created for the Bitcoin system. To create a new block, block creators (known as miners) compete to be the first to solve a very difficult math game. The puzzle is not conceptually difficult, but is difficult in the same way that cracking a secure code is difficult. Computer processors are used to find possible solutions to the puzzle. More processing power means higher speed, and so miners invest heavily in massive processing capacity – and use large amounts of energy to run it.

One of the reasons for the proof of work protocol is that each miner’s investment in hardware prevents them from stealing from the system. It therefore constitutes an element in how an open, public and decentralized system with uncontrolled participants can be kept secure.

Proof of effort

“The Merge” is the name given to Ethereum’s transition from proof of work to proof of stake protocol. Rather than an investment in hardware and electricity, Proof of Stake requires miners to post a financial stake in the system as a form of guarantee of their good faith. If they do not comply with the system’s rules, part or all of their stake may be lost.

New blocks in the Ethereum chain will be created by consensus among miners, with a two-thirds majority of a select group of miners agreeing that a new block should be created. The size of a miner’s financial stake corresponds to their chances of being selected as the primary miner of a new block or as part of the validation group for a particular block. Where a miner does not participate when selected, they will miss out on rewards.

Unlike Proof of Work, Proof of Stake requires no investment in processing power or energy, and the high energy consumption of the system is eliminated. The entire system remains digital across network participants, so there is still some energy use, but at a fraction of previous levels – some have estimated the reduction at 99.95 percent.

A complex change

While this shift sounds simple in theory, the decentralized nature of Ethereum means it has taken years to implement.

Changes to most software involve the software developer producing an update and asking users to apply it (or distributing it directly for cloud-based software as a service). In contrast, as a public and decentralized blockchain system, Ethereum does not have a central controlling entity. Changes to the system software must be made by consensus between users of the system regarding both what the change should be, and how and when it should be implemented.

Moreover, the Ethereum system was conceived as an infrastructure for new applications to build on, and the proliferation of such projects, including NFTs, DeFi structures, and smart contract systems, makes reaching consensus even more complicated. Even if these Ethereum users are not miners themselves, they must be satisfied that the new protocol can be applied to their applications.

Since users (miners or those with applications built on Ethereum) cannot be forced to adopt a change, there is a risk of a blockchain splitting or “forking” into two separate chains, with one chain implementing the new the protocols, and the other retains the old approach. Hard (or permanent) forks are not unheard of and have happened in the past with the Ethereum chain, but to make a change sustainable, the clear preference is for the vast majority to adopt the same change together.

However, it now appears that the merger is finally happening. At some point by September 20, 2022, the main Ethereum chain is expected to be merged with a subsidiary development chain that has been used to test and perfect the new proof of stake software. The continuity of the main chain will be preserved (even if it is a parallel hard fork), but with the new consensus mechanism used.

What is the impact?

The primary difference would be to dispel the criticism that Ethereum consumes an unacceptable amount of energy, especially at a time of supply constraints and high prices. The globally dispersed nature of mining means that the reduction in consumption will be spread and shared equally, so the difference may not be tangible in any particular country, but cumulatively it will be significant.

Some believe that this change will increase usability and scalability. Others disagree, although removing the environmental concern will resolve objections to adopting the technology based solely on the high energy consumption. Moreover, given the importance of Ethereum-based applications across the blockchain world, this positive shift could benefit the perception of distributed ledger technology more generally.

In terms of scalability, the new proof of stake system changes the mechanisms to control the speed of block creation, but acceleration transaction validation is not one of the goals. Scaling for applications based on Ethereum cannot therefore be directly affected.

The change should also mean that it is easier to be a miner on the system. Significant investments in specialized hardware will no longer be required, although miners must still have sufficient hardware to perform the necessary tasks and must be active participants to generate rewards.

Commentators on the merger have highlighted that the main risks of this change are its complexity and the fact that the protocol is new and less tested than proof of work. There are also some concerns that the new protocol could make Ethereum more vulnerable to malicious takeovers. Still, the reduction in energy consumption is welcome, and assuming all goes well, it is to be hoped that other blockchain systems using proof of work will consider a similar shift.

If you have any questions about any of the above, please do not hesitate to contact the authors or your usual Osborne Clarke contact.