Since the beginning of the year, crypto markets have been surrounded by speculation over the potential impact of Ethereum’s coming Merge — a major milestone for the second-largest blockchain. And now the date is confirmed, the long-awaited merge upgrade will be fully completed in mid-September.
What is the Merge?
This is the upgrade event where Ethereum will move from Proof of Work (PoW) to the Proof of Stake (PoS) consensus mechanism. This transition is believed to help remedy some of Ethereum Network’s issues with scalability and high energy consumption. A key question lies with how the shift to a PoS system, which is supposed to be faster and better energy-efficient than the current PoW protocol, will affect prices for Ether (ETH) and related digital assets.
PoS is a consensus mechanism in which users need to stake a certain number of tokens to gain the right to be randomly selected as validators, instead of using computing power like PoW. A validator will verify transactions and add them to a shared block. This block needs at least 128 validators to be validated. Once the sharded blocks have been validated and a new block is generated, two-thirds of the validators must confirm that the transaction is valid before the process can be terminated. On the Ethereum network, to be eligible for a validator slot, users must stake a minimum amount of 32 ETH.
To increase the number of validators and process transactions using PoS, the Ethereum mainnet, which is currently PoW-based, needs to merge with the Beacon Chain. Beacon Chain has been parallel to the mainnet since 1st December 2020 and there are over 375,000 active validators. It also plays an essential role in preparing for the subsequent upgrades of the sharded chain.
Although it is planned that the sharded chain development will be put on priority before merging with the main network, the original plan changed due to the rapid development of layer-2 scaling systems such as Arbitrum, Optimism, and Loopring. Therefore, most validators unanimously agreed to the Ethereum Merge and the transition to PoS.
How will the Merge impact the ETH system?
Compared to the resource-intensive PoW, Ethereum is predicted to reduce network energy consumption by 99.95%. The transition to PoS is also the first stage to put sharded chains into use in 2023. The sharded chain provides additional storage layers at a lower cost for decentralized applications. While some among the crypto community believe that the transition to PoS will help with issues like network transaction speed and gas fees, the Ethereum Foundation has already asserted that the Merge will have little effect on current gas fees. Besides that, even after the transition to PoS, there will only be a negligible difference in processing speeds on Ethereum’s main PoS chain (Beacon).
Since any major change related to the core protocol requires global consensus from all nodes, the process of applying updates will be highly time-consuming because it must be done carefully and steadily based on several crucial factors: Beacon Chain, Ethereum Merge, and sharded chain. These factors complete each other and allow Ethereum to improve scalability, security, and sustainability. The Merge is the time that the Beacon Chain, which is PoS-based will officially go live, and set a milestone for the official transition of the Ethereum network to PoS.
How do we benefit from Ethereum Merge?
Sharded chain: Although Ethereum Merge will not immediately improve the scalability, it is the first step towards bringing the sharded chain and PoS-based network in with full functionality. By upgrading network data throughput to 64 blockchains, the sharded chains offer additional low-cost layers for application development and data storage. They also allow layer-2 systems to operate with low transaction fees while benefiting from the security of the Ethereum mainnet.
Applications: DeFi applications running on the Ethereum network will take advantage of the mainnet. Fast transaction speed along with low transaction fees will attract more users. As a result, more money will flow from another network to Ethereum. Ethereum’s ecosystem will be able to regain its dominance.
User Experience: The likely case scenario that user experience will be improved by reduced gas fees and high transaction speeds. In addition, users can stake ETH into validator pools in exchange for rewards according to the PoS consensus mechanism. And since the number of minted ETH per day will be reduced, along with the sink of circulating supply due to a large amount of staked ETH, the price of ETH is predicted to skyrocket. Thus, ETH holders are likely to grab their pockets full from the Ethereum Merge.
Conclusion
In the meantime, while there are many competitive blockchains in the market, this upgrade is an opportunity for Ethereum with the ambition to regain its market dominance, evidenced by the recent increase of Ethereum’s market share in recent months in anticipation of The Merge. With the completion of the final test, Goerli was done in August, the Merge is really coming close to being launched officially. Ethereum Network’s developers and users alike can look forward to the improvements and bright road ahead of the second-largest crypto from this upgrade.