The Ethereum Merge: What Is It and What Comes Next?

What is the Ethereum (ETH) Merge?

  • The ETH Merge is an upgrade to the ETH blockchain where the current Proof of Work (PoW) Ethereum main-net will ‘merge’ with the Proof of Stake (PoS) Beacon chain.
  • TL:DR; The Merge moving ETH from PoW to PoS

Why is ETH changing from PoW to PoS?

PoS is a common consensus algorithm that evolved as a low-cost, low-energy consuming, and highly scalable alternative to PoW algorithms (which involves ‘mining’ or solving a complex mathematical problem in order to achieve distributed consensus and create new blocks in the blockchain).

A PoS algorithm entails the allocation of responsibility in creating a new public ledger to validators who ‘stake’ or pledge their tokens in a pool for the opportunity to verify transactions. Staking serves as a similar function to mining in PoW - verifying transactions and adding new blocks so that all nodes can reach consensus on the state of the open blockchain. The PoS consensus algorithm offers several potential benefits:

Highly Scalable 

  • PoS algorithms offer significantly reduced transaction times, which increases scalability.
  • Moving to PoS will make way for the next major Ethereum upgrade, dank sharding - splitting activity across several chains. This will create a path to get ETH transactions per second (TPS) up to ~100,000TPS. 
  • Scalability is exponential, not linear. Therefore the ability to use rollups (‘rolling up’ a collection of transactions) on top of the PoS algorithm sets ETH up for the future of the financial infrastructure.

More environmentally friendly

  • The process of creating and maintaining distributed ledgers becomes more energy efficient because the PoS consensus mechanism doesn't require miners to spend significant amounts of electricity on duplicative processes. The Mining hardware required to solve PoW hash equations, on the other hand, requires significant energy.
  • The ETH Foundation estimates that PoS reduces ETH’s energy consumption by ~99.95%.

Reduced centralization risk

  • The PoS network has a much lower barrier to entry since you do not have to purchase costly mining hardware.
  • PoS hardware requirements to run a validator node are substantially easier which allows for the average market participant to run any amount of nodes at a low cost.

ETH moves to a more deflationary state

  • Through ETH improvement proposal (EIP) 1559 gas fees will have two components – a base fee and a tip. The base fee will be a standard charge that all users will pay. It will be calculated by the network based on network traffic. The tip will be an optional extra payment that users can pay to speed up their transactions.
  • EIP-1559 also requires that the network burn all ETH tokens used to pay base fees. This procedure will reduce the total supply of Ether tokens, making Ether more scarce and therefore more valuable.
  • PoS reduces ETH issuance significantly to validators due to the lesser energy and hardware requirements needed to run a validator node (versus a mining rig).

Stronger crypto-economic security and social recovery in the case of a 51% attack 

  • A 51% attack happens when a malicious user in a network acquires control of a given blockchain's mining capabilities. It is implied that the attackers have more than 50% mining power and can mine faster than everyone else.
  • A 51% attack is still possible on PoS, but there are recovery mechanisms and harsher economic penalties for a 51% attack on PoS.
  • Dishonest validators (i.e. validators who propose multiple blocks in a single slot or submitting contradictory attestations) get their stake slashed. The more validators who participate in dishonest behavior at a single slot, the higher the penalty. In essence, if someone acquires 50% of ETH validator nodes and participates in dishonest behavior, all of their staked ETH can be destroyed. 
  • If someone does facilitate a 51% attack then there are social recovery mechanisms for the network. Honest validators can decide to keep building on a minority chain (they fork from the 51% attacked ETH) and allow all existing dApps, exchanges, and pools to do the same. And, they can forcibly remove the 51% attacker from the original network with social consensus. In totality, PoS seems to provide stronger measures against 51% attacks than PoW.

When is the merge happening?

  • Recent communications from the ETH foundation (as of August 22) state that The Merge is scheduled for Q3/Q4 2022, with a soft launch of September 19. 
  • Prevailing sentiment is the Merge will occur between September 15th-22nd. However, prior development challenges suggest the Merge may not happen until the end of Q4.

Will ETH PoW still exist?

  • Some miners may fork the ETH chain before the Merge to keep an ETH PoW chain going (so that they can continue to earn rewards). 
  • However, current ETH tokens will be on the PoS chain after the Merge. 

What are the outstanding challenges with the Merge?

  • There is a potential class of problems that could arise from actual differences between testnets and the mainnet. 
  • A testnet is an instance of a blockchain powered by the same or a newer version of the underlying software, to be used for testing and experimentation without risk to real funds or the main chain.Testnet tokens have no value (where mainnet tokens have value). It’s difficult to simulate exact behaviors on a testnet vs mainnet. More information to come as the crypto community and FalconX learns more.
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