Ethereum, the world’s second-largest cryptocurrency, has long been criticized for being unsustainable, unscalable, and expensive to use. Much like the Bitcoin blockchain, the Ethereum Mainnet functions using a proof-of-work (PoW) consensus, which many consider to be outdated. This consensus mechanism, and the fact that it’s incredibly energy inefficient, is one of the many reasons that people outside of the crypto space are hesitant to accept its global adoption. As a result, Ethereum is currently in the process of switching from its PoW consensus to the much more environmentally friendly proof-of-stake (PoS) consensus, in an upgrade called The Merge.
Originally planned for release in 2019, The Merge – previously known as ETH 2.0 – has been continuously pushed back in order to consolidate code and maintain the security of the network. Finally, it’s looking like The Merge will take place in Q3 or Q4 of 2022. But what exactly is The Merge, and why does it matter?
What is proof-of-work?
To really understand what’s happening with The Merge, it’s important to acknowledge the reason behind it. A consensus mechanism is a protocol used within a blockchain to ensure all nodes – devices connected and exchanging data with one another on a blockchain – are synchronized and agree on the legitimacy of transactions.
Ethereum currently runs on a proof-of-work consensus, which involves the blockchain nodes attempting to solve a complex mathematical problem, in this case, finding a block hash that is less than (or equal to) a predetermined number: the target. This target is periodically adjusted depending on the blockchain in question, and if miners – those attempting to find the target – are taking too long or finding blocks too quickly, the target is increased or decreased accordingly.
There are several disadvantages to PoW systems, the most notable of which is their excessive energy consumption. The electricity required to complete the complicated computational work is drastically higher than it is for centralized networks. In the early days of Bitcoin, the process was far less energy-intensive, but as the popularity of cryptocurrencies grew and more people competed to solve the mathematical problems, they became increasingly difficult and required greater computational power.
To combat this, specialized computers were built, with miners spending vast amounts of money and computational and electrical energy to be the first to solve the puzzle. Although there are potentially hundreds of thousands of computers competing to find the target, only one is able to do so successfully, meaning the vast majority of this energy is wasted.
What is proof-of-stake?
Although not perfect, the proof-of-stake consensus mechanism is a significant improvement on proof-of-work in many ways. PoS greatly reduces the amount of computational work required to verify blocks and transactions on the blockchain, instead of asking coin owners to offer their coins as collateral for the chance to validate blocks. Holders and stakers of coins, in this case, ETH, are referred to as validators.
PoS randomly selects a validator to mine the next block, eliminating the need for competition and therefore lessening the amount of energy wasted. Blocks are validated by several validators, and once the appropriate number of validators have verified the accuracy of the block, it is closed. In theory, proof-of-stake also makes a network more secure than its proof-of-work counterparts because the greater the number of people that participate in the network, the greater its decentralization and the safer it will be from any malicious attacks.
What exactly is The Merge?
It is apparent, therefore, why transitioning the Ethereum Mainnet over to a proof-of-stake consensus mechanism is beneficial, but what exactly is The Merge, and how will it work?
Considering how essential PoW is to Ethereum, it’s hardly surprising that this transition has been continuously delayed. The company’s solution was to create the Beacon Chain, a fully independent network with a PoS consensus layer. This secondary chain is currently live and is running parallel to the Ethereum Mainnet. In late 2020, a one-way bridge was created between the two to allow the new PoS network to start accepting deposits, and according to those overseeing it, it has since finalized all its epochs with no downtime.
The Merge refers to the joining of the Beacon Chain and the Ethereum Mainnet, allowing for the transition from proof-of-work to proof-of-stake to be fully realized. Once The Merge has taken place, the PoW consensus layer will be removed, although none of the transactions on the Ethereum network will be lost.
Once the Mainnet and the Beacon Chain have merged, the next upgrade will introduce shard chains to the network, expanding the Ethereum network to 64 blockchains. Sharding involves splitting a database horizontally to spread the load, thus reducing network congestion and increasing transaction speed. With shard chains, validators are only required to run data for the shard that they’re validating, rather than the entire network, which will dramatically lessen hardware requirements and improve speeds. Sharding will also eventually enable people to run Ethereum on a laptop or phone, which increases decentralization and improves security.
What happened to ETH 2.0?
Until late 2021, Ethereum’s execution and consensus layers were referred to as ETH 1.0 and ETH 2.0, respectively. Once work began on the Beacon Chain, it quickly became clear that it would take several years until everything on the Ethereum 2.0 roadmap would be delivered.
Moving away from the PoW consensus became a priority, and it was apparent that the Beacon Chain would be ready earlier than other aspects of the Ethereum 2.0 roadmap, leading to the creation of the ‘Early Merge’ proposal – the expedition of the move to proof-of-stake.
As the plan for the future of Ethereum evolved, referring to the next phase of the network’s life as Ethereum 2.0 felt inaccurate. Suggesting that Ethereum needs a second iteration or version implies that there’s an inherent issue with the first, which, although this is perhaps true in Ethereum’s case, did not fit with the way the company viewed its own network.
Additionally, the use of ETH 2.0 provides an opportunity for scammers to trick users into ‘swapping’ their ETH tokens for non-existent ETH 2.0 tokens, and so the decision was made to update the terminology and provide clarity to those involved in the Ethereum ecosystem.