The Ethereum merge is set to begin on September 14th, this article aims unpack why and how this will occur.
Why Merge?
The Merge event alludes to an event that will change how the Ethereum blockchain works. Specifically, the consensus mechanism - meaning the software that verifies transactions on the Ethereum blockchain - will be changed from a “Proof of Work” mechanism to “Proof of Stake”1. The goal for the change is to improve the scalability of the Ethereum blockchain by reducing input costs (such as energy) and creating a more diverse set of validators to secure the Ethereum blockchain2.
Once the change in the consensus mechanism has occurred, transactions will no longer require energy-intensive mining to verify transactions (such as the consensus mechanism for the Bitcoin blockchain). Instead, Ethereum network validators will pledge their ETH assets to the Ethereum network in exchange for earning staking rewards. In doing so, the network is expected to achieve greater throughput as the number of validators increases over time.
These validators will confirm transactions on the Ethereum blockchain, a total of at least 128 validators (the selected validators are randomized) would need to attest to each transaction in order to create a new block on the Ethereum blockchain. If there is a bad actor, that particular validator will lose their pledged ETH in addition to any potential staking rewards earned in the past.
Common critiques of the change come from advocates of Proof of Work consensus mechanisms. As opposed to relying on validators to secure the network, a Proof of Work mechanism relies on mining equipment and energy consumption to run mathematical computations (known as hash power) to verify blocks. Although this process limits scalability, it creates more security through greater barriers to entry. Further, becoming a validator that can propose new blocks on the Ethereum network will require the acquisition of at least 32 ETH (roughly $55,000 at today’s ETH / USD market value); a high bar that may lead to centralization of validators. Finally, a Denial-of-Service attack becomes possible in a Proof of Stake set up as network validators will be known prior to a block confirmation. A bad actor could interrupt the transaction prior to verification through a concentrated attack
How Merge?
The Merge represents the “joining of the existing execution layer of Ethereum … with its new proof-of-stake consensus layer, the Beacon Chain.3” Essentially, the platforms that users engage with today will be unchanged, the only retooling will be on the back-end. After the Merge is complete, the Beacon Chain, originally launched in 2020, becomes the controller of the Ethereum network to facilitate the new protocol.
Another common thread in the Merge discussion pertains to the proposed “ETHW” asset. Many Proof of Work advocates, such as Tron’s founder Justin Sun, have hopes to keep the legacy Ethereum consensus mechanism live after the Merge takes place4. Outside of the general critiques of the Proof of Stake consensus mechanism, the ETHW trend has been facilitated by ex ETH miners that would like to keep their mining investment expenditures relevant after the Merge. If such an event occurs, ETH holders will be sent ETHW (or whichever naming convention they land on, ETHPOW has also been proposed) to continue activities on the legacy blockchain.
Conclusion
The Merge represents a potential breakthrough in the Ethereum network; however, additional work will need to be done before the Ethereum network is complete5. The Merge's impact on items like actual throughput, transaction costs, and speed have yet to be measured and determined; these potential benefits may take months or years to play out.
Things to pay attention to over the next several weeks to avoid any scams:
Scams always feed off of current events, be careful and triple check anything you sign up for.
Forked assets (such as ETHW) may be air dropped to your address; however, fake assets may also be dropped. Always check with exchanges and relevant sources prior to any on-chain activities with unknown assets.
You don’t need to “do anything” to “upgrade” ETH you hold to the Beacon Chain, refer to the Ethereum Foundation or trustworthy news sources before you do anything.
Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Do your own research.
To learn more about the differences in Proof of Work vs Proof of Stake, please refer to this article: https://www.coindesk.com/learn/proof-of-work-vs-proof-of-stake-what-is-the-difference/.
https://robinhood.com/us/en/support/articles/the-ethereum-merge/
The Merge. Ethereum Foundation. https://ethereum.org/en/upgrades/merge/
“Justin Sub Backs Ethereum Hard Fork as Merge Approaches.” CoinDesk. https://www.coindesk.com/business/2022/08/05/justin-sun-backs-ethereum-hard-fork-as-merge-approaches/
“Vitalik Buterin says Ethereum will be 55% complete post-merge.” Fortune. https://fortune.com/2022/07/21/vitalik-buterin-ethereum-merge-ethcc-paris/