Sunday, September 25, 2022

What Is the Ethereum Merge and Why Is Everybody Talking About it?

What is the Merge?

Ethereum, the world’s second-largest cryptocurrency’s blockchain, is preparing to switch to a ‘Proof-of-Stake’ (PoS) protocol. Before we talk about the Merge, let’s learn what is Ethereum.

Founded by Vitalik Buterin in 2015, Ethereum is a decentralized, open-source blockchain with smart contract functionality (a computer program built to automatically execute events according to the legal terms of the contract).

The Merge is designed to shift the Ethereum blockchain from the current Proof-of-Work (PoW) mechanism to Proof of Stake. The move is expected to make the existing network more efficient, sustainable, and scalable.

In Proof of Work, the miners need to compete for rewards based on the computational powers they can acquire. This method offers a high level of security and provides a decentralized method of verifying transactions. However, it is inefficient with slow transaction speeds and expensive gas fees.

On the other hand, in Proof of Stake, the validator is randomly chosen based on how many coins they have locked up in the blockchain network, also known as staking. This process is energy-efficient and provides fast and cheap transaction processing.

But adjusting the second-largest blockchain from one system to another is a complex, long process. Each decision must be thought out thoroughly. We’ll take you through the reasons and stages of the protocol’s new transformation.

The Merge is the first of five planned upgrades for Ethereum and is expected to take place on September 15, 2022.

Phases of the Merge

The Merge is the first part of the Ethereum 2.0 upgrade. The entire plan consists of five phases:

  • The first phase in the pipeline is called the Merge. This phase will involve the “merging” of Ethereum’s current blockchain with Beacon Chain, the network responsible for creating new blocks. This process makes sure the new blocks are valid, and rewards validators with ETH for keeping the network secure. In other words, it will transition Ethereum’s consensus mechanism from Proof of Work to Proof of Stake.

● The next phase is called the Surge – this phase will bring sharding to the Ethereum blockchain. Sharding is a scaling process that will break Ethereum into separate partitions or “shards” to ease the network’s computational load. This upgrade is planned for 2023.

● Then next comes the Verge, which is the introduction of “verkle trees.” This upgrade involves improving data storage for the Ethereum nodes. It will also help Ethereum scaling, as it allows more blockchain transactions while keeping the blockchain decentralized.

● The fourth phase, called the Purge, is a similar upgrade that involves data storage for validators. A validator will be responsible for storing data, processing transactions, and adding new blocks to the blockchain. This transition will reduce the necessary hard drive space required for the validators. This also includes the collected data about past events and outstanding debt that will help in rearranging the storage and reducing network congestion.

● The last and final phase, called the Splurge, is a series of miscellaneous upgrades made to ensure the network runs smoothly after the prior four stages are launched.

What Does This Mean for Ethereum Miners?

As a user or holder of ETH or any other digital asset on Ethereum, as well as non-node-operating stakers, you need not do anything with your funds or wallet before the Merge.

Despite swapping from PoW, the entire history of Ethereum remains intact and unaffected after the transition to PoS. Any funds held in the wallet before the Merge will still be accessible after the Merge. No action is required to upgrade on the user front.

After the Merge, the practice of ETH mining on the Ethereum 2.0 network will end, either forcing miners to pivot to mining on Ethereum Classic or find other platforms.

Why Is Ethereum’s Upgrade Significant?

Fundamentally, Ethereum is changing the method that it uses to process transactions. Although the use of the PoW method is effective, it isn’t very efficient. Miners must invest a lot of time, energy, and equipment to have a chance at mining the transaction blocks and earn rewards.

Over half of the validator nodes can be acquired by businesses with significant computational power, which in return will pose major security risks to Ethereum. A decentralized blockchain cannot contain centralized points of failure. Because of this, the creators of Ethereum have decided to switch to a different consensus algorithm, called PoS.

Ethereum vs. Bitcoin

Bitcoin and Ethereum are the two most popular cryptocurrencies that make 63.6% of the global crypto market capitalization.

The price of Ethereum has risen nearly 648% in the past three years, which is more than double the 250% gains in Bitcoin during the same period.

The Merge will make Ethereum a more attractive investment than Bitcoin from an Environmental, Social, and Governance (ESG) perspective. However, it doesn’t pose any necessary threat to taking Bitcoin’s position as the world’s top crypto.

Several reports claim that Bitcoin and Ethereum are more complementary rather than competitive within the crypto market. Both cryptocurrencies serve different purposes. Bitcoin is a decentralized digital currency that helps you buy, sell, and exchange directly, without an intermediary like a bank. While Ethereum’s utility is as a Web 3.0 asset, that allows anyone in the network to use the service. Both are an integral part of the overall digital asset ecosystem.

Ethereum is also expected to complete a major trial for the Merge in June, using the test network Ropsten. Once the Ropsten upgrade is completed, Ethereum developers have another two test networks to upgrade before the merge of the main Ethereum network.

Ethereum’s Transition From Mining to Staking

Once the Merge is completed, staking will replace the mining process to verify Ethereum transactions. The staking process requires a specific period in which cryptocurrency tokens cannot be traded to participate in the transaction verification process.

In the PoS method, the algorithm gets to choose which validator gets to add the next block to a blockchain-based on how much cryptocurrency is staked. Investors must stake a minimum of 32 ETH to become an Ethereum validator.

There are currently more than 300,0000 Ethereum validators. The more ETH that a validator stakes, the more likely he is to produce blocks. Each time a validator produces blocks, he earns rewards in Ethereum in exchange for handling validation duties.

Some Common FAQs Around The Merge

Will the Ethereum gas fees be reduced after the Merge?

While reduced gas fees top every investor’s wishlist, the Merge is a change of consensus mechanism that will transition the Ethereum blockchain from PoW to PoS. Lowering transaction fees in Ethereum will require working on expanding the network capacity and throughput.

Will Ethereum transactions be faster after the Merge?

Ethereum transactions will not be noticeably faster. However, Beacon Chain allows validators to publish a block every 12 seconds, which on the mainnet is roughly 13.3 seconds.

Will the Merge result in downtime of the Ethereum blockchain?

The developers anticipate no downtime as blocks transition from being built using PoW to PoS.

Will investors be able to withdraw staked ETH?

Staked ETH (stETH), a cryptocurrency backed 1:1 by ether, currently lies locked on the Beacon Chain. Withdrawal of stETH holdings will be made available during the next upgrade, the Surge. As a result, the assets will remain locked and illiquid for nearly a year after the merger.

Will the validators be able to withdraw their ETH rewards until the Shanghai upgrade?

While stETH remains blocked for investors until withdrawals are resumed following the Merge, validators will have immediate access to the fee rewards and maximal extractable value (MEV) earned from the Ethereum mainnet.

What is the Merge?

Ethereum, the world’s second-largest cryptocurrency’s blockchain, is preparing to switch to a ‘Proof-of-Stake’ (PoS) protocol. Before we talk about the Merge, let’s learn what is Ethereum.

Founded by Vitalik Buterin in 2015, Ethereum is a decentralized, open-source blockchain with smart contract functionality (a computer program built to automatically execute events according to the legal terms of the contract).

The Merge is designed to shift the Ethereum blockchain from the current Proof-of-Work (PoW) mechanism to Proof of Stake. The move is expected to make the existing network more efficient, sustainable, and scalable.

In Proof of Work, the miners need to compete for rewards based on the computational powers they can acquire. This method offers a high level of security and provides a decentralized method of verifying transactions. However, it is inefficient with slow transaction speeds and expensive gas fees.

On the other hand, in Proof of Stake, the validator is randomly chosen based on how many coins they have locked up in the blockchain network, also known as staking. This process is energy-efficient and provides fast and cheap transaction processing.

But adjusting the second-largest blockchain from one system to another is a complex, long process. Each decision must be thought out thoroughly. We’ll take you through the reasons and stages of the protocol’s new transformation.

The Merge is the first of five planned upgrades for Ethereum and is expected to take place on September 15, 2022.

Phases of the Merge

The Merge is the first part of the Ethereum 2.0 upgrade. The entire plan consists of five phases:

  • The first phase in the pipeline is called the Merge. This phase will involve the “merging” of Ethereum’s current blockchain with Beacon Chain, the network responsible for creating new blocks. This process makes sure the new blocks are valid, and rewards validators with ETH for keeping the network secure. In other words, it will transition Ethereum’s consensus mechanism from Proof of Work to Proof of Stake.

● The next phase is called the Surge – this phase will bring sharding to the Ethereum blockchain. Sharding is a scaling process that will break Ethereum into separate partitions or “shards” to ease the network’s computational load. This upgrade is planned for 2023.

● Then next comes the Verge, which is the introduction of “verkle trees.” This upgrade involves improving data storage for the Ethereum nodes. It will also help Ethereum scaling, as it allows more blockchain transactions while keeping the blockchain decentralized.

● The fourth phase, called the Purge, is a similar upgrade that involves data storage for validators. A validator will be responsible for storing data, processing transactions, and adding new blocks to the blockchain. This transition will reduce the necessary hard drive space required for the validators. This also includes the collected data about past events and outstanding debt that will help in rearranging the storage and reducing network congestion.

● The last and final phase, called the Splurge, is a series of miscellaneous upgrades made to ensure the network runs smoothly after the prior four stages are launched.

What Does This Mean for Ethereum Miners?

As a user or holder of ETH or any other digital asset on Ethereum, as well as non-node-operating stakers, you need not do anything with your funds or wallet before the Merge.

Despite swapping from PoW, the entire history of Ethereum remains intact and unaffected after the transition to PoS. Any funds held in the wallet before the Merge will still be accessible after the Merge. No action is required to upgrade on the user front.

After the Merge, the practice of ETH mining on the Ethereum 2.0 network will end, either forcing miners to pivot to mining on Ethereum Classic or find other platforms.

Why Is Ethereum’s Upgrade Significant?

Fundamentally, Ethereum is changing the method that it uses to process transactions. Although the use of the PoW method is effective, it isn’t very efficient. Miners must invest a lot of time, energy, and equipment to have a chance at mining the transaction blocks and earn rewards.

Over half of the validator nodes can be acquired by businesses with significant computational power, which in return will pose major security risks to Ethereum. A decentralized blockchain cannot contain centralized points of failure. Because of this, the creators of Ethereum have decided to switch to a different consensus algorithm, called PoS.

Ethereum vs. Bitcoin

Bitcoin and Ethereum are the two most popular cryptocurrencies that make 63.6% of the global crypto market capitalization.

The price of Ethereum has risen nearly 648% in the past three years, which is more than double the 250% gains in Bitcoin during the same period.

The Merge will make Ethereum a more attractive investment than Bitcoin from an Environmental, Social, and Governance (ESG) perspective. However, it doesn’t pose any necessary threat to taking Bitcoin’s position as the world’s top crypto.

Several reports claim that Bitcoin and Ethereum are more complementary rather than competitive within the crypto market. Both cryptocurrencies serve different purposes. Bitcoin is a decentralized digital currency that helps you buy, sell, and exchange directly, without an intermediary like a bank. While Ethereum’s utility is as a Web 3.0 asset, that allows anyone in the network to use the service. Both are an integral part of the overall digital asset ecosystem.

Ethereum is also expected to complete a major trial for the Merge in June, using the test network Ropsten. Once the Ropsten upgrade is completed, Ethereum developers have another two test networks to upgrade before the merge of the main Ethereum network.

Ethereum’s Transition From Mining to Staking

Once the Merge is completed, staking will replace the mining process to verify Ethereum transactions. The staking process requires a specific period in which cryptocurrency tokens cannot be traded to participate in the transaction verification process.

In the PoS method, the algorithm gets to choose which validator gets to add the next block to a blockchain-based on how much cryptocurrency is staked. Investors must stake a minimum of 32 ETH to become an Ethereum validator.

There are currently more than 300,0000 Ethereum validators. The more ETH that a validator stakes, the more likely he is to produce blocks. Each time a validator produces blocks, he earns rewards in Ethereum in exchange for handling validation duties.

Some Common FAQs Around The Merge

Will the Ethereum gas fees be reduced after the Merge?

While reduced gas fees top every investor’s wishlist, the Merge is a change of consensus mechanism that will transition the Ethereum blockchain from PoW to PoS. Lowering transaction fees in Ethereum will require working on expanding the network capacity and throughput.

Will Ethereum transactions be faster after the Merge?

Ethereum transactions will not be noticeably faster. However, Beacon Chain allows validators to publish a block every 12 seconds, which on the mainnet is roughly 13.3 seconds.

Will the Merge result in downtime of the Ethereum blockchain?

The developers anticipate no downtime as blocks transition from being built using PoW to PoS.

Will investors be able to withdraw staked ETH?

Staked ETH (stETH), a cryptocurrency backed 1:1 by ether, currently lies locked on the Beacon Chain. Withdrawal of stETH holdings will be made available during the next upgrade, the Surge. As a result, the assets will remain locked and illiquid for nearly a year after the merger.

Will the validators be able to withdraw their ETH rewards until the Shanghai upgrade?

While stETH remains blocked for investors until withdrawals are resumed following the Merge, validators will have immediate access to the fee rewards and maximal extractable value (MEV) earned from the Ethereum mainnet.

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