Ethereum Merge: From Proof-of-Work (POW) to Proof-of-Stake (POS)
One of the most anticipated events in cryptocurrency history is closing in.
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To put it simply, the Merge is the most noteworthy upgrade in the history of Ethereum. It’s the process of merging the Ethereum Mainnet with the Beacon Chain proof-of-stake system. Ethereum is shifting from its current proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) model to become a more environmentally friendly and efficient protocol. It’s believed that the Merge will reduce Ethereum's energy consumption by ~99.95%.
Before diving into the specifics of this disruptive upgrade, let’s do some housekeeping and clear up the concepts that are affected the most.
What are consensus mechanisms?
A consensus mechanism is the process of agreement about the content of shared ledgers in blockchain technology. It’s one of the greatest, if not the greatest, feats of blockchain technology. Computers (a network of nodes) need to agree on the state of the blockchain - which transactions to add and in which order. There are many types of consensus mechanisms being operated. The two major consensus mechanisms tested to be scalable and successful are PoW and PoS.
In a centralized system, like the banking system we’ve been using for centuries, the central authority manages the master ledger and notifies all the interested parties about changes. The problem with a centralized system is that it’s easier to target and attack, and a possible failure can mean an unmedicated disaster for the entire economy. A consensus mechanism achieves that balance by removing the need for a central authority.
Let’s use an example to better illustrate how a consensus mechanism works. The Byzantine generals problem is a game theory conundrum that describes how difficult it is for different parties to reach an agreement without the help of a trusted mitigator. Imagine ten different generals dispersed in different locations, trying to decide when they should attack the enemy. How do they coordinate the attack? How do they ensure the information is not intercepted by the enemy? What if one of the generals is a traitor and uses the information to their advantage?
What is proof-of-work?
The most commonly used consensus mechanism for solving that problem was Proof-of-Work, a process that requires members of a network to expend effort solving an arbitrary mathematical puzzle in order to verify the accuracy of new transactions that are added to a blockchain. The problem with the PoW consensus mechanism is that it requires miners to compete for rewards based on the amount of computational power they can acquire. That makes the whole process slow, and difficult to scale while consuming insane amounts of energy.
What is proof-of-stake?
The Proof-of-Stake mechanism randomly selects validators relative to the total amount and time their ether (ETH) currency has been staked. Once they are selected they then proceed to validate transactions in exchange for a reward in ETH. On the other hand, if they fail to validate or they do something bad or malicious, they will be penalized by losing the ETH they staked. That incentivizes validators to behave well and make sure the blockchain stays trustworthy.
The most notable benefits of Proof-of-Stake compared to Proof-of-Work are:
- Elimination of advanced and expensive hardware like mining rigs
- Energy efficiency
Why is the Ethereum merge so important to investors and the community?
Investors should see the Merge as a software update. Currently, there is no need for their active involvement nor should they worry about any changes regarding their investments. Due to the massive anticipation and hype around the Merge, many people see it as the solution to all the problems that have been holding Ethereum back. The truth of the matter is that it’s not the be-all-end-all solution but rather the next step of its evolution. As far as the community goes, here are the main things that make this update so exciting:
- It directly addresses Ethereum's scalability concerns
- It helps Ethereum retain the dApp and community built on it, even with the competition from newer L1 blockchains
- Significantly boosts energy efficiency
- Because of the positives mentioned above, many expect the demand for ETH tokens to rise, increasing Ethereum stake, which is good news for investors
Yes, the Merge will significantly improve energy efficiency, ultra sound money with better crypto-economics, supply constraints and a seamless transition. What it won’t do is reduce gas fees or solve any user-experience-related issues. As mentioned before, the Merge is a chapter in a much larger book about Ethereum’s evolution. The benefits and advantages of the Merge will be more visible in due time. Any projections on what it will instantly mean for the industry are just speculations. If facts are anything to go by, the recent test Merge was a successful ‘dress rehearsal’ for what is to come.
During the post-merger period, the Ethereum team will start on the next scheduled transition - sharding, which allows blockchains to scale vertically. These steps will hopefully lead to the realization of Ethereum's true vision: to be more scalable and secure, but also to remain decentralized.
For those that want to become active contributors to this entire process, follow this blog post series on Becoming a Validator on Ethereum 2.0.