It is finally happening. And we just can’t keep calm. Why should we, after all? This is as hot as it gets. Merge is probably the biggest transition in the history of Blockchains. Are you following so far or does this sound like gibberish to you? Well, if you belong to the latter, stay with us. Because today, we take it from the top!
In this light-hearted post, we’ll try to explain to you about ‘the merge’ like you are 5. And as we achieve that feat, we’ll talk about some implications of the merge. While we are on it, it would be a good opportunity to bust some serious myths floating around it. So let’s get started.
Everyone is all gung ho about it. Well, in their defense, the build-up was just insane. Ethereum foundation has been trying to hit this milestone for over two years now. And finally, it is soon going to become a reality on the 15th of September!
Oh yes! So Ethereum is moving from proof-of-work to proof-of-stake. For the uninitiated, these are two different consensus mechanisms. Don’t worry. We’ll break it down further. You see, Blockchains are decentralized. So, the way the transactions are validated is through nodes (or a set of computers attached to the network). These computers talk to each other to determine the current status of the network at each moment.
This agreement (or consensus) can be achieved in a few different ways. Proof-of-work is where you put electricity as collateral and try to validate the transactions to earn a reward. All the nodes do this simultaneously and only one of them wins. This means that electricity used by other nodes goes in vain.
Proof-of-stake on the other hand is greener. Here, you put the actual money as collateral to win rights to validate the transactions. So instead of all the nodes giving it a shot, only one (selected randomly) goes ahead and validates the transaction.
Well, we are keeping our promise. Here’s a brilliant analogy for absolute noobs to understand what’s happening.
Imagine Bitcoin as a young teenager. It wanted a car to get around. So he decided that the most important part of a car is the engine. And this engine must have these three capabilities.
So he gets a muscle car.
Fast forward to a couple of years later. Bitcoin has a sibling called Ethereum. Ethereum wants a car as well but it has another criterion. Apart from the engine being reliable, strong and safe, it also wants it to be
However, it cannot afford the electric car as of now. Fast forward half a decade and this younger sibling has made some money. It can now afford the new engine.
But here’s the problem. The car cannot stop while you change the engine. So how do you swap the engine without stopping the car?
And if you get what we just mentioned above, you are covered. That is exactly what is happening in this ‘Merge’.
This duplicate car here is known as the beacon chain.
The Beacon chain has been running in parallel to Ethereum PoW for the past two years. All the transactions on Ethereum PoW are copied to this chain.
The merge is just the critical point where these engines will be swapped. In other words, PoW chain will merge with the PoS chain.
Oh, if you are wondering if this will be successful or not, there are test arenas to try this stuff out. In the past 3 months, the merge has happened on three different testnets of Ethereum.
Let us switch back to reality. What is it about the Merge that will impact you as an individual or investor? Turns out that Merge is a great step in the right direction. And if you like Ethereum, there’s a lot to look forward to. Let us talk about it in detail:
1. Carbon Emissions:
Well, nothing beats this. The carbon footprint for Ethereum will go down by 99% after the implementation of the merge. This is because PoS consumes a lot less energy as compared to PoW consensus mechanism.
This takes Ethereum towards becoming an ESG-compliant Blockchain. This also takes away one of the biggest critiques of Blockchain technology.
2. Emission Rate:
In a proof-of-work system, miners are rewarded for validating transactions. As a result, new ETH is issued each day, each moment, each block to incentivize miners to supply computation to validate transactions. These rewards are roughly $20 Million per day. This is essentially the cost paid by Ethereum to the miners to keep everything in place.
In a PoS Blockchain, you don’t have to pay the miners for electricity deployed in providing the computation. This is because now you don’t have competition. So instead, you get to secure the network at a much lesser price.
Due to these factors, new Ethereum entering the ecosystem is about to go down from 4.3% to 0.4%. That is 90% less inflation.
3. Supply Shock:
The way a PoS network works is when people like you and I stake our cryptocurrency with a validator in the hope to get validator rewards, the more the amount staked with you as a validator, the higher your chances of winning the rights to validate.
Currently, only 10% of ETH is staked in the Beacon chain. Once the merge happens, a lot more people are likely to stake, resulting in lesser supplies and hence better prices.
Now that we have understood what Merge is and how it is impacting us, let us also address some of the misnomers floating in the market around merge.
1. Ethereum Becomes Faster:
Ethereum is capable of processing 15 TPS. Some people believe that the Merge is going to change that. However, that is not true. While the merge puts Ethereum on the track to becoming faster, it is not going to happen with this update.
Merge is going to impact consensus protocol and not the execution layer.
2. Bye-Bye Gas Fee:
Well, if you are holding some transactions in the hope to complete them at a cheaper price in future, wait no more. Because there is going to be no impact on gas fees after the merge.
Change in the consensus protocol has nothing to do with the gas fees.
In general, the Merge is a massive dose of hopium. For my non-crypto native readers, that is how we refer to good news amidst bearish sentiments. Overall, we are witnessing an absolute rejig of the world’s most popular Blockchain and things are about to get exciting.