The Ethereum merge is one of the most significant events to happen in the cryptocurrency space. The way Ethereum works has been criticized as being slow and inefficient, while blockchain technology has become more popular than ever. So, how is the merger actually going to change things? Here's what investors should know about the Ethereum merge – and why it matters so much for this industry.
What is “The Merge”?
Ethereum has just completed its long-awaited migration to a Proof-of-stake* transaction validation mechanism. The blockchain specializing in DApps abandons Proof-of-work* and therefore mining for staking. The Merge represents the merger of the Beacon chain (Consensus) with the Ethereum PoW mainnet (Execution).
Since 2020, Ethereum already has a PoS network called Beacon Chain. However, this network is not yet used to process transactions. It is mainly used to allow the computers making up the Ethereum network to prepare for the big update to PoS.
This transition therefore requires a merger between the Beacon Chain acting as the “consensus” layer and the PoW mainnet serving as the “execution” layer. This is why this change is called “The Merge”.
An energy consumption reduced by more than 99%
Proof-of-Stake is more energy efficient than Proof-of-Work because it doesn't require miners to use computers to solve complicated mathematical problems in order to confirm transactions on the blockchain. Instead, users "stake" some Ether (the native cryptocurrency of Ethereum) in an account, which allows them to validate blocks on the chain by using their wallets' private keys in combination with random numbers generated by centralized servers. This process requires no mining hardware or electricity costs but does require that stakeholders put up enough Ether so that they're incentivized not to act maliciously or have their stake stolen from them by others trying to take over control of validator nodes/accounts within this system
To validate transactions on Ethereum, network participants – validators and no longer miners – no longer have to run energy-intensive machines, but stake ethers, locking them in dedicated accounts.
The Ethereum Foundation thus estimates that the merger makes the blockchain greener with energy consumption reduced by 99.95%.
No gain in speed or drop in fees
Contrary to popular misconception, the Ethereum blockchain gains very little in scalability (transaction processing speed) with The Merge. The network now validates blocks very slightly faster, but congestion issues will still be present. Transaction fees are also not going down. One of the updates will allow for larger blocks, which in turn will increase the number of transactions Ethereum can handle. This is important because it will reduce congestion on the network and make it more efficient.
In fact, these are upcoming updates that will allow Ethereum to become faster and cheaper. Vitalik Buterin said this summer that the ETH blockchain would be only 55% complete after the merger. Updates, known as Surge, Verge, Purge and Splurge, will thus contribute to making the second blockchain on the market more scalable, in particular thanks to sharding, and less expensive.
The Merge also makes Ethereum more secure by making it easier to detect any potential attacks or flaws in the system. With a PoW mechanism, 51% of the power of the network is needed to control it, or about $5 billion worth of mining hardware according to popular ETH developer Justin Drake.
Furthermore, the developer explains that the network guards can now identify the attacker and eject him from the system. “More than that, we can penalize them, including destroying their entire bet,” Drake said.
Change in monetary policy
With The Merge, Ethereum's monetary policy is changing. Cryptocurrency is not becoming deflationary. This is still a misconception. Adoption of PoS adds “deflationary pressure” by distributing smaller rewards. Miners were generating nearly 13,000 ETH daily. Validators now earn significantly less, around 1600 per day.
At the same time, a certain amount of ETH paid into the network as transaction fees is now burned, a change that came into effect in 2021 with EIP-1559. This, combined with a drop in the emission rate, thus adds deflationary pressure, according to blockchain experts.
The Ethereum merge is an important step in the future of cryptocurrency. It will help to improve the security and usability of Ethereum, while at the same time making it a more viable choice for investors. However, there are still some issues that need to be ironed out before it can be rolled out on a large scale. The developers of Ethereum have stated that they expect this process to take about two years from start to finish, but only time will tell how long it really takes for these changes to take effect.