Explained: ETH’s Merge

Good morning! Welcome to The Daily Moon. It’s a brand new week. But Alibaba wants to lie low for a while. Alibaba Cloud launched an NFT solution with a lot of social media fanfare. Just hours later, it quietly deleted all these posts. Is China’s crypto ban the reason? Guess we’ll never know.

Moving on, today we talk about Ethereum’s move to consensus and what it means for the market. Let’s get started.

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ETH Begins ‘The Merge’

Ethereum aced its first test. The Ropsten test network has merged its proof-of-work (PoW) layer with Beacon’s proof-of-stake (PoS) chain. It’s a precursor to the Ethereum mainnet merger with Beacon’s PoS by August.

‘The Merge’, as it’s being called, involves a big shift. The Ethereum blockchain will move from PoW to PoS. The move has been named the ‘consensus layer’ and will help cut energy costs by 99%.

The trifecta of Eth2There are three layers to Ethereum, moving from PoW to PoS. Before we get there, it is essential to understand what PoW and PoS are:

1. PoW: High-power computers are used to solve complex maths problems to mine crypto.

2. PoS: This involves ‘staking’ or putting some crypto to validate a transaction.

Once Ethereum's move is complete, investors won’t need to spend millions of dollars on buying specialised hardware to mine this crypto.

The actual transition from Eth1 to Eth2 is being done in three phases: Beacon, The Merge, and Shard Chains. Here’s how it will work:

1. Beacon Chain: This was the first step for moving to PoS. Beacon went live in December 2020 and will be Ethereum’s backbone to the shift.

2. Testing: There was a dry run where Ethereum’s test network Ropsten was merged with the Beacon chain. There’ll be two more test mergers.

3. The Merge: The entire Ethereum network will move to the PoS model through The Merge. Here, the mainnet and Beacon will fuse ‌to form a single chain.

4. Shard Chains: Sharding will involve splitting the data to spread the load. This will reduce network congestion and increase the number of transactions per second.

5. Rollups: The final stage involves scaling layer 2 projects on the Ethereum blockchain. Here, the load is taken off the main network. Transactions are performed on an allied chain but validated by consensus.

Currently, the computing system validates the addition of new blocks. Upon moving to PoS, validators who stake 32 ETH will take over the role of adding new blocks.

Who benefits?There are three stakeholders who’ll benefit:

1. Environment: The power consumption for mining will go down. Right now, Ethereum mining consumes 26 TWh of electricity per year.

2. Users: Ethereum’s current network can only handle ~30 transactions per second. Its 2.0 version promises up to 100,000 transactions per second.

3. Businesses: Projects built on the Ethereum blockchain will get faster because of sharding.

Even before the final changeover takes place, developers working on the sidelines have benefited.

1. Layer-2 developer StarkWare raised $100 million at an $8 billion valuation.

2. Optimism launched an airdrop of its OP token.

Projects built on the Ethereum blockchain, such as Axie Infinity, OpenSea, MakerDAO, SushiSwap, and Uniswap, are set to be the big winners.

• Transactions will be completed faster.

• Costs will come down because of the PoS model.

• More users can be onboarded because of sharding.

Now, let’s talk challenges In its seven-year history, this will be amongst the biggest shifts for the Ethereum blockchain. There are a few concerns:

• PoS means ‌you will have to stake crypto for a long time. If prices slide, you will lose.

• The entire network isn’t involved in verifying transactions. So there is a possibility of fraud.

• Delays may affect prices, considering it’s still a bear market.

As of May 8, the total value of the Eth2 deposit contract was 12,453,234 ETH. But, the price of Ethereum is down ~51% since January. Experts predict a positive impact of The Merge on its future prices. All of this depends on whether Ethereum gets it right on the first try.

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