Nick

Jun 14, 2022

The $200 Billion Merge

One of the biggest changes to web3 is coming this summer.

Ethereum, the world's second largest cryptocurrency, is taking their network from Proof-of-work to Proof-of-stake.

It will be the most interesting code merge the market has ever seen.

It's high risk, high reward.

The Merge Mechanics

Ethereum has been discussing the change to Proof-of-stake since 2014, even before the original chain went live.

Vitalik posted a blog article outlining the strengths, and citing proof-of-stake does not waste any significant amount of electricity.

There were weaknesses noted around the transition, tailored around security, but the strengths outweighed them.

What's different in PoW and PoS?

These two consensus algorithms have their similarities and differences.

They both offer rewards for securing the network, but with a different approach.

In a Proof-of-work consensus, energy is used to calculate complex math problems. The miner who solves the equation first, receives the reward.

This is what miners do.

In a Proof-of-stake consensus, validators on the network will pledge a reward if the network rules are followed.

This uses less energy than miners.

Ethereum is #2 in current market cap and this was all created by mining.

Miners have 5-6 figures of United States dollars invested. This meant that Ethereum had to create a plan to force the consensus algorithm change.

They decided on making the math equations more difficult, known as a "difficulty bomb". The difficulty bomb would slow down block times to around 13 seconds.

The good news for miners?

This difficulty bomb, planned since 2016, is not implemented as of this publication. This is due to technical challenges on merging the entire chain.

The Technical Process

The PoS chain is also known as the "Beacon Chain".

The Beacon Chain launched on December 1st, 2020. This chain went live in parallel with the PoW chain, allowing the developers to work on both.

While at the moment there are two chains running, this will not be the case forever.

"The Merge" is taking the PoS chain, and merging it into the PoW chain. Doing this merge will guarantee that none of the history is lost since Ethereum's genesis block.

The blockchain will still have a record of every transaction completed.

After the merge is completed, the Beacon chain will coordinate the agreements among validators on the state of the network. The Execution layer, what we know as PoW chain today, will handle the block production. Both will then be Proof of stake.

Ethereum users shouldn't notice a difference in these changes. Validators will be required to run both layers.

The Investment Opportunity

When the Beacon chain launched back in December 2020, users were able to stake their Ether to help secure the new consensus layer.

If you want to run your own validator on the Beacon Chain, it requires 32 ETH. Sounds like a lot, but third-party services offer help as users "pool together" to meet that validator requirement. You will receive a fraction of the yield, dependent on how much ETH you stake in the pool.

Ethereum does not offer these pools on it's Layer 1 Network.

Here are some different places to stake without the 32 ETH requirement:

  • Coinbase (Centralized)

  • Binance (Centralized)

  • Kraken (Centralized)

  • Rocket Pool (Decentralized)

  • Lido (Decentralized)

At the time of this publication, there are 12.7 Million ETH being staked.

The Future Outlook

After the Merge, there is still work to be done to reach the end goal.

There are questions around if the Merge will fix the high gas fees. This is not the case. The Merge is setting up the foundation for Ethereum developers to begin addressing these gas issues. This feature is known as "Data Sharding".

Data Sharding is expected to go live sometime in 2023. This was lower on the priority list for Ethereum Developers. Especially with the technology of Layer-2 applications.

Shard chains will only work after the PoS consensus mechanism is in place.

When data sharding goes live, layer-2 applications can change their focus. They will stop focusing on reducing gas fees and go to building utilities on top of Ethereum.

Conclusion

Ethereum has big dreams, but these big dreams come with high risks.

They have gone on record of saying "The Merge can be thought of as replacing the engine of an airplane while it is still flying". They have done their homework, the testing looks good (so far).

Excited for what the future of Ethereum has for us!

Nick

The Tech Mountaineer. Building a portfolio of online solo businesses. Tweets on web3, writing, and becoming a tech solopreneur.