The merge signifies the Ethereum network’s transition to proof-of-stake (PoS), its new technique for validating crypto transactions (also known as a consensus mechanism) for crypto investors.
- The Beacon Chain (announced in 2020) is Ethereum’s PoS network.
- Similar to Bitcoin, Ethereum miners strive to publish blocks in today’s PoW system by competing to resolve cryptographic problems.
- Ethereum is a blockchain with its currency, Ether.
Most crypto generally generates massive electricity bills equaling the total consumption of a small nation. This high energy consumption emanates from the fact that crypto mining needs high-powered computers requiring tons of power. That will change with the highly anticipated Ethereum merge and together with the launch of Ethereum 2.0.
Understanding the merge
The Beacon Chain (announced in 2020) is Ethereum’s PoS network. However, it does not yet apply to transaction processing. For the time being, it is effectively simply a staging location for machines running the Ethereum network in preparation for the PoS upgrade.
To fully convert to PoS, Ethereum’s Beacon Chain (the “Consensus” layer) must combine with Ethereum’s PoW mainnet (the “Execution” layer).
This blockchain technology, renowned for processing smart contracts, is making the next significant step towards overall efficiency, including energy efficiency and cost savings.
The merge will partition the Ethereum network into smaller data blocks, allowing for more transactions at a faster rate. Most analysts believe that Ethereum 2.0, in its new form, will be able to re-employ some of the engineers that left the blockchain.
Ethereum is too costly for developers working on web 3.0 applications due to the increasing gas rates. However, after Ethereum 2.0, these developers may return to the network. The switch to proof-of-stake should lower Ethereum’s energy usage by 99.95%.
The merge signifies the Ethereum network’s transition to proof-of-stake (PoS), its new technique for validating crypto transactions (also known as a consensus mechanism). The new approach will substitute the more power-hungry proof-of-work (PoW) strategy introduced by Bitcoin.
Differentiating proof-of-stake (PoS) from proof-of-work (PoW)
The methods used to determine who has the privilege to register the next “block” of transactions on the network vary between proof-of-stake (PoS) and proof-of-work (PoW).
Similar to Bitcoin, Ethereum miners strive to publish blocks in today’s PoW system by competing to resolve cryptographic problems.
To construct blocks in the forthcoming PoS system, validators that stake at least 32 ether ($50,000) with the network are chosen randomly. The more ether one invests, the more likely one will be selected.
The miner/validator who wins a block in either scheme is paid with a combination of transaction fees and freshly minted Ether (ETH). PoS validators are also rewarded for various acts that assist in safeguarding the network.
Ethereum has more use cases than Bitcoin
As crypto diehards, investors, and others anticipate this, Ether, Ethereum’s native currency, has risen in value, now trading at roughly $1,600/eth ahead of the merge in mid-September. They believe that the merging effects of Ethereum will enhance the demand for money.
In contrast, Bitcoin has lost 29% of its value since July, according to CoinMarketCap, a worldwide tracking website for cryptocurrency asset prices owned by Binance. Despite this, Bitcoin’s value remains significantly higher than Eth’s at $19,834.
Because Bitcoin is a cryptocurrency, its utility is limited to financial transactions. Contrastively, Ethereum is a blockchain with its currency, Ether. Therefore, Ethereum has more use cases than Bitcoin, according to Kaavya, founder of Lumos Labs, a developer-focused metaverse ecosystem.
What the Ethereum merge means for crypto investors
The merge will lead to faster transactions
Ethereum 2.0 intends to perform 100,000 transactions per second, substantially lowering gas fees – the fees paid to the blockchain by development companies or crypto consumers to fulfil a transaction.
After sharding, it can accommodate more transactions, making it quicker and simpler to access. Because more people can use it readily, it will get cheaper in addition to the economies of scale notion.
Reduced gas prices
Ethereum only processes 30 transactions per second, with the gas fees or transaction costs going as high as $100. Consequently, the fewer transactions fulfilled, the higher the gas fees. After the merger, an increase in the throughput will correspond with a fall as low as $0.02 post-rollups, according to the Network founder, Vitalik Buterin.
Sustainable, less energy-intensive mining guaranteed by the merge
According to the Ethereum Foundation, one Ethereum 2.0 transaction will require power equal to around 20 minutes of television (35 watts). Buterin’s goal is to cut energy use by 99.95%.
Initially, making a transaction required high-powered computers to answer complex mathematical equations to gain incentives for mining or verifying crypto transactions.
Since it does not need validators to solve these complicated equations and does not demand hardware, Ethereum 2.0 consumes considerably less energy to validate crypto transactions.
Sharding, or partitioning the Ethereum blockchain into several data blocks, will attract more developers to Eth 2.0 for project development; the blockchain underpins the vast majority of web3 initiatives.
Its diverse applications intend to make banking more customer-centric and rethink how digital payments are made without relying on third-party data. It also intends to lessen dependency on fiat currency.
Better security and protection for crypto investors
The Solana hack, which wiped out over $8 million in user assets, demonstrates how susceptible wallets are to hackers. The transition to proof-of-stake for Ethereum will make it very difficult and costly for hackers.
While users may spend less power, hackers need far more energy to break it, making it incredibly energy intensive. Moreover, every validator on the Ethereum 2.0 network will have a verifiable address.
A decrease in fees not as yet
No projections exist that transaction costs for will change due to the Ethereum merge. Future network improvements, such as danksharding and proto-danksharding, may assist in alleviating the high network costs. However, they are not anticipated until at least 2023.
Rollups, third-party platforms like Arbitrum and Optimism that package transactions and execute them independently from Ethereum’s mainnet, remain the primary solution to transaction cost concerns for crypto investors.
The merger offers plenty for crypto investors to look forward to but will not generate instant benefits. Ethereum 2.0 will have to go through many phases to reach its full potential. Buterin said at the Ethereum Community Conference on July 22 that after the merge,’ Ethereum would be just approximately 55% complete. The full Ethereum merge will occur sometime in 2023.