The Merge was completed on the 15th of September 2022 at 06:42:42 UTC. Those are words that many in the crypto community have waited years to hear.
Ethereum, the second biggest crypto by market capitalisation, underwent its most significant change since 2015 this week, moving from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus.
This was no mean feat and required years of careful research and testing. The risks involved with the move from PoW to PoS were significant, and never before have we seen an open system that secures billions of dollars attempt such a migration. You can understand why the Ethereum developers adopted a go-slow attitude and postponed the upgrade as often as they did; it had to be flawless.
Thankfully, it has gone through, and the next step of Ethereum’s roadmap can begin. This week we will investigate what The Merge is and where Ethereum is headed from here.
What Is The Merge?
The Merge is the term used by the crypto community to describe Ethereum’s move from a PoW to a PoS network. The Ethereum Foundation defines it as: “The Merge represents the joining of the existing execution layer of Ethereum (the mainnet we use today) with its new proof-of-stake consensus layer – the Beacon Chain.”
However, an excellent place to begin our journey into understanding The Merge is defining what PoW and PoS consensus mechanisms are in the first place.
Consensus mechanisms stipulate the rules of how truth is determined by any given blockchain network. There are many different approaches to determining truth, and each one comes with its own benefits and drawbacks. Proof of Work is an example of a consensus mechanism, and before we get to Proof of Stake, it is worthwhile taking the time to understand Proof of Work so you can understand the key differences.
Proof of Work
Proof of Work was initially created to help reduce spam email. The idea behind it was that computers were required to perform a small amount of computational work before sending an email. This would be trivial for any computer sending a few emails at a time, but it would be impractical for those sending a large number. However, it was with Bitcoin that Satoshi Nakamoto first applied it to digital money in a large-scale commercial sense.
In Satoshi’s system, individuals could buy expensive computational hardware and direct it toward mining. Mining at its most basic is expending computational energy to “find” or propose valid blocks that meet the rules of the network. This is the proof of “work” you are doing in the system. If the nodes of the network agree that it is, in fact, a valid block and it meets the consensus rules of the network, they will accept it and add it to the chain and blocks that have come before. If the new block doesn’t agree with the consensus rules (which is easy to prove), you forfeit your chance to receive the block reward.
As you can probably guess by now, Proof of Stake differs in the “proof” you have to provide to the network.
Proof of Stake
Proof of Stake was created to address some of the perceived shortcomings within a Proof of Work system. Peercoin, which launched in 2012, was the first project to implement Proof of Stake consensus, and since then, its popularity and use have risen immensely.
As described above, miners have to purchase expensive computational hardware in a Proof of Work system and expend electricity to order and propose blocks to secure the network. In a Proof of Stake system, miners or “validators”, as they are known, provide their crypto holdings as collateral and must put it up as a “stake” in order to earn the right to validate blocks according to the network’s consensus rules. Just as miners in Proof of Work broadcast the newly mined blocks to the network, and they are checked against their consensus rules by the nodes, so too are the blocks in Proof of Stake. However, in this system, if you are found to be “lying” about the transactions within the block by the network’s nodes, you get your stake or collateral “slashed” or taken away.
These financial incentives are what inspire people to act honestly in the system; they have rules enforced by code that means at any point in time, it is in your best interest to contribute positively to the system as a whole. This is what makes it possible to reach a global consensus on an open ledger without any centralised coordinating entity, something not possible before Satoshi’s creation.
Fidelity Digital Assets have created a handy table that summarises PoW and PoS, their core differences, and their advantages and disadvantages:
Source: Fidelity Digital Assets
The Journey To The Merge
The journey to The Merge has been a long one. The idea of an Ethereum PoS chain has been debated since Ethereum was first conceptualised. However, this Merge and the rest of the Ethereum 2.0 roadmap were first proposed over half a decade ago by the Ethereum developers and served as a viable route to help Ethereum increase the Transactions Per Second (TPS) and reduce gas fees. Very quickly, all those involved realised the magnitude of such an undertaking and research and development began. This culminated in the Ethereum PoS Beacon Chain launch on the 1st of December 2020.
The Beacon Chain
The Beacon Chain has functioned as a standalone Ethereum chain and allowed the developers to test the Ethereum PoS consensus. The Beacon Chain doesn’t process transactions or smart contracts; instead, it coordinates the network of stakers currently operating on the Ethereum PoS chain. This chain has operated concurrently with the Ethereum mainchain for nearly two years, providing an environment for the developers to ensure that any bugs or issues present are addressed, essentially the Ethereum 2.0 testnet. This chain became the central hub for Ethereum’s consensus when The Merge occurred; this means that it will process, execute and settle all transactions and smart contracts going forward.
As the above diagram suggests, The Merge was the point at which the Beacon Chain and the Ethereum PoW chain became one, creating one chain that contains the entire transactional history of Ethereum. However, there was still a significant amount of testing that took place on Ethereum’s PoW testnets, and over the course of the last few months, they all went through their own “Merge” and successfully transitioned to PoS. This started with the Ropsten testnet in June of this year, Sepolia in July and Goerli in August. These tests provided invaluable data that allowed the developers to identify and tweak any issues that would have arisen during the transition of the mainnet. With the successful “Merge” on the Goerli testnet, the decision was made to move forward with The Merge on the mainnet. To do this, the developers initiated a hard fork called the Bellatrix upgrade on the 6th of September, which “prepared” the chain for The Merge. This upgrade would trigger The Merge to occur at a Total Terminal Difficulty (TTD) of 58750000000000000000000, which represented the total cumulative difficulty of all mined Ethereum blocks. When the chain reached this TTD, the difficulty level increased to a point where mining new blocks on the PoW chain was no longer possible. This marked the successful Merge of Ethereum’s Execution layer and the new PoS consensus layer.
This Merge was a long time in the marking; yet, what does and doesn’t it mean for Ethereum today?
What Does The Merge Change?
The Merge has been anticipated for years. So what is changing and what isn’t?
What Is Changing
- Ethereum moves to PoS, a less energy-intensive chain.
- Block times should be more consistent.
- The Ether token issuance rate will drop, and when combined with EIP-1559 (burning of the base fee), there may be a consistent reduction in the Ether token supply.
- The nature of PoS makes Ether a yield-bearing asset if staked by holders.
What Isn’t Changing
- There will be no significant improvement in the speed of the chain or a reduction in gas fees.
- Those who have staked on the Beacon Chain will still be unable to withdraw their Ether. This will only be possible in a subsequent upgrade called Shanghai, which is planned to take place 6-12 months from now.
While The Merge was a significant step toward the final vision of Ethereum, it is just the first major step in a five-stage roadmap laid out by the network developers. So where to from here?
The Ethereum Roadmap
The first step has been achieved, and in Vitalik’s own words, “Ethereum can be up to being 55% complete after the merge.”
The rest of the roadmap is broken into five stages:
1) The Merge
2) The Surge
3) The Verge
4) The Purge
5) The Splurge
The next step in the Ethereum roadmap is The Surge. This will introduce a scaling technique called sharding to meaningfully increase the number of Transactions Per Second Ethereum can handle and reduce the gas fee’s once can expect to pay.
Sharding is a computer science concept that involves splitting a database horizontally to spread the load. In Ethereum’s case, this will essentially involve splitting the entire network into smaller partitions or multiple mini-blockchains, 64 to be exact.
Ethereum plans on using sharding synergistically with other layer 2 rollups by splitting the burden of handling the large amount of data required by these rollups over the whole network.
There has also been increasing interest in a sharding approach dubbed Danksharding. This approach is similar to that described above; however, instead of using shards to increase the TPS of the network, it uses shards to increase the space for groups of data. This is a complicated computer science topic; if you want to understand it in greater depth, you can use the following resource. The Ethereum developers hope to integrate sharding sometime in 2023, but as with The Merge, there may be unexpected delays and other issues along the way.
The third step in the roadmap is called The Verge. The Verge will introduce an alternative way of structuring Ethereum data with the introduction of “Verkle trees”.
Traditionally blockchains such as Ethereum and Bitcoin have used Merkle trees to encode their data efficiently and securely to maintain data integrity. They do this by converting or hashing blocks of information into long strands of code that contain a record of all previous transactions. Verkle trees are slightly different and are an upgrade to Merkle proofs, allowing for much smaller proof sizes. This will contribute significantly towards making Ethereum more scalable by optimising storage and reducing node sizes.
The Purge is one of the last substantial upgrades that Ethereum has on its roadmap. This upgrade will focus on reducing or “purging” spare historical data and, in turn, decrease the hard drive space needed for validators. This will make the process of validating blocks more efficient for validators and reduce network congestion. By minimising network congestion, more transactions can be processed per second, considerably scaling Ethereum. According to Vitalik, once The Purge has been implemented, TPS on Ethereum could reach as high as 100 000 compared with its current TPS of 10-15.
The Splurge is the final step in the final vision for Ethereum 2.0. These are “smaller” upgrades that will ensure that the blockchain continues to function as designed and run smoothly. This step has been described by Vitalik as “the fun stuff”. Once they have completed a successful “Splurge”, the vision developers had for Ethereum to be a more scalable chain will have been achieved.
This definitely will not be the final version of Ethereum as there will be continuous improvements as it matures; however, it will mark the end of several years of development before we begin on Ethereum 3.0.
Ethereum has completed the first step towards its final vision of a scalable, secure and decentralised blockchain. While there are many years to go to finish the roadmap, we cannot understate how significant this achievement was.
The Ethereum we have come to know will not change too much today, but the rest of the path has been laid out, and with the move to PoS, the developers proved that they do possess the ability to successfully implement their plans.
As Ethereum continues to improve and build on itself, we look forward to seeing it go from strength to strength, and we remain confident in its future trajectory.
If you are interested in staying up to date, please subscribe to our newsletter at etherbridge.co
This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.