Ethereum is about to change forever. The second-place cryptocurrency is undergoing a massive upgrade that will introduce staking, change how the crypto is mined, and create shard chains. The rapid adoption of Decentralized Finance (DeFi) and the NFT boom of 2021 boosted Ethereum’s price to a new all-time high of US$4,891.70. It may have slipped since then, as all cryptos have, but a series of long-awaited upgrades may help the crypto reach unforeseen heights.
“The Merge” is when the first and most substantial upgrade becomes live: The Beacon Chain and the current mainnet will become one. The upgrade is slated for Q2 of 2022, which means it could only be months away. However, the Ethereum merge has already been delayed, so nothing is set in stone.Is now the time to invest in Ethereum? We’ll let you decide, nobody really knows how the new upgrades will impact the price. So, instead of investment advice, let’s explore the upcoming changes and discuss how they’ll dramatically impact Ethereum’s ecosystem.
The Beacon Chain: Proof-of-Stake Replaces Proof-of-Work
There are currently two Ethereum blockchains – mainnet and The Beacon Chain.
Mainnet is the blockchain that we all know and love and it’s currently the chain verifying and processing transactions and operating smart contracts.
The Beacon Chain is running in parallel, but right now it’s in a testing phase. This new blockchain is proof-of-stake, while mainnet is proof-of-work.
“The Merge” is when Ethereum changes from proof-of-work to proof-of-stake and the Beacon Chain and mainnet become one (technically, one becomes the execution layer and the other becomes the consensus layer). Other upgrades are planned, but changing mining methods is the essence of the infamous Merge.
Proof-of-Work vs. Proof-of-Stake
The Ethereum Beacon Chain Merge will end proof-of-work mining entirely.
Proof-of-work (PoW) is the mining method that relies on powerful computers solving complex computational problems to produce new blocks. Proof-of-work was introduced with Bitcoin, the original cryptocurrency, and is still used by Bitcoin and other cryptocurrencies based on it.
However, due to the computational complexity of proof-of-work mining, the energy consumption of PoW blockchains is a repeated critique from crypto skeptics. Cutting edge graphics cards and processors work tirelessly around the world, to mine blocks and maintain the security and integrity of the network.
Enter proof-of-stake (PoS). Peercoin introduced proof-of-stake mining in 2012 and it has since been implemented in multiple blockchains. Proof-of-stake does away with complex problem solving that consumes huge amounts of power and reduces “mining” to the same electricity consumption of a normal datacenter, roughly.
Proof-of-stake doesn’t have miners, it has validators. Anyone with 32 ether can stake it to become a validator and directly contribute to the blockchain. The blockchain randomly selects a validator to produce each block. Once produced, the validator gets their reward, and the blockchain picks the next validator at the pre-determine interval. Producing blocks doesn’t inherently require the massive resources necessary in proof-of-work blockchains. As MIT’s Technology Review highlights, PoW was a clever way to create a decentralized ledger that was difficult to manipulate by bad actors. It worked, with one caveat, the 51% attack.
Is Proof-of-Stake More Secure?
The 51% attack was a serious concern in the early days of Bitcoin and it’s still possible with any blockchain. A 51% attack is when a malicious actor controls more than half of the miners and can introduce fraudulent transactions to the blockchain without being caught. It was the topic of much conversation in the early days of Bitcoin.
So does PoS remove 51% attacks? No, but it makes them more expensive. A malicious actor would need to control 51% of staked coins to introduce fraudulent transactions, rather than 51% of miners. Considering the Beacon Chain currently holds USD$20 billion of staked ether, a malicious actor would need $10 billion to carry out a 51% attack. After The Merge, that price is only going to increase as more validators start taking part. From a technical perspective, PoS isn’t inherently more secure.
But logically, it’s hard to imagine someone having billions of dollars and wanting to carry out a 51% attack. Just like Satoshi said about 51% attacks in PoW, it’d probably be more profitable to just become a legitimate miner (or validator).
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What is Ethereum 2.0 and Where Can I Buy It?
Average cryptocurrency holders can participate by staking their ether to validators who share their rewards with contributors, which allows more people to participate without needing to buy (and power) high-end computers. Staking is the backbone of DeFi, meaning holding and staking ether is all that you’ll need to get started.
Ethereum 2.0 doesn’t exist and you can’t buy it anywhere. Let’s discuss.
“Ethereum 2.0” is how people reference the coming upgrades. However, Ethereum developers are doing their best to get people to stop using the term. They’re afraid that it leads people to think of the changes as an entirely new cryptocurrency, rather than an upgrade to Ethereum.
There isn’t going to be a new coin known as ETH2. It will still be called Ethereum and go by ETH. You’ll definitely still see the term Ethereum 2.0 still in use, and even Coinbase calls it “ETH2” in its staking interface. But it’s important to understand that this is not a fork that will make a new cryptocurrency, it’s a software update.
One of the reasons why the developers are discouraging use of the term Ethereum 2.0 is that it opens the door to scams. Someone could make a new crypto called ETH2 (or something similar) and take advantage of less-informed crypto users. If you want to buy “Ethereum 2.0,” you can buy Ethereum and stake it with a cryptocurrency banking platform. Your Ethereum will be illiquid until after The Merge, but it will earn interest until then. Sometime after the Merge, you’ll be able to withdraw your Ethereum, and it will now be the upgraded ether some still call “Ethereum 2.0.”
What Happens After The Merge?
You can find people asking about the Ethereum Merge date Reddit all the time. The answer is always the same, there’s no concrete date and it’s been delayed before.
But we shouldn’t be asking ‘when is The Merge Ethereum.’ We should be asking what happens next.
The Merge strictly means the end of proof-of-work mining. You won’t even be able to withdraw staked Ethereum the day of the Merge, and gas prices (the fee for Ethereum transactions) aren’t going to suddenly become more affordable.
So, what happens after the Merge?
The “Triple Halvening” of Post-Merge Ethereum
A “halvening” is when block rewards decrease in proof-of-work mining. It’s an anti-inflationary measure that makes creating new bitcoins (or another PoW coin) more difficult.
The Merge is being referred to as a “triple halvening” by many Ethereum fans. This is because Ethereum’s yearly inflation rate will drop from 4.3% to 0.43%. New emissions will dramatically drop from 12,000 ETH per day to 1,280 ETH per day. When combined with a new burn mechanism, which destroys coins forever, Ethereum aficionados have come to call it a “triple halvening.”
The argument goes that these three factors will increase the price due to decreased supply. It remains to be seen if any of those changes will have a tangible impact on the price, or if these are merely talking points to get more people to invest in Ethereum, which does impact the price.
The Discussion Around Energy Efficiency
Energy consumption is a major critique of cryptocurrency. As the world strives to transition to clean energy to fight the climate crisis, there is still work to be done in the world of cryptocurrencies.
The Ethereum Foundation estimates that switching to proof-of-stake mining will reduce the energy consumption of the Ethereum blockchain by 99.95%. The exact reduction remains to be seen.
Shard Chains will Become Reality
Shard chains were once a major goal of the Ethereum upgrade, but they’ve dropped in priority as Layer 2 chains have been developed by other parties.
Shard chains will be new blockchains that horizontally spread Ethereum’s workload. Right now, 64 shard chains are planned. The goal of shard chains is to reduce network congestion and increase transactions per second.
Layer 2 solutions have emerged in recent years that interact with Ethereum’s blockchain without relying on it for every transaction. The success of these solutions have reduced the congestion on Ethereum, which in turn has decreased the priority of introducing shard chains.
As of now, shard chains are slated for 2023 and will be rolled out in phases.
The Future of Ethereum
The Merge is the end of the proof-of-work mining model for Ethereum and replaces it with proof-of-stake mining. Ethereum will then pave the way for future updates to expand on its new functionality.
So, what’s the future of Ethereum? The Beacon Chain has undergone extensive testing, but there’s never been a proof-of-stake at this scale. Skeptics are worried about how The Merge will impact stability. Additionally, the thousands of smart contracts hosted on mainnet may need updates after The Merge. Projects ranging from DeFi platforms to NFT auction sites may be affected.
Have you heard about Ethereum Classic? It’s a hard fork of Ethereum made by disgruntled miners after the main blockchain rolled back the chain due to a hack. Are we going to see another hard fork made by all the proof-of-work Ethereum miners who don’t want to participate in proof-of-stake? Perhaps we will.
The future of Ethereum is a blockchain that’s supposed to be more scalable and sustainable. As new features like shard chains are introduced, it will keep growing and evolving to address the growing needs of the second-largest cryptocurrency.
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