What is the Ethereum Merge Update? The blockchain takes its largest step

2022-04-22, 08:51

What is the Ethereum Merge Update? It consists of the Ethereum network merging with its test Beacon Chain Proof-of-Stake (PoS) system. It will mark the moment where Ethereum will finally leave its Proof-of-Work (PoW) framework and fully enter the PoS consensus mechanism.

What does the Ethereum Merge update seek to solve?
· Environmental issues from crypto mining: According to data from the Ethereum Foundation, the Merge update will reduce the energy costs for the Ethereum network by a whopping, unprecedented 99.5%. Since Ethereum is the second-largest blockchain in the world, this shift toward an environmentally-friendly major network will be an essential stepping stone towards digital assets embracing a greener future.

· Aid the fight against Ethereum’s scalability issues: Since switching the network to a Proof-of-Stake mechanism will reduce its energy consumption by up to 99.5%, it will also aid the network to become less congested with the transactional flow, fee surges and other problems that originate from hardware power. But don’t keep hopes too high, as only the “Sharding” update, now postponed, will be able to fully tackle scalability issues.

· Reduce ETH supply, while increasing holders: One of the main hypotheses of the Ethereum Merge update is that it will finally make Ethereum a deflationary asset, since there won’t be any more mining incentives for network validators - instead, the governance mechanisms will be based on how much ETH the validators have staked in the network, which may serve as an incentive for new investors to come along and stake large bags of ETH to become validators in the network and reap the blockchain’s rewards.

Updates are an essential aspect of cryptocurrencies. Mostly discussed as assets when it comes to financial and regulatory frameworks, we tend to forget that these virtual currencies are, most of all, technologies - ones that can be changed and improved whenever needed, as long as there is a consensus for members of the network governance.

Such updates apply to any cryptocurrency and that includes the Ethereum network, which is close to executing the most important update in its history - the “Merge” update.

In this article, we go through what the Ethereum Merge update is, the features it will bring to the second-largest blockchain and its implications for the crypto ecosystem and ETH’s value.

What is the Ethereum Merge update?

Now expected for the third quarter of 2022 after two delays this year, the Ethereum Merge update consists of the Ethereum network merging - therefore the name - with its beacon chain Proof-of-Stake (PoS) system. In a nutshell, it will mark the moment where Ethereum will finally leave its Proof-of-Work (PoW) framework and fully enter the PoS consensus mechanism.

Ethereum has been using PoW since its inception, back in 2015. This framework, which is also utilized by Bitcoin as the first blockchain consensus mechanism, relies on miners and node validators to make decisions on network updates based on their governance relevance compared to other validators in the network. With Proof-of-Stake, however, governance is then decided by validators according to not their computational power to verify transactions, but the number of cryptocurrencies (in this case, ETH) that they hold.

Under testing phase for a couple of years through a parallel chain called the Beacon Chain, the Merge seeks to make the network more efficient. As the Ethereum network grew, it required more computational power to validate transactions, which made the blockchain slower and reduced incentives for newcomers to become node operators. Proof-of-Stake provides a much more straightforward system, and one that doesn’t rely on nearly as much hardware performance as the traditional Proof-of-Work.

What does the Ethereum Merge update seek to solve?

Changing a crypto network from Pow to PoS mechanisms has lasting ramifications across the entire blockchain, basically changing the very essence of the project and how it will function from that moment on. With that in mind, here are the main issues that the Ethereum Merge update will potentially solve.

Environmental issues decurrent from crypto mining
It’s no secret that crypto mining has its environmental issues related to hardware usage and the amount of energy it takes to feed these massive worldwide networks. The problem has been under political debate thoroughly for the last year or so, and culminated at its peak in May 2021 when China banned crypto mining while Tesla stopped accepting Bitcoin due to environmental concerns.

The same goes for Ethereum mining through node validators and, with the Merge update integrating a full PoS mechanism, it will signify the end of mining needs for the network. According to data from the Ethereum Foundation, the Merge update will reduce the energy costs for the Ethereum network by a whopping, unprecedented 99.5%. Since Ethereum is the second-largest blockchain in the world, this shift toward an environmentally-friendly major network will be an essential stepping stone towards digital assets embracing a greener future.

Aid the fight against Ethereum’s scalability issues
Ethereum’s scalability issues are well-known in the overall crypto community, and the Merge update may be a powerful ally in reducing the problems that originate from such challenges. Since switching the network to a Proof-of-Stake mechanism will reduce its energy consumption by up to 99.5%, it will also aid the network to become less congested with the transactional flow, fee surges and other problems that originate from hardware power.

But don’t keep your hopes too high; although the update may help with Ethereum’s scalability issues, chances are these issues will still persist until another update comes along. While the network will transition from miners to stakers, they can still flood the network and be paid high fees for the transactions - which is established by how much input the blockchain is able to handle.

Previously, the Merge update was expected to come together with another one called “Sharding”, which would consist of splitting the network into separate pieces that would autonomously build a more efficient and therefore, cheaper network. The update was ditched for simultaneous release with Merge, so most of the same scalability issues may persist until sharding comes along.

Potentially reduce the supply of Ethereum and increase holders through governance
One of the main hypotheses of the Ethereum Merge update is that it will finally make Ethereum a deflationary asset, since there won’t be any more mining incentives for network validators - instead, the governance mechanisms will be based on how much ETH the validators have staked in the network. Last year’s London Hard Fork update was already a major move towards ETH becoming deflationary, as it introduced crypto-burning frameworks that have been consistently reducing the average supply output of Ether per day.

Since network validators will be rewarded through staking, the update may also serve as an incentive for new investors to come along and stake large bags of ETH to become validators in the network and reap the blockchain’s rewards. If such a situation actually occurs, combined with Ethereum’s deflation, it may progressively catapult ETH’s value beyond previous records. These couple of predictions are highly allegorical and situational, however, so really only time will tell.

Author: Gate.io Researcher: Victor Bastos
* This article represents only the views of the researcher and does not constitute any investment suggestions.
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