After Eight Years, Ethereum Merge Marks the end of the Proof-of-Work Mechanism；The Journey.
TL: DR
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The Ethereum upgrade known as The Merge took place on Thursday, September 15, 2022, and saw Ethereum go from a proof-of-work (PoW) network to a proof-of-stake (PoS) network.
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Proof-of-Stake and Proof-of-Work are consensus protocols for validating transactions. Ethereum formally used PoW, which consumed a lot of electricity, making it bad for the environment.
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Vitalik has cited energy consumption as one of the primary reasons for the transition. The shift to PoS is projected to reduce the network's electricity consumption by 99%.
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The change to proof-of-stake will be a positive development for Chinese Ethereum enthusiasts as regulators can no longer detect Ethereum node operators by monitoring unusually high electricity consumption.
It is a week since the beginning of a new epoch for the Ethereum network following the historic termination of the proof-of-work mechanism. The energy-consuming consensus protocol, which has been used for eight years, was finally scrapped for a more sustainable proof-of-stake mechanism. The long-awaited event of the transition, popularly known as Merge, was triggered when the blockchain reached a Total Terminal Difficulty of 58,750,000,000T on September 15.
The Ethereum foundation sponsored the largest Merge watch party, which featured talks from Vitalik Buterin and other community leaders. The party had 41 000 concurrent Youtube viewers at its peak. As the final stages (the Surge", "Verge," "Purge," "Splurge") on the Ethereum technical roadmap start to unfold, it is pertinent will cast our minds back and take a review of this monumental revolution in the epoch of crypto history.
The Journey to the termination of the proof-of-work
Soon after its inception in 2015, Ethereum announced its intention to transition to a proof-of-stake protocol. The transition has been faced with constant delays that were touted at the time as giving the team more opportunity to prepare. It also gave Ethereum founder Vitalik Buterin enough time to compile various writings based on his experiences. These will appear in a book later this month.
The eight years of proof-of-work were run on GPU mining, a system that was scathingly criticized for its environmental impact.
The success of the decentralized finance initiatives operating on the Ethereum blockchain has allowed miners to make significant profits in particular. These numerous DeFi platforms have increased the number of transactions and activity on the Ethereum blockchain, which has caused fees to soar and processing times to lengthen. Increased transaction costs are being borne primarily by end users, but miners have been laughing all the way to the bank.
Within these eight years of proof-of-work, Ethereum miners saw a record income of over $830 million in January 2021, amounts not seen since the first few weeks of 2018 since the larger cryptocurrency market collapsed following the stunning highs of December 2017. The network has also recorded a whooping 626, 700 contract addresses, 122,374,074ETH in circulation, over 15. 5million blocks.
The Merge, which begins at the end of the eight years of proof-of-work, integrated the earlier ETH1 chain (Execution chain) with the new ETH2 chain (Beacon Chain). The Beacon chain finally went live in December 2020, replacing the miners, while the execution chain remained the same, operating the proof-of-work. The launch of the Beacon chain was one of the first significant events leading up to the Merge. Since then, Ethereum has run both a proof-of-stake (PoS) chain (Beacon Chain) and a proof-of-work (PoW) chain.
The total shift to the proof-of-stake also seeks to silence critics of the industry's energy consumption, which has been blamed for contributing to climate change. According to the Ethereum Foundation, switching to Proof-of-Stake reduces the blockchain's power consumption by 99.95%.
Reviewing Vitalik and the shift to proof-of-stake
While the transition to Proof of Stake had been planned even before the current Proof of Work Ethereum blockchain was created, Buterin Vitalik argued early this year that starting with proof of stake would have been a mistake.
Vitalik contended that Ethereum's most significant challenges and criticisms stem from the difficulty of balancing two contradictory visions. Buterin states that Ethereum must be a "highly functional platform and performant for building advanced applications" and a "simple and pure blockchain." in other words, it is meant to be both complex and simple.
Ethereum's environmental footprint is expected to shrink dramatically along with its block rewards under proof-of-stake consensus. Last August, fee burn was introduced with EIP-1559, which many observers believe would make Ethereum deflationary once it transitions to PoS. It implies that more Ether will be burned than created, potentially paving the way for significant price gains.
Shifting to Proof-of-Stake, Ethereum adopted Gasper, which Buterin described as both a "complex" and "potent system." He admits that using simpler versions of Proof-of-Stake could have resulted in "significant improvements[s]" in the network's energy consumption and supply issuance at a much earlier stage.
He alluded to NXT PoS, which has been around since 2013 and had Ethereum written into the code when the network was first launched. "We could have focused on a more limited set of objectives first if we had been more modest at the start," he said.
Buterin says that switching to a simpler PoS model could have reduced the scale of the network's ecological externalities "and anti-crypto mentality as a result of environmental damage."
After the successful Merge, the excited Buterin felicitated the community and ushered in the next era of Ethereum in a tweet.
According to Buterin, the Merge can be viewed as rewriting the laws of physics. Proof of Work utilizes real-world functionalities such as electricity, hardware, and computers. On the other hand, Proof of Stake virtualizes everything, "basically allowing us to create a simulated universe with its own laws of physics."
The Merge & Proof-of-Work Mining in China
The CEO of China-based Crypto investment firm, Sino Global Capital, Matthew Graham, has said Ethereum's Merge may reveal whether Chinese miners still influence the crypto industry. Some miners led by the Chinese miner Chandler Guo are expected to support a version of the current proof-of-work mechanism via a hard fork following the Merge.
Guo hopes to attract the Ethereum miners who the new PoS blockchain will kick off the network because the new system will not require a miner's computing power to validate transactions on the chain.
ETHPoW (ETHW), an Ethereum hard fork supported by these proof-of-work (PoW) miners, experienced a massive rally in the days leading up to Ethereum's merge event.
According to CoinMarketCap data, the token soared from $35.4 to $60.68 shortly after the merger, representing a 70% increase in less than five hours. However, the forked token has since lost all of its gains, falling to about $5.90 at the time of this writing.
On August 8, the token reached an all-time high of $141 before plummeting to an all-time low of $26 on September 13. The same day, ETHPoW announced the launch of its mainnet, bringing the coin to just over $36.
Chinese government officials banned bitcoin (BTC) mining in May 2021. Before China banned crypto mining, the country accounted for up to two-thirds of bitcoin's global hash power or the amount of energy required to perform proof-of-work.
Since then, regulators have launched several mining crackdowns, but the industry has recently seen a rebound in hash rate after being dormant for several months.
Crypto mines are frequently located in backward and landlocked areas of China where there is little economic development and, thus, no tax revenue.
The change to proof-of-stake will be a positive development for Chinese Ethereum enthusiasts as regulators can no longer detect Ethereum node operators by monitoring unusually high electricity consumption. On the other hand, proof-of-work is usually done at mining farms full of rigs, which are a collection of hardware and processors assembled for crypto mining.
Price draws down before and after the Merge.
The price of Ether (ETH) dropped sharply in cryptocurrency markets, capping a period of price stability that began just hours after the Ethereum blockchain completed its historic Merge to a more energy-efficient proof-of-stake blockchain.
The second-largest cryptocurrency was down 9.1% to $1,489, its most significant daily drop since August 26. The largest cryptocurrency, bitcoin (BTC), was down about 2% daily.
According to Riyad Carey, a research analyst at crypto data firm Kaiko, the sudden price drop appears to be a "buy-the-rumor, sell-the-fact" reaction.
Conclusion
Ethereum's Merge has finally occurred, with the first and most apparent immediate impact being on the network's energy consumption. Switching from mining to staking meant removing the component of blockchain technology that has a negative environmental reputation.
PoS for proposing blocks consumes far less energy than its power-hungry predecessor, proof-of-work.
Meanwhile, many Ethereum miners have sought refuge on other networks, such as Ethereum Classic, which still uses proof-of-work. The migration of former Ethereum miners to these other chains has dampened the impact of the Merge on overall crypto emissions.
However, mining on proof-of-work blockchains is unlikely to become profitable enough for most Ethereum mining operations to continue operating in the long run. Chandler Guo, the miner behind a contentious Ethereum Proof-of-Work (ETHW), admitted as much himself.
Author: M. Olatunji, Gate.io Researcher
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