Boardroom breaks down what the Ethereum merge really means, how the network will change forever, and how it will ultimately affect consumers.
Developers have finally set a date for the much-anticipated “Ethereum merge” on the notable blockchain network.
As defined in Boardroom’s Crypto, Blockchain, & Metaverse Glossary, Ethereum is a decentralized blockchain platform powered by its native cryptocurrency, Ether. Smart contracts originated on the Ethereum platform, which also supports decentralized apps. Specifically, developers predict the Ethereum network will transition from the proof-of-work (PoW) consensus mechanism to proof-of-stake (PoS) during the week of Sept. 19, meaning the official Ethereum merge date is as little as two months away.
So, what does this all mean? There are several concepts to break down here in order to understand the key components of the Ethereum merge and its long-term significance. We have all the details and definitions below.
PoW vs. PoS
Before diving into what the merge is, it’s essential to understand these two crypto consensus mechanisms:
- Proof-of-work (PoW) is a decentralized consensus mechanism that requires members of a network to expend effort solving an arbitrary mathematical puzzle in order to prevent users from gaming the system. This method requires a lot of electricity.
- Proof-of-stake (PoS) is a consensus mechanism that requires blockchain networks to employ validators who stake their own crypto assets in exchange for the chance to validate new transactions on the blockchain. An initial winner is selected to validate a new block, and other validators can attest to its accuracy. Once a certain validation threshold is met, the network creates a new block on the blockchain, and all participating validators earn an award in the native crypto on the network. This method requires less computational energy and is much faster.
PoS was created as an alternative to PoW. In short, the PoW concept relies heavily on computational support, while PoS drastically lowers the amount of computational work needed to verify new blocks on the blockchain. Since validators are randomly selected with PoS, this method is more energy-efficient and eco-friendly since miners aren’t competing to solve an equation. Theoretically, the PoS mechanism is supposed to be more secure by comparison.
There is no mining with the PoS system, as the primary method is staking. To be a validator, you must be an investor, too.
What is the Ethereum Merge?
The Ethereum merge is the point at which the network plans to move off PoW and transition to PoS. It sounds like a simple task, but technologically, it will require a serious push.
Developers are dubbing the new network “Ethereum 2.0.” This transition is reminiscent of the upgrade from Web1 (the early public internet) to Web2 (the broadband/streaming/social networking era), as Ethereum developers were always aware of the limitations of using PoW. This means the merge is inevitable, even if most of the blockchain industry still uses the PoW mechanism.
Cardano, Flow, and Solana are some of the well-known blockchain platforms already using the PoS system. The Ethereum network itself has already started implementing PoS with the Beacon Chain and has been running it in parallel with its PoW method; Ethereum will use the Beacon Chain to kickoff the merge.
As a result of moving away from mining, the Motley Fool reports that the Ethereum merge will reduce the network’s energy consumption by an estimated 99.5%.
What the ETH merge means for investors
Experts expect that the merge will push Ethereum’s price to new levels. As of 1 p.m. ET on July 18, ETH’s price is up just over 10% over the past 24 hours to $1,493, per Coindesk. For the first time in five weeks, the crypto market cap shot over $1 trillion Monday. That’s evidence to suggest that investors must feel a little at ease after braving the crypto winter.
Ethereum’s improved system could also help it compete with other blockchain networks, but investors should still be cautious about over-investing, as crypto valuations fluctuate daily.
So, what about gas prices? DeFi trader and PoS leader Vivek Raman explained in a Twitter thread that the first version of Ethereum 2.0 will not reduce gas prices — this is due to the merge changing the consensus layer of Ethereum but not touching the data availability or execution layers. (If you want to go down the rabbit hole further, check out this Reddit thread, which details how and why gas fees won’t fluctuate.)
We’re about two months out from the expected merger, and some crypto enthusiasts think this is the exact phenomenon we need to set the market straight:
Others, meanwhile, are still showing skepticism:
We’ll follow up in September and report on the merge’s progress.