Robert Napoli | April 20th, 2022
Sometime later this year, but with no firm date, the blockchain platform Ethereum is expected to make a major transition. With this event, dubbed the “Merge,” Ethereum is taking the next step toward its next iteration.
The Merge refers to phasing in Ethereum’s Beacon Chain, a blockchain network that’s been running in parallel to Ethereum’s Mainnet since 2020. Beacon Chain will transition Ethereum from a proof-of-work (PoW) consensus model to proof-of-stake (PoS) in a move designed to provide a more energy-efficient, secure, and sustainable blockchain network.
There is a ton of excitement about this upcoming change. Still, to appreciate the significance of this, it’s important to understand how critical consensus protocols are to the nature of blockchain and how they may shape the future of the technology.
Integral to all blockchains is the notion of decentralized consensus methods to circumvent the need for a central, authoritative intermediary to coordinate and validate transactions.
A consensus algorithm establishes the standard by which transactions are deemed valid. Bitcoin, the original blockchain cryptocurrency introduced in 2008, was built on a PoW consensus, which requires agents to solve a computationally difficult cryptographic problem through a process called mining.
Bitcoin, Ethereum (in its current incarnation), and other PoW-based blockchains use mining to impose a cost on users for the privilege of adding a block. Blocks are how transactions are recorded and added to the blockchain. The cost of computing the required solution is designed to deter bad actors from maliciously manipulating the blockchain in their favor.
Although the largest and most popular blockchains currently utilize PoW mining, it’s considered by many to be an unsustainable system for the long-term future of the technology. Although there are security, scalability, and other concerns, one of the loudest complaints with mining is the growing computational resources it requires.
All else being equal, if a PoW blockchain agent has better mining equipment (i.e., the form of more powerful processing), they have an advantage over other agents. This provides an opportunity for malicious activity and results in a computational arms race that consumes an ever-increasing amount of energy.
But PoW is just one approach to achieving blockchain consensus (there is a growing list of different consensus mechanisms on various platforms), many of which are experimental. Next to PoW, the second most popular consensus algorithm is PoS.
When mining, agents earn coins or tokens (the fundamental exchange units) by performing computational work. But some blockchains, like Ethereum’s separate Beacon Chain, allow agents to stake their current coins to be used as validators on the network, earning a percentage as an incentive.
The right to become a validator in Beacon Chain’s PoS mechanism requires the agent to stake a minimum of 32 Ether (ETH), the native cryptocurrency of Ethereum. That stake is then put to work running smart contracts and performing the internal functions of the network.
Currently, 32 ETH has a USD value hovering around $100,000, but agents without that kind of capital can join collectives and pool their resources to become validators. Staking also does not require agents to have any specialized computing equipment.
It’s estimated that Ethereum’s move to PoS will result in per-transaction energy consumption of 1/2400 that of PoW – a huge win. Additionally, Ethereum’s merger with its Beacon Chain should be seamless and won’t affect the network other than perhaps a momentary blip in activity. And its overall energy use will drop immediately.
The long-term goals of Ethereum are similar to that of many blockchain technologies, which is to balance several features that tend to work against each other:
The Merge addresses all of these to some degree, moving Ethereum closer to its vision.
Increasing concerns about energy use and its impact on the environment are driving changes and innovation in the crypto space. With the PoW model already being viewed as untenable and unsustainable in the long term, new approaches to blockchain consensus are becoming increasingly popular.
The ability for agents to game the system with fast processors and mining farms is a non-issue with stake-oriented consensus methods. Therefore, PoS is not only a boon to security but is more consistent with the decentralized notion of blockchain itself because it makes it much more difficult to concentrate influence over the system into fewer hands.
The Merge also sets the stage for greater scalability, in terms of transactions per second (TPS), in the Ethereum network, providing an opportunity for rapid growth as adoption increases.
Ethereum is already the second most popular blockchain behind Bitcoin and is trying to lead the way to a stable future for a technology that is barely a decade old. If The Merge is successful, it may become a template for others to follow.