The Ethereum blockchain that underlies the second-largest cryptocurrency by market capitalization is about to go through a historic software upgrade that will change it forever.
The upgrade, known as “the Merge,” has been in the works for more than two years after being delayed multiple times. It will reduce the network’s power consumption by more than 99% by making the entire blockchain more energy-efficient. The upgrade is planned to be completed on Sept. 15.
Blockchain technology has been a target of critics and regulators for some time now because of the amount of energy it consumes. A single transaction on Ethereum can use roughly 181 kilowatt-hours, which is about enough to power a house in the U.S. for six days.
This is a consequence of how blockchains validate and secure networks, which is by solving complex cryptographic puzzles to add transactions to “blocks” and chain them together in an immutable distributed ledger. These transactions track the movement of cryptocurrency tokens between users’ wallets.
The priority of the Merge will be exchanging Ethereum’s “proof of work,” or PoW, verification mechanism for what is known as “proof of stake,” or PoS. It’s part of a roadmap that used to be called “Ethereum 2.0,” which is a series of upgrades to Ethereum that would improve its efficiency, scalability and speed.
Ethereum represents a massive ecosystem for developers and is one of the primary gateways for Web3, otherwise known as the decentralized web. It allows for financial transactions to occur peer-to-peer without the need for middlemen or centralized institutions with the use of smart contracts, which is software that self-executes once certain conditions occur. This permits developers to create decentralized applications, or dapps, for token exchanges, decentralized finance, securities trading, interest-generation, gaming and more.
By making Ethereum more energy-efficient, proponents believe, Merge will prompt developers who have been on the fence about joining because of its potential environmental impact finally to get into Web3. The Merge also sets up Ethereum for bigger upgrades in the future that will increase its transaction speeds up to more than 100,000 per second, which will make it faster and cheaper to use. This increased scalability will open up Ethereum for a whole new wave of applications and opportunities.
This upgrade is called the Merge because it will merge a currently running proof of stake Ethereum blockchain, known as the Beacon Chain, with the main Ethereum blockchain and essentially replace its proof-of-work engine with the proof-of-stake engine while it’s still running. This is something a lot like replacing an airplane engine while it’s still flying, an event that, if it goes off without a hitch, will go down in blockchain history.
The Merge fundamentally changes a critical component of Ethereum, so there’s a significant degree of risk that the blockchain is facing with the event approaching. Of course, the core team has been working on this for years and attempted to suss out every potential thing that could go wrong and delayed it multiple times. The blockchain’s developers claim that PoS is more secure and it is used in several other major blockchains including Tezos, Avalanche and Solana.
Although Ethereum is switching to PoS, bitcoin is unlikely to follow suit. Critics of the change say that PoW is the primary way that bitcoin remains decentralized and that switching to PoS will tend to shift validation resources too much. Some point out how the major blockchain Solana has suffered numerous disruptions caused by bugs and denial-of-service attacks, causing validators to lose consensus.
Other critics of the change to PoS also include cryptocurrency miners who have sunk billions of dollars into computing equipment dedicated to PoW who will soon either be out of work or need to shift to other blockchains in order to make money.
Image: Ethereum.org
Making Ethereum more energy-efficient
Currently, to secure the network, Ethereum transactions are validated across the network in a decentralized way using what is called proof of work, similar to other cryptocurrencies such as bitcoin.
This is a consensus mechanism where users called “miners” set up extremely powerful computers to solve complex mathematical puzzles in order to verify new transactions. The first miner to solve the puzzle adds the record of the transactions to the blockchain in a “block” and is rewarded with the blockchain’s native cryptocurrency, plus the fees users pay per transaction.
PoW is so energy-intensive because many miners are competing against one another to solve these complex puzzles at once and only one can win per block. That means the energy used by all the miners who didn’t win essentially goes unused. This process is seen as extremely wasteful and the total amount of energy used is the same irrespective of how many transactions flow through the network per block.
The electricity issues go way up when considering the fact that the winner is often up against hundreds of thousands of other miners for that winning block each time. In the case of the Bitcoin network, the reward is 6.5 bitcoins, about $132,000, and Ethereum rewards two ether, about $3,200.
According to Digiconomist, Ethereum consumes 78.6 terawatt-hours of electricity per year doing these computations, or approximately the energy consumption of Chile, which is also comparable to the carbon footprint of Hong Kong. After the Merge, this consumption should drop by almost 99.95%, which would make its total energy expenditure below 0.01 terawatt-hours a year.
Mining bitcoin is even more energy-intensive, clocking in at 131.6 terawatt-hours of electricity per year, which is comparable to the power consumption of Argentina. Bitcoin and cryptocurrency mines around the world have become the focus of watchdog and regulatory scrutiny, including in New York, where the state passed a bill banning new proof-of-work mining facility licenses that rely on nonrenewable sources.
Proof of stake will turn this entirely on its head by removing complex puzzles and powerful computers from the network by allowing individual users to “stake,” or lock up, their own cryptocurrency in order to become validators. Validators are responsible for storing data, processing transactions and adding new blocks to the blockchain, which maintains the security of the chain and prevents fraudulent transactions from happening.
As a reward for staking their coins, validators also receive interest on their staked coins in the form of ether. This reward acts as both a passive income opportunity for validators and also an incentive to assist with securing transactions on the blockchain.
The purpose of these consensus mechanisms is to prevent a bad actor from taking over by controlling enough of the network. For example, in order to fake a transaction on the Bitcoin or Ethereum blockchain, an attacker would have to control more than 51% of the network power under PoW, which would be a considerable amount of computing power.
Under PoS, it would be extremely costly to overwhelm 51% of the network because, in order to become a validator, it costs 32 ether, or about $50,000. As a result, the more total ether that is staked by validators to secure the network, the harder it is for any single attacker to reach the needed 51%. With the reward incentive driving more validators to stake their coins, it’s expected that it will make Ethereum even harder to attack.
What the Merge means for miners
The shift away from proof of work could put a lot of Ethereum miners out of work. Or will it? Some diehard miners have looked at the upcoming upgrade and decided that they don’t want to give up billions of dollars’ worth of mining equipment.
To this end, they could shift to other proof-of-work chains, for example, Ethereum Classic, which is proof of work. This is the oldest Ethereum hard fork, which happened in 2016 when the Ethereum Decentralized Autonomous Organization was hacked for $55 million. It will remain proof of work when Ethereum becomes proof of stake.
Crypto journalist Colin Wu estimated that the Merge could displace more than $5 billion worth of Ethereum mining equipment in the form of graphics cards and application-specific integrated circuit or ASIC mining machines, most of which belong to Chinese miners.
Noting this, Chandler Guo, a prominent Chinese Ethereum miner, said that a lot of miners would suffer from the Merge. He predicted that the update would lead to the emergence of multiple forks of Ethereum that would allow for PoW mining and supported the idea of miners organizing to form their own. He called for the creation of a blockchain fork from Ethereum after the Merge named ETHPOW or ETHW that would allow them to continue using their equipment.
Several exchanges, including Poloniex and BitMEX, have already begun to list tokens of this yet-undeveloped Ethereum PoW fork as ETHW futures.
As for the Ethereum Classic ecosystem, it has already received support from Bitmain’s cryptocurrency mining platform Antpool in the form of $10 million. A number of miners have also begun to shift their rigs over to the network in anticipation of the Merge as well.
The future for developers after the Merge
The biggest takeaway for developers is that the Merge will have almost no immediate effect on them at all. Their apps will continue to work exactly as they worked before. One thing it will do is provide the foundation for upgrades that will ease congestion and increase scalability on the network in the future.
“The exciting thing for developers working on Ethereum apps is that it’s a ‘no-op,’” Rob Dawson, chief technology officer of ConsenSys, told SiliconANGLE. ConsenSys is the blockchain software company behind the world’s leading Ethereum wallet MetaMask. “We’re able to do it in a way that doesn’t require any upgrades or any thinking about what they’re doing to change.”
He said his hope is that it ends up being a “really boring upgrade.” There has been a lot of testing over the past couple of years, every edge case has been hammered out and it should just be like flipping a switch. This should also be the experience for developers.
“It should be a seamless experience,” Dawson said. “We all go to bed, wake up the next morning, and we’re all proof of stake on Ethereum.”
The big deal will be the foundation the Merge leaves for development in the future, Dawson explained. That foundation will allow for protocol-level changes to increase capacity on Ethereum. That in turn will permit it to sustain more transactions, which will lower fees on the network and increase throughput.
That’s already happening with what’s called Layer-2 scaling solutions, he said, with networks such as Polygon and Optimism. These are blockchains that run offload transactions from Ethereum by bundling them together first on their own chain and then transferring the information back in order to lower fees. As a result, they execute faster, more cheaply and can maintain the security of running on Ethereum itself.
In the future, these Layer-2 solutions will be able to have solutions at the core protocol layer with an upgrade called Sharding — a process of splitting a database horizontally to spread the load – that will work synergistically with them. It will help by splitting up the load created by large amounts of data needed by Layer-2 networks operating on Ethereum. Sharding becomes possible after the Merge and is expected to become available sometime in 2023.
The current Ethereum network can support only 30 transactions per second, and that leads to congestion, delays and high fees. That means that when new, large-scale projects are launched on the main network, they can have crippling effects. One recent and prominent example is the Yuga Labs Inc. Otherside metaverse launch, which caused transaction fees to spike to nearly $7,000 per transaction in May.
With sharding supporting extra data availability for Layer-2 blockchains, this could open up networks capable of processing more than 100,000 transactions per second, which would produce superfast transactions and ultralow fees.
For Dawson, the biggest payoff of the Merge is that it shows that the developers and community have put careful thought into its future and its impact on the rest of the world. He believes that should resonate not just with the current developers who work on Ethereum apps – who will not feel the effects of the Merge itself – but also with developers who have been timid about coming on board.
“I think that it helps remove the dissonance for a lot of non-Web3 developers, people who say, ‘I don’t want anything to do with that, this is bad for the planet,’” Dawson said. “It is opening up a proven infrastructure to even more developers out there. That’s probably the biggest impact for developers who aren’t on Ethereum and gives us an opportunity to talk to them and tell them that it’s growing, it’s well-known and it can solve problems across many use cases. And it’s a platform that’s doing careful, deliberate innovation that will be well-supported into the future.”