The Impact Professional’s Guide to The Merge
Much has been written about The Merge, aka the Ethereum blockchain’s impending transition from Proof of Work (PoW) to Proof of Stake (PoS). Generally speaking, sentiments are positive and excitement is high, especially surrounding the anticipated 99% reduction in energy usage. Whatever one’s opinion of the coming event (currently slated to occur mid September), one thing is certain: The Merge is one of the most important events to happen in the history of web3, and it will impact all aspects of Ethereum, including how Ethereum impacts the world.
Still wondering what The Merge is and why it matters? We’ve compiled answers to some of the most common Merge questions and simplified them as best as we can for a nontechnical, impact-conscious audience.
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What is The Merge?
The Merge refers to the moment when the Ethereum blockchain will switch from using Proof of Work consensus mechanism to validate transactions to a Proof of Stake consensus mechanism.
Read more:
- The Merge (Ethereum.org)
What does Proof of Work and Proof of Stake mean?
Both Proof of Work and Proof of Stake are consensus mechanisms that enable decentralized networks to agree on things, such as account balances or the order of transactions. The consensus mechanism of a blockchain is the underlying algorithm that sets the rules for adding valid blocks to the blockchain (ie. mining).
Currently, under the Proof of Work system, miners validate blocks with energy intensive computations. Miners are rewarded financially with transaction fees for adding validated blocks. Proof of Work puts tens of thousands of computers in competition with each other to solve the same problems simultaneously. Because of this, Proof of Work is energy intensive and expensive. Plus, with this system, Ethereum can only process seven to fifteen transactions per second (compare that to Visa, which can process thousands of transactions per second).
Under the new Proof of Stake system, instead of competitive block mining, willing participants will instead stake Ethereum (capital) to validate transactions. In a Proof of Stake system, computers are randomly drawn from a pool of stakers to validate transactions, thus reducing the computational work needed. This means Proof of Stake is less energy intensive, less costly and thus more accessible, and easier to process.
Read more:
Why is it called The Merge?
The event is called The Merge, because it is the moment when two independent blockchains that are currently running in parallel, the main Ethereum blockchain and a special-purpose test blockchain called the Beacon Chain (or Consensus Layer), will merge, resulting in a total switch to Proof of Stake consensus. The sole purpose of the Beacon Chain, which was launched in December 2020, has been to test the Proof of Stake consensus mechanism before its deployment across the entire ecosystem.
Read more:
- Everything You Need to Know About the Merge (Bankless)
Is The Merge a new idea? Why now?
The Merge has been a part of the plan for Ethereum for years. Co-founder Vitalik Buterin first spoke about switching to a Proof of Stake consensus mechanism in 2013. Proof of Stake consensus, however, is complex; it took years of research and development to perfect it, hence the multi-year process to make the switch. The Merge is the first part of a multi-year plan that will lead to the eventual formation of Ethereum 2.0.
Earlier this month (August 2022), the third and final public test in preparation for The Merge was completed. The Merge is now expected to fully happen on September 15th or 16th. Technically speaking, it will happen at block 58750000000000000000000 on the chain, which is expected to happen on September 15th or 16th.
Read more:
Who decides when The Merge happens?
Ethereum governance happens off-chain with a wide variety of stakeholders involved in the process.
Read more:
- Introduction to Ethereum governance (Ethereum.org)
How will The Merge make Ethereum more environmentally-friendly?
Reduced energy consumption is one of the main benefits of switching Ethereum to a Proof of Stake consensus mechanism and one of the key reasons this change is happening at all.
Currently with Proof of Work consensus, Ethereum’s total energy consumption is about 112 TWh per year, comparable to the energy usage of all of The Netherlands with 17 million people. After The Merge, Ethereum will consume 99.95% less energy than it does currently — a big deal, considering energy consumption is one of the most common critiques of blockchain tech in general.
This is because Proof of Stake consensus secures a blockchain with capital instead of energy (as in Proof of Work). With Proof of Stake, the energy needed to secure Ethereum is comparable to basic computer usage. A system like this, which relies exclusively on computing power and doesn’t require the energy consumption associated with transporting people to offices or lighting buildings as in the traditional financial sector, would literally be the most environmentally-friendly financial system in the world.
Read more:
- The Ethereum Merge Explained (CNET)
- Can Ethereum’s proof-of-stake transition save the planet? (forkast)
What will happen to the humans who currently mine Ethereum?
Proof of Stake consensus means that Ethereum will no longer require energy-intensive, expensive mining operations to run, which overall is better for the environment and enables anyone to get involved in securing the network without the need to purchase costly equipment. However, this means that individuals who currently mine Ethereum all over the world, including those who have invested in costly equipment to do so for a living, will suddenly need to seek alternative income streams.
It’s important to differentiate between mining pools, which are companies that coordinate the resources of individual miners, and individual miners themselves. Mining pools, most agree, are prepared to weather the transition. The Merge has been in test mode for years. Mining pool companies have the capital and resources to pivot quickly to operating staking pools, and many are already prepared to do so. Since most mining companies never generated computing power themselves, instead relying on the resources of individual contributors, they never purchased expensive hardware and are not set to lose on costly investments in the same way that individuals are.
For individual miners who have limited capital and resources, the shift will be harder. In a Proof of Work consensus system, individuals only need to contribute computing power to earn; in Proof of Stake, they will be required to contribute (stake) large amounts of ETH. In other words, their expensive hardware equipment will be useless and essentially worthless. Proof of Stake will require a minimum staking contribution of 32 ETH (~$60,000) to see even the smallest returns, an amount exceeding the savings of most individuals, especially in the developing world. In order for this to be worth it for most individuals, they would need to create their own staking pools or participate in a company’s, which would most likely mean taking an income hit. Another option for individuals is to repurpose their equipment to mine other types of cryptocurrencies with comparable processors, but since other cryptocurrencies are less established than Ethereum, profitability is not guaranteed.
Still, an argument can be made that individuals, like companies, had several years to prepare for the transition. On the flip side, the fact that expensive hardware will no longer be needed in a Proof of Stake system means that anyone, anywhere with anything as simple as a home computer will be able to contribute to an Ethereum staking pool and potentially profit.
Read more:
- Ethereum Mining Pools Will Survive The Merge — What About the Miners? (Decrypt)
- JPMorgan: Ethereum Miners Face an Abrupt Change Following the Merge (CoinDesk)
Will everyone switch to Proof of Stake?
Not quite. Some Ethereum miners aren’t thrilled about the switch and are planning to create a fork. A fork is when a blockchain splits into two separate blockchains. When The Merge happens, some miners will continue to operate on the Proof of Work chain, thus creating a hard-fork. If a fork happens, it will run alongside the new Proof of Stake chain. It’s unclear how a forked Proof of Work chain would be valued or perceived over time.
Read more:
- Prominent Chinese Ethereum Miner Wants to Resist Merge, Create Fork (Decrypt)
- Vitalik Buterin not worried about Ethereum fork, says most proponents ‘want to make a quick buck’ (Fortune)
If there are two chains, which is “real”? What does this mean for existing assets?
All on-chain assets, including NFTs, will duplicate when The Merge takes place. A version will exist on the original Proof of Work chain and another on the Proof of Stake chain. How this will impact the market is unclear; the value will depend on community and market reaction post-merge. The exception is stablecoins, which have been clear about only recognizing the new Proof of Stake blockchain. Existing assets will not be lost.
Read more:
- What Is The Merge and How Will It Impact NFTs? (Lucky Trader)
Why should I care about The Merge?
With a market cap of $240 billion today, Ethereum is the largest, most active ecosystem in web3. All economic activity that takes place on the Ethereum blockchain, including its security, will be impacted when The Merge happens.
To date, no blockchain has undergone such a significant, public change. Because of this, years have been spent testing and perfecting the switch to mitigate the risks. The fact that it will happen soon is a big deal. What comes next will impact the future of cryptocurrency and web3 forever.
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Do you have more questions about The Merge? Let us know at web3forgood@gmail.com.
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