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Everything You Need to Know about the Ethereum Merge

The great Ethereum Merge has been tentatively scheduled to take place in mid-September, and debates about its impact on the blockchain industry have been fast and furious.

The Merge will see the current Ethereum mainnet merge with the proof-of-stake Beacon Chain network, marking the most profound upgrade to Ethereum to date, second only to the genesis block in importance. This transition also stands as an example of how a major, decentralized system can effectively decrease its carbon footprint by a significant amount.

“The Merge” is the name that has been given to the transition of the Ethereum blockchain from proof-of-work (PoW) to proof-of-stake (PoS). The transition is referred to as a “merge” because it denotes the merger of two separate blockchains currently running in parallel. To understand what “The Merge’’ is and why two chains are “merging”, we need to first understand what Pow and PoS are, alongside the differences between the two.

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🔹Proof of Work (PoW):

PoW is a consensus mechanism to select which network participants (miners) are allowed to deal with the task of validating new data. The task is a lucrative one because miners are rewarded with new tokens when they accurately verify the new data.

The PoW mechanism requires miners to compete with one another to be the first to solve arbitrary mathematical puzzles where the winner is selected to add the newest batch of data or transactions to the blockchain. Winning miners only receive their reward in the form of new tokens after other miners in the network confirm that the data being added to the chain is correct and valid.

🔹Proof of Stake (PoS):

An alternative to PoW, which is widely viewed as being the first consensus mechanism, PoS is a more energy-efficient consensus algorithm that is used to validate crypto asset transactions.

Under the PoS mechanism, cryptocurrency owners can stake their tokens from the same blockchain to validate new blocks of transactions and add them to the blockchain. The probability of being selected to validate a new block is determined by the quantity of holdings being staked. When a block of transactions is ready to be generated, the PoS mechanism will select a validator node to review if the transactions in the block are accurate. If the validator reviews the block correctly, he can add the block to the blockchain and receive token rewards for his contribution. However, if the validator reviews the block information wrongly and adds a block with incorrect information, he’ll lose some of his staked assets as a penalty.

🔹Differences between PoS and PoW mining

  1. Various sources of computing power

In PoW mining, it is the computing capabilities of the mining machine (CPU, graphics card, ASIC, etc.) that determine who can mine more, but this is not the case in PoS mining. PoS mining does not require additional mining equipment, nor does it take up a large amount of computing resources.

In PoS mining, it is token quantity and token age that determine who is more likely to generate a block and gain token rewards. The properties behind these two factors are as follows.

Token quantity: The amount of a crypto asset one stakes.

Token age: The time difference between the last change (eg., transaction, mining) of this token to the present time.

The more tokens one stakes and the longer the token age, the higher the likelihood that a new block can be generated.

  1. Number of token produced

In PoW, the amount of tokens one can mine has no relation to how many tokens one holds; while in PoS, the number of token rewards one is able to obtain will be dependent on the quantity of tokens staked as well as their age.

Many blockchain networks, including Ethereum, have begun the transition from PoW to PoS, and hybrids of the two consensus mechanisms have been adopted since 2018; there are several reasons behind such a transition.

The main reason lies with the need to cut down on energy consumption — under the PoW mechanism, miners consume significant amounts of computing power and this raises the cost of handling fees. If governments worldwide ban mining farms, the entire network will face the threat of paralysis. However, under the PoS mechanism, mining difficulty has little relationship with computing power, and therefore requires no excessive power consumption.

In addition, the miners themselves are token holders with their own fund transfer requirements — they would thus be motivated to keep transaction fees to an acceptable level. With its offer of a faster and cheaper network transfer solution, the PoS mechanism undoubtedly signals a new direction for the development of the blockchain industry.

🔹How experts view ‘The Merge’

Mark Cuban, an American billionaire investor and owner of the Dallas Mavericks, believes that “The Merge” could well be a double-edged sword. In his view, investors’ excitement surrounding the transition could surpass the actual use-cases.

Citigroup mentioned in a recent research report that “The Merge” is the first of five planned upgrades for the network, and may increase transaction speeds by only 10%, given the reduction in block times. The upgrade, however, lays the path for the “Surge,” which is the next planned upgrade for the network and promises to bring a 100,000 transactions-per-second (TPS) capability to the blockchain.

The report also added that the upgrade will have a number of consequences, which include power energy intensity and the transition of ETH into a deflationary asset.

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