The Merge Is Nearly Here: What to Expect From Ethereum’s Transition to Proof of Stake (PoS)

After several delays, Ethereum’s proof-of-stake upgrade is finally here. It is expected to take place between Sept. 14 – 15. Ethereum users have been eagerly awaiting the upgrade, dubbed the ‘Merge’, since the blockchain announced the launch of the Beacon Chain in Dec. 2020. The new chain was launched with the primary purpose of transitioning to a more energy-efficient operating system. Here are some of the key points to take note of concerning the network upgrade.

What is the Merge?

Considered by some as one of the most important events in recent cryptocurrency history, the Merge represents Ethereum’s transition from something called Proof-of-Work (PoW) to Proof-of-Stake (PoS).

The transition must be activated on the Beacon Chain, the new proof-of-stake consensus layer running in parallel with Ethereum’s current proof-of-work chain, which processes transactions. When the two merge, the Beacon Chain will effectively absorb the proof-of-work chain, cutting Ethereum’s energy use by over 99%.

The Beacon Chain coordinates a network of stakers, and introduced PoS to Ethereum. The switch to this new chain started in Nov. 2020, as a one-way bridge began taking deposits and secured millions of ETH from several validators (stakers).

The chain has run smoothly ever since. A series of smaller but important upgrades, called testnet merges, have been implemented over the past two years, all rallying toward the Merge.

But there is concern that the new chain could give major stakers – the guys that secure the Ethereum network – power to block transactions in compliance with regulatory demands, and against the cryptocurrency ethos of privacy and decentralization.

Only four entities – Binance, Coinbase, Lido, and Kraken – control about 66% of all the ETH staked on Beacon Chain. According to the Ethereum website, there is more than 14.4 million ETH staked by over 426,000 validators.

“Too much of the Ethereum ecosystem is thinking that reducing energy usage should be the single-minded goal of the network,” Brian Pasfield, CTO of Fringe Finance, told Be[In]Crypto.

“But given that introduces additional existential risks whereby authorities will be able to censor transactions via bribery attacks, I think the long-term risks have not been assessed in a balanced manner,” he added.

Why the Merge?

While Bitcoin pioneered the concept of peer-to-peer (P2P) cryptographic transactions, it is Ethereum that brought on the next revolution in cryptocurrency with its smart contracts – decentralized applications that opened the door to novel financial products, including NFTs, lending, and borrowing.

Within just a year to Nov. 2021, the total sum of value locked in Ethereum-based protocols soared more than 1,200% to about $110 billion. But progress is a double-edged sword. ETH found it hard to process the increased number of transactions fast enough, causing fees to rise sharply.

Likewise, Ethereum’s energy use hit the roof. If the blockchain was to become the primary vehicle for mass cryptocurrency adoption, it needed a system capable of processing huge transaction volumes per second at a fraction of its existing energy consumption.

Hence, the Merge. The Ethereum Foundation estimates that the switch to proof-of-stake will reduce energy use by 99.95%. Transaction speeds are expected to rise 12% while the cost to send a transaction over the Ethereum network will decline by a similar margin.

“In terms of its carbon footprint, it would essentially be like any other internet operation whose energy use involves nothing more than running a network of computers, rather than a venture resembling a collection of gigantic digital factories,” according to Olga Kharif from Bloomberg Quicktake.

When is it happening?

According to Gabriel Halm, a researcher at IntoTheBlock, the merge will happen by Sept. 15 at 12:00 UTC if the hashrate maintains an average of about 844 TH/s. However, given the 30-day TH/s average on Ethereum mining and hashrates, the expected merge date should be closer to Sept.14.

What happens after the Merge?

The success of the upgrade, which represents a series of upgrades to follow on the network as highlighted by Ethereum founder Vitalik Buterin, will have significant implications on PoW blockchains, like Bitcoin, and the economics of ETH.

After the Merge, the annual ETH inflation rate will go from 4.3% to 0.43%. Ethereum issuance will decline by around 90%, as more coins get locked away via staking. That means ETH will become deflationary, something that could spur price growth.

“In the long term, the Merge upgrade will definitely improve the price of Ethereum,” Pasfield, the Fringe Finance executive, told Be[In]Crypto.

“Still, at the moment, the main impulse seems to be already embedded in the coin’s rate. Because of this, it is likely that immediately after the Merge, it will show a great degree of volatility.”

The Beacon Chain erases the need for so-called miners – a network of energy-intensive super computers who have hitherto helped to secure and process transactions. It is thought PoW may be a lot more secure compared to PoS.

Regardless, miners, who earned billions of dollars for their work, will likely be the hardest hit by the Merge. That’s the reason some have signaled a split from the main Ethereum blockchain, in order to stay in business.

For Be[In]Crypto’s latest Bitcoin (BTC) analysis, click here.

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Source: https://beincrypto.com/the-merge-is-nearly-here-what-you-need-to-know/