The time for the Ethereum Merge is getting closer - spotlights are inevitably on Ethereum 2.0. Although Ethereum is not celebrating a new all-time high in market value, the blockchain is back in the spotlight thanks to the imminent arrival of the next phase of its upgrade: the Merge.
Moving Ethereum from Proof-of-Work to Proof-of-Stake represents not only a big change for the network, but also for the entire ecosystem. At this point, you may have seen lots of forecasts from financial experts analysing how the Ethereum Merge will impact the price of the token. However, we''ll mainly focus on what the Merge is and what we can expect from the Ethereum 2.0 update.
Note: Ethereum 2.0 is a popular but incorrect way of referring to the new PoS version of Ethereum.
When is the Ethereum Merge and what it consists of?
Before talking about the Merge, we must first understand why it was necessary. Ethereum, like other blockchains such as Bitcoin or Monero, is a blockchain whose consensus mechanism is originally based on Proof-of-Work (PoW).
One of the main disadvantages of PoW lies in the high computational power that a miner needs to compete to solve the mathematical problem and thus be the first to mine a block and receive rewards. To better illustrate the amount of energy consumed by Ethereum's network, it reaches the same level as countries such as the Netherlands in terms of energy consumption. However, by moving to PoS, this energy consumption could be reduced by as much as 99.5%.
As a solution to the problem of high energy consumption, high network costs and scalability difficulties, Ethereum decided to prepare the network for a gradual upgrade to PoS consensus, starting with the launch of the well-known Beacon Chain.
What is Beacon Chain?
A PoS Ethereum PoS chain has existed since 2020: the Beacon Chain. This chain currently runs parallel to the Ethereum mainnet and will incorporate the PoS consensus layer into Ethereum once it is merged with the mainnet.
Contrary to popular belief, there won't be an Ethereum 2.0 blockchain to upgrade from PoW to PoS. Instead, the current PoW consensus layer will be exchanged for the PoS consensus layer that will incorporate the Beacon Chain. This is composed of different consensus clients, such as Prysm, Teku, Nimbus, Lighthouse, Lodestar, which run the algorithm that will allow the network to reach consensus when validating transactions. On the other hand, there is the Ethereum execution layer, which is responsible for processing and executing the network's transactions, which will remain intact.
Source: Ethereum.org
After understanding what the Merge consists of, we can define the merge as the upgrade by which Ethereum's blockchain will change its PoW consensus layer to that of a PoS consensus mechanism. The main goal of the migration is to make the Ethereum blockchain more sustainable, scalable and secure.
Ethereum certainly believes that the Proof-of-Stake consensus mechanism has what it takes to achieve its vision and end its current vulnerabilities. However, most of the changes to the Ethereum blockchain will not be implemented instantly, as the merge is only one phase of the whole process.
Phases of the Ethereum's Upgrade
Phase 0: Launch of Beacon Chain
Phase completed. The Beacon Chain was launched last December 2020. Since then, thousands of validators have been set up to secure the Ethereum network with their staked ETH. Exactly 32 ETH are required to set up a validator on Beacon Chain, which cannot be withdrawn until the option is enabled.
Phase 1: The Merge
Next phase. The Merge is expected to take place in August/September 2022. It will consist of merging the Ethereum's mainnet and the Beacon Chain, which means the final transition from Proof-of-Work to Proof-of-Stake, and therefore saying the last goodbye to PoW in the Ethereum blockchain. To this end, several merge simulations have already been run on Ethereum testnets, allowing the team to fix bugs and optimizing the transition. The last successful merge simulations were the Ropsten testnet (8 June 2022) and the recently launched Sepolia testnet (6 July 2022). After the last simulation where the Goerli and Prater testnets will be merged, the merge of the Beacon Chain with Ethereum will finally take place.
Once the merge is over, validators will keep generating rewards for each validated block. However, transfers and withdrawals of staked ETH, which would have been locked until now, will be possible after the Shanghai update. To avoid a large-scale flight of validators, only 6 validators (with 32 ETH in staking) can be removed per epoch or epoch, which is equivalent to 6.4 minutes.
Phase 2: Sharding
Phase planned for 2023. The sharding phase will be managed in stages and will eventually ease network congestion and increase the number of transactions per second, although the process is still being refined. Initially, it was planned to shard Ethereum's database horizontally into 64 chains, making transactions much easier to process and efficiently distributing the network load.
Instead of processing transactions using the data history of the entire blockchain, validators would validate transactions separately in independent shards, which would result in a lower load and better performance.
These shards would communicate directly with Beacon Chain, which would coordinate them and store the information received. As a result, they would always have access to an up-to-date database and the network would be much more efficient and scalable.
Original diagram by Hsiao-wei Wang, designed by Quantstamp. Source: vitalik.ca
However, with new scalability approaches being discovered, sharding keeps evolving. One of the main problems of sharding lies in the absence of communication between shards, which gives rise to multiple vulnerabilities. As a result, the first version of sharding 1.0 became obsolete and evolved into danksharding, and finally into proto-danksharding.
Unlike sharding, where validators work on shards and propose blocks directly to the Beacon Chain without communicating with each other, danksharding focus on a rollup-centric roadmap, which adds a new type of blob-carrying transactions. These blobs are much cheaper extra data spaces that are added to regular transactions in order to lower the cost per transaction. Although this solution increases the block size, it makes transactions up to 10 times faster and cheaper.
Rollups are protocols designed to roll up transactions sent by shards and make a single transaction to the Beacon Chain. This way, Ethereum only has to process one transaction, increasing the speed of potential transactions and reducing the cost.
Here, the shards and the Beacon Chain are Layer 1, while rollups are Layer 2. In danksharding, each shard sends their transactions directly to the L2 rollups, instead of sending them directly to the Beacon Chain. These rollups receive, pack and send the information directly to the Beacon Chain in a single transaction. This, in addition to allowing the network sharding, leads to a greater amount of processed data and in turn to the chains interconnection. The main objective of danksharding is to ensure that layer 2 increases the number of transactions that can be processed and lowers the transaction cost of the Ethereum network.
Later, Vitalik Buterin proposed proto-danksharding as a new way to improve danksharding. Although the data blobs solution has already been implemented (EIP-4844), it's just a short-term solution. It won't be until proto-danksharding that the functionality of carrying-blobs transactions will be completed.
What to expect from the Ethereum Merge
What to expect regarding the blockchain may vary depending on the phase we are in, but this time, we will focus on the Merge phase. Below, we will highlight what to expect after the Ethereum Merge:
Faster transactions. Processing speed of transactions will increase after the danksharding phase begins, which in turn will make the network's ability to process transactions even faster.
Higher security. Ethereum has more than 400,000 validators, using different consensus clients, making it possible to further decentralise the network. This is a very significant figure considering that Solana, despite being a PoS network from the start, has around 1800 validators.
Increased Ethereum adoption. Moving to the PoS consensus mechanism and increasing the network's load capacity will make it easier to build more projects on the Ethereum blockchain. Until now, we have seen large projects born on the Ethereum blockchain end up building their own network because Ethereum was already at its maximum.
Reduced energy consumption. A favourable factor for the environment which could encourage the adoption of the network regarding organisations and traditional companies.
Misconceptions about Ethereum 2.0 and The Merge
Given the amount of information about the Ethereum merge on the Internet, you may have come across some misconceptions that we would like to clear up. Below, we'll answer some of the questions that have been circulating around the web over the past few months.
"The Ethereum Merge will reduce gas fees"
No, the Ethereum merge won't reduce the gas fees of the blockchain. The merge is just one phase among different stages of the Ethereum upgrade to PoS. However, the processing speed and network efficiency resulting from the full network upgrade to PoS consensus will lead to a reduction in transaction costs as the process by which transactions are processed is simplified.
"The Ethereum Merge will fork the blockchain and there will be a new ETH2 token"
The update was originally labelled as ETH 2.0 or Ethereum 2.0. However, in January 2022, the Ethereum Foundation decided to change the upgrade name to "Ethereum" to prevent users from potential fraudulent attacks. Always pay attention and only trust official sources. The merge will just upgrade the blockchain from Proof-of-Work to Proof-of-Stake, but there won't be any ETH2 tokens and no network fork will be made. No token changes or user actions will be required for the upgrade to take place.
"Ethereum has set a specific date for the upgrade"
Not exactly. Despite speculation from numerous sources, we recommend only checking official sources. It's expected to take place between late August and September, according to the Ethereum official site.
Conclusion
As the merge phase is imminent, the Ethereum network is attracting most of the attention of our users. Once the changes are implemented, the benefits of the merge phase will become instantly noticeable. Ethereum will be transformed from an unsustainable, unscalable and expensive network, to an eco-friendly network, designed to be scalable and much cheaper, thanks to the reduction in cost per transaction.
Will the upgrade impact the ETH token price, and will this be the start of a wave of decentralised applications landing on the Ethereum network? Unknown questions we all wonder about... We'll have to keep waiting to see what happens. In the meantime... You can join the ETH staking, even if you don't have 32 ETH!