Ethereum merge and how it may affect me as an Investor
Ethereum which claims a second position after the bitcoin blockchain is one that continues to implement new techniques to meet customer needs. Just as jog of memory, Ethereum is the parent blockchain that supports Ether. It would be an interesting thing to learn the new developments in Ethereum, especially the merge.
Ethereum is the blockchain behind the second largest crypto globally. Currently, it is working towards reducing its carbon footprint by about 99%. The upcoming Ethereum merge is very important as an investor as it may affect you in different ways. It is expected to take place on 15th September 2022.
What is Ethereum?
Ethereum is a decentralized open source blockchain that has smart contract functionality. Its native crypto is Ether. In terms of market capitalization, Ether is second after Bitcoin. Ethereum powers ETH as well as other decentralized applications.
Furthermore, Ethereum technology is a home to digital applications, global payments, and money. Ethereum is opened for any person across the globe. All that is needed is the internet. Apart from being a digital money, it may represent anything that you own then traded and later placed as a non-fungible token. The features of Ethereum include Ethereum Virtual Machine, decentralized applications, smart contract, and Ether.
What is the Ethereum Merge About?
The Ethereum merge is about upgrade to the Ethereum platform which will merge Beacon Chain and Ethereum Mainnet. It will ensure a transition from, proof of work to proof of stake. The merge will result in the end of using proof of work in Ethereum. The merge further set stage for upgrades such as sharding. Besides, as I said earlier, the merge will reduce the energy consumption of Ethereum by about 99.95%.
The merge entails joining Mainnet which is the current Ethereum execution layer with Beacon Chain that is a new proof of stake consensus layer. The merge will eliminate the requirement of energy intensive mining. Instead, it will secure the network using staked ETH. The process will ensure that Ethereum enhances sustainability, security, and scalability.
The Beacon Chain
The Beacon Chain is the Ethereum 2.0’s processing engine. It exists in a different blockchain in the Ethereum network. Also, it runs in parallel. It has never processed a transaction on Mainnet. However, it has been coming to a consensus on its own. This takes place by agreeing on the active validators as well as their account balances.
PoS secures Beacon Chain and it was developed on 1st December 2020. However, Mainnet runs on PoW. Therefore, the change that is about to be made is on the merge. Although merging with Mainnet will have some implications in the network, funds are safe and no history will be lost.
Why the Merge is taking place
In explaining the transition, Ethereum Foundation describes it as a spaceship in mid-flight. According to the foundation, “The community has built a new engine and a hardened hull. After significant testing, it’s almost time to hot-swap the new engine for the old mid-flight. This will merge the new, more efficient engine into the existing ship.”
The old engine which Mainnethas been used by the blockchain since 2015 when PoW was introduced. PoW was used in addining new transactions securely as well as other information. Additionally, PoW needs user computer in solving challenging computations before a new block is added. Bitcoin also uses this method and it is energy intensive. Ethereum’s PoW in a year consumes the same energy that is consumed by a country like Belgium in a year.
PoS is a good alternative as it consumes less energy. Instead of using electricity, users who need to be part of the verification process will put their personal crypto on the line. The process is referred to as staking. The users (validators)are selected randomly in verifying new information that should be added to a block. When they confirm accurate information then they get cryptocurrency. However, in case they are dishonest, they lose their stake.
The Things that Will Change if the Merge Takes place
First in the merge, Sharding will be possible. Sharding is the process of splitting validation work to small amounts. This allows the Ethereum network to handle more transactions. Additionally, it might increase the number of people using Ethereum to allow individuals run Ethereum even in small devices such as phones. Even though Sharding is not part of the merge, it will be present on future updates table.
The second change is that mining will not be possible. If the merge is successful, there will not be a possibility of verifying transactions on Mainnet by mining. Instead, what will happen is that the validators existing in Beacon chain will confirm the new transactions. Additionally, there will be a decrease by about 90% on the rate in which new coins enter in circulation. The reason is because there will be mining rewards and rewards staking will stop. Also, there will be a drop in the energy required to maintain Ethereum.
The Things that will not Change
The way you access Ether will not change. The reason is because the merge will transfer the whole transaction history. Besides the digital assets will be accessible.
The other thing that will not change is transaction speeds and gas fees. The merge will not lead to faster transaction fees or even lower gas fees. Also, the gas fees will remain the same.
Is the Merge that is about to take Place Risky
The merge is about to take place and anything might take place. It might go wrong or even be successful. After its launch, Ethereum might run slowly or even stop completely. Besides, there may be other small errors and noticing them might be challenging. However, there are low cases that such cases may take place.
Although some investors claim that PoS is secure as it has been used in blockchains such as Avalanche and Solana, that might not be the case. PoW proves to be more secure. It is hard to cheat the system since it requires high computational power. However, in PoS, it is not that difficult to cheat the system. It just needs amassing huge amount of Ether.
Ethereum, just like Bitcoin, is a decentralized network. This means that all the powers do not lie in the developers’ hands. Therefore, the community especially the miners are not happy about mining being left out in the new network.