The Ethereum Merge is an historic moment in the young lives of blockchain networks, virtual currencies and Web3. The Merge — the transition of the Ethereum network from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism — is the first step in a process intended to improve Ethereum’s sustainability, security and scalability. After years of planning and testing, the Merge occurred on 15 September 2022.
Blockchain networks process transactions and store the records of those transactions in blocks that are linked chronologically and secured with cryptography. A blockchain itself is simply a database containing blocks of transactions. The computers comprising a blockchain network process transactions, create new blocks and store identical copies of the blockchain database. Those computers are typically owned by hundreds or thousands of independent operators around the world. Blockchain networks are said to be ‘decentralised’ because the independence of the operators means there is no central authority that can control a network.
To add a block to a blockchain, the network computers must first agree on which new transactions will be included in the block. The process of agreeing on the transactions in a block is called consensus. There are several different types of consensus mechanisms, the two most dominant being PoW and PoS. Bitcoin uses PoW, as did Ethereum before the Merge. Ethereum now uses PoS.
Tampering with a transaction in a block that is more than a few minutes old is virtually impossible because, owing to the unique way blocks are linked, every newer block would also need to be changed. But changing all those blocks would require consensus across the network, which a person seeking to tamper with the transaction could only be assured of if they control a majority of the voting power in the consensus mechanism. Achieving that level of voting power is difficult and expensive in a decentralised network.
The Merge is Ethereum’s transition from a PoW to a PoS consensus mechanism. So why is it called the Merge and not the Transition?
Conceptually, Ethereum can be thought of as having two layers: an execution layer and a consensus layer. The execution layer is where transactions are processed and where the state of the network — the historical records in the blockchain — are stored. The consensus layer is where transactions are validated and where blocks are assembled and agreed.
Since processing its first transactions in 2015, Ethereum had a PoW consensus layer operating in tandem with its execution layer. In 2020, the Ethereum ‘Beacon Chain’ was launched. The Beacon Chain was a parallel network with a PoS consensus layer but it did not process transactions or execute Ethereum’s smart contracts. The goal of the Beacon Chain was to confirm the viability of PoS as a consensus mechanism for Ethereum.
The Merge, then, was the merger of the Beacon Chain’s PoS consensus layer with the execution layer of the legacy Ethereum network. As a result of the Merge, Ethereum’s PoW consensus layer was disconnected from the network.
Sustainability
Blockchain networks like Ethereum and Bitcoin give rewards to network operators who create new blocks that are added to their blockchains. To earn the right to create a new block in a PoW network like Bitcoin, operators compete to solve very difficult mathematical problems. The ‘work’ in PoW is the computing power needed to solve those problems.
Computers need electricity. One estimate of the electricity required to operate the Bitcoin network estimates power consumption to be about 700 kWh per transaction. To put that in perspective, the average private condominium in Singapore uses less than 600 kWh of electricity each month. Even though the Ethereum PoW network was estimated to be about 11 times more efficient than Bitcoin, the electricity use per transaction was still enormous.
In contrast, after the Merge the Ethereum PoS network is estimated to cut energy use by 99.95%. In the Ethereum PoS network, the right to create a new block is assigned randomly to operators based on the sizes of their respective stakes in the network (i.e, the amount of ETH tokens they have each locked in the network). There is no hard math problem to solve and no energy spent solving it.
Although Ethereum’s energy use is not trivial, it’s a massive improvement over the PoW version of Ethereum and several orders of magnitude more efficient than Bitcoin. And, with future planned improvements in transaction throughput as discussed below, the energy use per transaction will drop further.
Security
The effect of the Merge on Ethereum’s security is less clearcut. PoS proponents argue that Ethereum’s security posture will improve. By one estimate, it would cost about US$5 billion to buy and operate enough computers to successfully attack Ethereum’s old PoW consensus layer, but it would cost more than US$20 billion to stake enough ETH to successfully attack the new PoS consensus layer. PoW proponents argue that the enormous energy costs provide better security and, because capital is more easily assembled and deployed than computing resources, an attack on a PoS network is more likely to succeed than an attack on a PoW network.
Scalability
The inability of PoW networks like Bitcoin and pre-Merge Ethereum to scale with demand has severely limited their adoption as payment systems. Bitcoin currently processes about 5 transactions per second (TPS) while pre-Merge Ethereum handled about 20 TPS. In contrast, the Visa credit card network currently processes about 2,000 TPS with capacity for more.
The vision for post-Merge Ethereum is 100,000 TPS. However, that level of performance can only be reached with the implementation of another technology called sharding, which involves processing transactions outside the main Ethereum network, bundling those transactions into a single transaction, and then processing that single transaction in the normal way in the main Ethereum network.
The Merge enables sharding because the block validators in the PoS consensus layer will be known, will have staked ETH and can (presumably) be trusted when responsibilities for approving shards are divided among them. In a PoW network, miners have no obligation or commitment to the network and can withdraw at any time. Nevertheless, the effect of sharding on network security is not yet fully understood.
Other Consequences of the Merge
While dramatically improving sustainability and laying the ground work for scalability, the Merge is not a panacea for all of Ethereum’s challenges. Here is an overview of some things that have changed and some that have remained the same after the Merge.
The Merge is a major upgrade for Ethereum’s sustainability and sets the stage for further performance improvements.
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Disclaimer: This article is for general information only and does not constitute legal advice.
