Anyone can become a validator without specialized equipment. What is The Ethereum Merge? - our team explains
FXMAG Education 07.11.2022 15:18
The biggest blockchain platform, Ethereum as well as the highest capitalized altcoin (ETH) received a groundbreaking update called The Merge. Under it, the Ethereum network now no longer needs to rely on the work of digital miners mining ETH tokens, in addition the platform has also changed its consensus algorithm to Proof-of-Stake.
What does this really mean for the average network user, what does this process involve and will Ethereum change as a result of the upgrade? Could such a wide-ranging change to the network go wrong?
Why did the ETH mining have to stop?
The Ethereum network was launched exactly on July 30, 2015 and only a dozen or so days later, in August of the same year, one of the first source code updates was introduced, which implemented the so-called Difficulty bombs . It is an algorithm that, at a specific moment of "detonation", is to rapidly raise the difficulty of mining in the Ethereum network to a level where further mining of ETH will be completely unprofitable, or even impossible. This moment has been described as a symbolic "Ice Age", after which miners will have nothing to look for in the Ethereum network, which is tantamount to abandoning the Proof of Work consensus algorithm. Today, hardly anyone remembers that the original bomb of difficulty was supposed to explode in the middle of 2017, thus starting the process of transitioning the Ethereum network to Proof of Stake using a protocol called Casper. As you know, nothing like that happened, because changing the consensus algorithm in such a complicated protocol as Ethereum was then turned out to be much more difficult than the developers expected. So it was necessary to make a change to the source code that delayed the activation of the Difficulty Bomb. The first such update, called Byzantium, took place in mid-October 2017. Ultimately, the bomb of difficulty was delayed four more times (including twice last year). This time, however, the moment has come - the bomb of difficulties, after five years of delay, was finally detonated on Thursday, September 15 in the early hours of the morning. Thus, the Ethereum network has now switched to a completely new consensus algorithm, operating in the Proof of Stake model. This is an important change because so far Ethereum was the second Proof of Work network after bitcoin in terms of computing power.
Of course, the departure from mining ETH is no surprise, the Ethereum network was designed from the beginning to eventually switch to a Proof of Stake algorithm. However, many miners had found a sort of "comfort zone" in Ethereum over the years and were opposed to changing the consensus algorithm. Sam Vitalik Buterin, co-founder of Ethereum, when asked about what the miners of ETH should do once The Merge had occurred, replied that a great alternative for them will be, among others, Ethereum Classic.
A certain threat to the integrity of the Ethereum network may be art nouveau projects such as Ethereum PoW, which brings together miners who oppose the transition to Proof of Stake and want to continue digging ETH, thus separating from the main Ethereum chain (the Ethereum PoW hard fork took place in Wednesday morning).
Why is Ethereum's transition to Proof of Stake so important?
It is already known that the change of the Ethereum consensus algorithm was inevitable and - despite many years of delays - it finally happened. But why was Proof of Work not future-proof for the Ethereum network?
First of all, it concerns issues related to scalability, which in the Proof of Work model is simply too low (depending on how it is calculated, it is determined at approximately 25 transactions per second). It is worth remembering that the Ethereum network is completely different from, for example, bitcoin itself. Ethereum is much more extensive, and on the Ethereum blockchain (in addition to the ETH itself) there are thousands of large smart contracts and decentralized applications and tokens that generate network traffic and need more and more bandwidth. The problems of Ethereum clogging and growing transaction fees resulting from low bandwidth have been occurring in the entire ecosystem for years, although the first real stress-test for Ethereum was the explosion in popularity of the decentralized application with NFT CryptoKitties, which at the end of 2017 was able to "clog up" the entire network. Staying with the Proof of Work consensus algorithm would greatly reduce the potential for future network scalability enhancement. However, that's not the only problem.
Proof of Work for a project of such a large scale would be more and more difficult to maintain over time, mainly due to the systematically increasing electricity consumption. Earlier this week, the Ethereum network recorded an annual electricity consumption of almost 84 TWh (terawatt hours), which puts it on a par with Finland. The high dynamics of the increase in energy consumption of the Ethereum network is evidenced by the fact that a year ago it amounted to less than 52 TWh per year, and at the peak of the boom at the turn of 2017/18 it was less than 17 TWh per year. And it is not only about environmental issues - in the environment of more expensive energy resources and the growing threat of electricity shortages, maintaining such a power-consuming and ineffective network is also not very prospective and socially irresponsible. In fact, all these problems are solved through the switch to Proof of Stake, which reduced the energy consumption of the entire Ethereum network by over 99% overnight.
What is The Merge about?
The very moment referred to as The Merge marked the transition from the Proof of Work consensus algorithm to the Proof of Stake. But how did this come about? The very process of changing the rules of consensus in such an extensive network as Ethereum is very complicated, hence many years of delays and extensive tests. In December 2020, the so-called Beacon Chain , an independent Ethereum test network based on the Proof of Stake consensus algorithm, which currently houses over 427,000. validation nodes, called validators, which secure the network of over 14.445 million ETH units. At the moment of The Merge, the aforementioned difficulty bomb "detonated", which made the miners stop digging ETH. The next transaction blocks will already be added to the Ethereum network based on the consensus between the validators, i.e. based on the Proof of Stake. The Merge process itself is therefore an amalgamation of the main Ethereum network with the Beacon Chain, which has previously acted as a test network.
Proof of Stake in Ethereum 2.0
After updating The Merge, the aforementioned validators were responsible for approving transactions and creating new ETH units, which are a reward for their work. It is no longer a digital spoil, but a reward for staking funds on your approval node. Anyone can become a validator without specialized equipment. The condition is to freeze at least 32 ETH and run a full node in the Ethereum network, of course, there are other ways to staking without this amount and without having to set up a full node, such as putting funds into a smart contract with a staking pool or doing it on a centralized exchange. Importantly, the validator's locked amount itself can be seized if the validator tries to break the rules of consensus and acts dishonestly (e.g. by trying to validate invalid transactions), in line with the principle that honestly running a node gives more benefits than trying to break the rules. This 32 ETH is the minimum threshold to launch your own approval node - the more funds we stack, the greater our rewards for block approval will be. However, the rates of return for staking will be lower than for mining ETH. After miners stop securing the Ethereum network, staking is expected to bring an annual rate of return close to 7% of the value of the frozen capital.
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Will Ethereum upgrade reduce transaction fees and speed up the network?
One of the more frequently asked questions about The Merge is the amount of the transaction fees on the Ethereum network, which has always been a problem for the entire ecosystem. The question is absolutely justified - since the entry of Ethereum into phase 2.0 was such an important event, the question is whether or not it had a positive impact on the use of ETH? Unfortunately, The Merge itself did not introduce any changes that could lower the prices of Gas, which is used to cover transaction fees in the network. So the answer is simple - after The Merge and Ethereum's transition to Proof of Stake, trading fees did not drop on their own. The good news, however, is that this is only the first stage that opens the way to further network development - in 2023, sharding is to be introduced in the Ethereum network, i.e. a solution that allows the network of blocks to be divided multiple times into smaller fragments, which will rapidly increase the scalability of the network. According to Vitalik Buterina, sharding can increase Ethereum's throughput by up to 100 times. The implementation of sharding will also reduce transaction fees. From the perspective of transaction costs, an update (hard-fork) called Shanghai, which is planned for the first quarter of 2023, will also be important. It will introduce significant improvements to smart contracts, which should noticeably lower gas prices. However, the Shanghai hard fork itself is associated with the risk of a decline in ETH quotations. This is due to the fact that validators in the network will be able to withdraw their stacked funds only after its implementation. Their ETH (at least 32 for each validating node) will therefore be frozen for the next few months.
As for the reduction of transaction approval time after The Merge, the change was rather cosmetic. The update introduced a fixed block time of 12 seconds, while it is currently around 12-14 seconds, so it is not much of a noticeable change for the average Ethereum user.
