Ethereum, the second-largest blockchain-based platform by market capitalization, is tentatively set to convert its Proof-of-Work (PoW) consensus mechanism, which challenges miners to solve mathematical puzzles to update the blockchain, into proof. stake (PoS), which makes decisions on updates through a vote among holders who have “bet” a “risky” cryptocurrency due to bad behavior, on September 15. This software update (the “merger”) will be a complete overhaul of the system that has been running for seven years. For nearly two years, a separate PoS blockchain, called the Beacon Chain, has been running alongside the original Ethereum blockchain to allow software developers to test and improve it. The merger will bring the two together. PoS will require 99.9% less energy to maintain than PoW, and if successful, the merger will enable greater Ethereum improvements in the future. This would be good news for the crypto industry, which has had a very difficult year so far.
Ethereum can both record transfers of its cryptocurrency and all assets and functions held therein in “smart contracts”. All decisions regarding upgrades are made by consensus between developers and interested parties who have created applications (such as stablecoins and DeFi) or assets listed on Ethereum. Some miners who have made significant investments in hardware to run PoW might object to the merger and attempt to run the old software. Applications running on Ethereum may be negatively impacted, and some would need to temporarily suspend transactions to install new components and adapt to the new protocol during the merge. The overall conversion is still expected to go smoothly due to the significant amount of testing that has been done.
As PoS reduces the need for electricity and specialized mining hardware, the rewards for validating transactions can be significantly reduced. This partly explains why the price of ether has risen recently while other currencies, including bitcoin, have not. Another benefit of merging is network security. Currently, to take control of Ethereum or Bitcoin, a hacker needs 51% of the total computing power used for mining. A hack of a PoS blockchain requires a stake of half of all cryptocurrency, which would be even more expensive.
Historically, Ethereum has been slow and expensive, especially when the network is busy. Transaction registration fees (“gas fees”) can reach $100 per transaction. Post-merge upgrades, including ‘push’, ‘spike’, ‘purge’, and ‘madness’, will primarily focus on improving scale and efficiency. Sharding, the process of dividing a database into chunks to distribute the load, will allow the blockchain to scale and handle many more transactions at potentially lower cost. The Verge will introduce a new mathematical protocol allowing a user to run the software without needing to store all the data on the blockchain. Purging will remove old data from Ethereum’s transaction history. Finally, the Madness will implement a number of miscellaneous upgrades.
Although the Ethereum Foundation has postponed the merger in the past, successful dress rehearsals like the Goerli testnet make a mid-September date look promising. Some predict that the merger will continue to propel the value of Ether. Others are more cautious. Undoubtedly, a successful merger will be of great significance for the crypto industry.