This event has been awaited for 7 years …
It is a Copernican revolution. After several years of preparation, the Ethereum blockchain is about to proceed, around September 15, 2022, to a crucial update of its operation. An event expected for seven years …
Its stakes are considerable. Currently, Ethereum secures nearly $400 billion of value, whether Ethers, Stablecoins, or NFTs. The upgrade of such an important network is therefore very critical. Many even place the operation in the Top 5 most important events in the crypto ecosystem since the creation of Bitcoin, in 2009.
The operation, dubbed “The Merge” consists of changing the method that the Blockchain uses to validate its transactions. Until now, Ethereum has used, just like the Bitcoin Blockchain, the Proof-of-Work (PoW).
On September 15, 2022, Ethereum will switch to Proof-of-Stake (PoS).
PoW consists of thousands of miners competing to find the hash of the next block to be added to the Bitcoin Blockchain. No intelligence here, it’s just raw work. The more computing power you have, the more likely you are to find the hash of the next block. When they succeed, they contribute to the smooth running of the Blockchain by validating transactions and are compensated for this with a reward. In Bitcoin in the case of the Bitcoin Blockchain.
This consensus method ensures perfect decentralization of Bitcoin, but it is regularly and unfairly criticized because of the amount of energy required to operate it. This is because the miners set up huge infrastructures and run very powerful computers day and night to perform the calculations. Opponents of Bitcoin pretend to understand that it is precisely this consumption of energy to produce Bitcoin that gives Bitcoin its value. On the contrary, Bitcoin promotes the development of sustainable energy. But that’s another subject.
It is estimated that the current operation of Ethereum requires between 94 and 112 TWh of electricity per year, equivalent to the electricity consumption of a country like the Netherlands. The Proof-of-Stake method, on the other hand, is much less energy-intensive, but it involves centralization reminiscent of the current failed monetary and financial system.
PoS consists of drawing lots of volunteer validators with Ethers, the native currency of Ethereum, and entrusting them with the validation work. This protocol avoids having several validators working on the same transaction. To participate in the validation process, validators will have to deposit 32 Ethers in escrow (one Ether is currently worth about $1,580).
Validators block tokens to be drawn to participate in the security of the network. Part of this deposit can be seized by Ethereum if the validator tries to corrupt the blockchain. A punitive system called “slashing”.
According to an estimation of Blockchain analysis companies, the switch to proof by stake could reduce the energy consumption of the Blockchain by 99.95%. “The Merge” should therefore attract into the Ethereum ecosystem companies wishing to use ESG-compatible protocols and, in doing so, close the gap with competing blockchains such as Solana.
But all this is at the cost of a centralization that poses a problem to those who want to free themselves from the flaws of the current system.
Even before the launch of Ethereum in 2015, the founders had already planned a move to Proof-of-Stake sooner or later. The process started in December 2020, with the launch of the Beacon Chain, a parallel Blockchain already running with this mechanism, and on which Ethereum developers were able to successfully run tests without touching the main Blockchain. Nearly 420,000 validators are already active on this parallel Blockchain.
Mid-September 2022, the two Blockchains will merge, hence the name “The Merge”. A high-risk process. There is little chance that the operation will fail. It has already been simulated about fifteen times. This makes Ethereum players rather confident. Coinbase, the largest American crypto platform, has decided to “briefly” suspend deposits and withdrawals of cryptos running on Ethereum while the update is being carried out.
Currently, about 5 entities alone concentrate 65% of Ethereum’s mining capacity. The update will allow individuals to validate with fairly basic hardware. Individuals with enough money to be validators, however, because the entry ticket is not given, which implies problems of centralization.
“The Merge” will therefore induce more decentralization than at present. The multiplication of individual validators may make large-scale computer attacks much more complicated, but the security of the network will never match that of the Bitcoin system. Some take comfort in the fact that corrupting the Ethereum blockchain will be 1,000 times more expensive with proof-of-stake than with proof-of-work.
It is the fact that it will be so expensive to become a network validator that is the problem …
While the deal is highly anticipated, it doesn’t solve all the problems for Ethereum. “The Merge” will not, for example, help it increase the number of transactions it can process at once. Currently, Ethereum can perform between 20 and 30 transactions per second.
The other challenge is to increase to several thousand transactions per second. “The Merge” will also not reduce transaction fees on Ethereum. These are known to be very high compared to competing Blockchains.
