> Blog > Explaining the Ethereum Merge

Published September 2, 2022

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Date: 9.15.2022 (UTC)
Merge to Etherum Proof-of-Stake
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Ever since Bitcoin first introduced the world to the idea of decentralized digital currency, developers, entrepreneurs, and visionaries have been working tirelessly to create new and improved versions of this groundbreaking technology. Ethereum was one of the first, and most prominent projects to build upon Bitcoin’s initial success and introduce more advanced functionality to the blockchain space. 

But as the project grew from a proof-of-concept to a decentralized, worldwide computing ecosystem, the network struggled to keep pace with the demand placed upon it. After years of debate, development, trial and error, the world’s number two cryptocurrency by market capitalization is about to undergo The Merge, the final phase of its long-awaited upgrade from Ethereum 1.0 to Ethereum 2.0.  

In this article, we’ll discuss everything you need to know about The Merge: what it is, why it’s happening, and what impact it will have on Ethereum and the blockchain industry as a whole. 

What is Ethereum? 

Founded in 2014 by a young Russian-Canadian programmer named Vitalik Buterin, Ethereum is a decentralized, open-source blockchain platform that brings advanced functionality beyond transfers of value to the world of cryptocurrency. 

Unlike Bitcoin, which was designed primarily as a digital currency, Ethereum was built to be a decentralized platform with a wider range of uses. The Ethereum Virtual Machine (EVM), the decentralized “world computer” at the heart of the platform, does facilitate financial transactions like its predecessor, but also went a step further to introduce higher programmability to blockchain protocols.  

This programmability is made possible by smart contracts, pieces of computer code that automatically execute when predetermined conditions are met. Smart contracts enable the creation of more complex scripts and protocols that can be built on top of a blockchain, and have paved the way for a new class of decentralized applications (dApps) and services.  

The addition of smart contracts, paired with Ethereum’s increasing adoption as a digital currency, placed severe strains on the network as it grew from an idea into a global decentralized ecosystem. Network congestion meant that transaction times skyrocketed, as did the fees associated with each transaction.  

So how could you increase the network’s performance without sacrificing its security or decentralization? To increase the network’s scalability, the Ethereum community would need to rethink the very foundation of the network– the blockchain’s consensus mechanism itself.  

And that’s exactly what they set out to do with The Merge. 

What is the Ethereum Merge?  

‘The Merge’ is a term used to describe the final phase of Ethereum’s transition from its original proof-of-work consensus mechanism to the new proof-of-stake protocol. In April of 2022, Ethereum began running on two parallel blockchains—the legacy proof-of-work chain, and the Beacon chain– the upgraded proof-of-stake chain. Beginning on September 6th, these two will begin to be merged into Ethereum’s new proof-of-stake, multichain infrastructure, with the process set to conclude on September 15th.  

Making sweeping changes to an open-source software project is never easy, especially when you’re dealing with the world’s second-most valuable cryptocurrency and billions of dollars of value held within it. As such, the process of upgrading Ethereum from its original design (Ethereum 1.0) to its new form (Ethereum 2.0) has been a long and complicated one.  

But to understand how this upgrade will work and why it’s important, we’ll need to take a basic look at the key component of how a blockchain works. 

It’s All About Consensus 

visual of a decentralized community reaching consensus

Blockchain technology succeeded where previous attempts at digital cash have failed because it’s built on a decentralized consensus model. This means that instead of relying on a central authority to verify and approve transactions, the network itself determines which transactions are valid. In the case of Bitcoin, transactions represent transfers of value, but Ethereum has shown that blockchain technology can be used for much more than that.  

The key to any consensus model is ensuring that bad actors– those who seek to game the system for their own benefit– cannot overpower the network. In a permissionless, public blockchain like Bitcoin or Ethereum, anyone can join the network and help validate transactions. This means that anyone can also attempt to game the system, which is why blockchains rely on mathematical algorithms and a decentralized network of computers to ensure that the network’s well-intentioned computer nodes can reach consensus in a fair and transparent manner.  

The consensus model used by many public blockchains is called Proof of Work (PoW). PoW was outlined in the original Bitcoin whitepaper and relies on miners, computers who contribute computational power to the network in exchange for financial rewards, to validate transactions and add them to the immutable ledger of transactions that makes up the blockchain.  

Miners are incentivized to play by the rules and maintain the security of the network because they receive block rewards for their efforts. These rewards take the form of newly minted cryptocurrency, transaction fees collected from users, or a combination of both.  

The major downside to the PoW consensus model is that it is extraordinarily resource intensive. In the case of Bitcoin, some reports show the network consumed more electricity than the entire country of Argentina in 2021. Ethereum isn’t quite as bad, but it’s still estimated to consume more electricity than the entire country of Qatar.  

The high level of energy consumption is due to the fact that miners must compete with one another to be the first to validate a block of transactions and earn the associated rewards. This competition takes the form of a mathematical puzzle that can only be solved through trial and error, a process that requires significant computational power.  

As the number of transactions increases, so too does the computational power required to validate them. This prompted the concerns that Ethereum 1.0 would eventually become too resource intensive to be viable in the long run.  

To address these concerns, the Ethereum community voted to implement a new consensus mechanism called Proof of Stake (PoS), which is designed to be more energy efficient while increasing scalability and maintaining the network’s security. 

Understanding Ethereum’s New Consensus Mechanism 

In order to be functional and maintain value, a blockchain must be secure, decentralized, and scalable. In the early days of Bitcoin, these three objectives were relatively easy to achieve, as the number of transactions was minuscule compared to the traffic that networks deal with today. As Ethereum has grown in popularity and size, it’s become increasingly difficult to maintain all three objectives simultaneously.  

This is why Ethereum is moving from a proof-of-work (PoW) consensus model to a proof-of-stake (PoS) consensus model: to maintain the network’s security while improving its scalability and efficiency. 

From Proof of Work to Proof of Stake 

The primary downside to the proof-of-work consensus model is that it’s very resource intensive. In order for a miner to be rewarded for validating a block of transactions, they must first solve a set of increasingly complex mathematical puzzles. The computational power required to do this increases as the number of transactions on the network increases, which means that more and more electricity is consumed as the network grows.  

Another problem with PoW is that it’s simply too slow for validating consensus on a broad scale. Blockchain networks are like highways, except they’re used for moving money instead of vehicles. With so many transactions running through a PoW blockchain network, they can quickly add up and cause delays in finalizing transactions – like a traffic jam on the highway.  

For these reasons, Ethereum is moving to a PoS consensus model. With PoS, miners are replaced by validators who stake funds on the network in order to earn rewards.  

Staking is the process of posting an asset, cryptocurrency or otherwise, as collateral to earn some form of reward. The number of rewards earned is proportional to the amount staked. In the context of Ethereum, validators who stake ETH will earn rewards in the form of newly minted ETH.  

It’s almost like posting bail. When you post bail, you are putting up money as collateral to earn the right to be released from jail while you await your trial. If you show up for your court date, you get your money back plus interest. If you don’t show up, you forfeit your money and are heading back to jail.  

Similarly, when a validator stakes ETH on the Ethereum network, they are putting up money as collateral in order to earn the right to validate blocks of transactions. If they do a good job of validating transactions, they will earn rewards in the form of newly minted ETH. If they don’t, they will forfeit their staked ETH.  

The PoS consensus model is more energy efficient because it doesn’t require nearly as much computational power as PoW. This is because there is no need to solve complex mathematical puzzles to validate blocks of transactions. If a validator tries to cheat or act maliciously, they stand to lose their staked tokens, creating a strong disincentive for bad behavior.  

PoS is also more scalable than PoW because it can also be implemented with sharding, a process of breaking the network into smaller pieces that can be processed in parallel.  

Eliminating the need for expensive mining equipment can also democratize the validation process, depending on the minimum staking amounts set by the network.  

Impact of the Ethereum Merge 

benefits and drawbacks of the ETH Merge

Now that we’ve covered what the Ethereum Merge is and why it’s happening, let’s take a look at some of the potential impacts.  

Potential Benefits

The most obvious benefit of the Ethereum merge is that it will make the network more energy efficient. This is good news for both the environment and for ETH holders, as it will reduce the energy needed to power the network and reduce Ethereum’s environmental footprint by as much as 99.95% according to The Ethereum Foundation.  

The proof-of-stake consensus model is also more scalable than proof-of-work protocols, and the Ethereum merge is forecasted to drastically improve the number of transactions Ethereum can handle per second – from about 15 to over 100,000 TPS. This is important because Ethereum is currently struggling with scalability issues, which contribute to high transaction fees and long wait times.  

Potential Setbacks  

One often-cited potential drawback of the Ethereum merge is that it could lead to more centralization of the network. The staking system will require validators to have a minimum amount of ETH to participate, which could make it difficult for small-time investors to get involved with Ethereum’s validation process in theory. Since launching in April of this year, Ethereum’s Beacon chain has already attracted over 400,000 validators, with many independent investors pooling funds together to take advantage of the network’s staking benefits.  

Some critics also posit that the new consensus model could be less secure than PoW. Validator nodes could be more susceptible to distributed denial of service (DDoS) attacks or other forms of malicious behavior, which could lead to network disruptions, though it remains to be seen whether this will actually be the case.  

This upgrade will be one of the most significant events in the history of the cryptocurrency industry, and despite years of testing, it’s impossible to forecast and account for every possible contingency.  

How to Prepare for the Ethereum Merge 

If you’re an ETH holder, there’s not much you need to do to prepare for the Ethereum merge. Your ETH will still be the same currency after The Merge happens, so be very wary of any sites or services claiming to ‘upgrade’ your coins. Whether your funds are in a non-custodial wallet, or held on an exchange, the merge will not affect your currently-held funds. 

You will, however, need to take note of when the upgrade happens, which is currently slated for September 15, 2022. During the upgrade, sending and receiving Ethereum could potentially be disabled, and many cryptocurrency exchanges will likely disable deposits and withdrawals of Ethereum, and Ethereum-backed assets like ERC-20 tokens.  

Thus, it’s a good idea to make sure your ETH and ETH-backed assets are securely stored before the upgrade and avoid transferring funds until the new network is live.  

The Future of Ethereum 

The Ethereum Merge is the final stage of the biggest change in the protocol’s history, but it’s just one step in the Ethereum roadmap. With improved scalability, security, and energy efficiency, Ethereum will continue to power the next generation of decentralized apps and services, and the ETH token could secure its position as a major force in the cryptocurrency market for years to come.  

As more and more people begin to understand and use Ethereum, the network will only gain in value and functionality. So whether you’re a long-time ETH holder or you’re just getting started, now is a good time to keep an eye on Ethereum and see what the future holds for this groundbreaking project.  

If you want to learn more about the Ethereum Merge or a wide range of different aspects of the blockchain industry, check out the FTT DAO blog and be sure to follow FTT DAO on Twitter

The Ethereum Merge is scheduled to occur on September 15th, 2022. Until then, learn more about how this upgrade will affect the cryptocurrency industry and get active with FTT DAO today! 

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