Ethereum Merge And How It Affects ETH System

Ethereum Merge has been a highlight on social media these days and is expected to be the game changer for Ethereum. So what is Ethereum Merge? And how will it impact the ETH system and cryptocurrency investors? Let’s find out with Tokenize Xchange!

What is Ethereum Merge?

The Ethereum Merge is the event in which Ethereum will move from Proof of Work (PoW) to Proof of Stake (PoS) consensus mechanism to improve transaction speed, and scalability, reduce fees and be more environmentally friendly. However, this is not a simple process and it has to follow plenty of complicated steps. Each step must be thoroughly evaluated before proceeding.

Proof of Stake is a consensus mechanism in which users need to stake a certain number of tokens to gain the right to be randomly selected as validators instead of using computing power like Proof of Work.

A validator will verify transactions and add them to a shared block. This block needs at least 128 validators to be validated. Once the sharded blocks have been validated and a new block is generated, 2/3 of the validators must confirm that the transaction is valid before the process can be terminated. On the Ethereum network, to be eligible for a validator slot, users must stake a minimum amount of 32 ETH.

In order to increase the number of validators and process transactions using PoS, the Ethereum mainnet, which is currently PoW-based, needs to merge with the Beacon Chain. Beacon Chain has been parallel to the mainnet since December 1st, 2020, and there are over 375,000 active validators. It also plays an essential role in preparing for the next upgrades of the sharded chain.

Although it is planned that the sharded chain development will be put on priority before merging with the main network. But the original plan changed due to the rapid development of layer-2 scaling systems such as Arbitrum, Optimism, and Loopring. Therefore, most validators unanimously agreed to the Ethereum Merge and the transition to PoS.

How does the Ethereum Merge impact the ETH system?

Vitalik Buterin, the co-founder of Ethereum, had noticed his ideas for the transition of Ethereum from PoW to PoS. Compared to the resource-intensive PoW, Ethereum is predicted to reduce network energy consumption by 99.95%.

The transition to PoS is also the first stage to put sharded chains into use in 2023. That will help to solve current congestion, reduce gas fees, and support the layer-2 scaling system. The sharded chain provides additional layers of storage at a lower cost for decentralized applications.

Since any major change related to the core protocol requires global consensus from all nodes, the process of applying updates will be highly time-consuming because it must be done carefully and steadily based on several crucial factors: Beacon Chain, Ethereum Merge, and sharded chain. These factors complete each other and allow Ethereum to improve scalability, security, and sustainability.

As planned, Buterin will conduct the Ethereum Merge event in August of this year. But it has been recently rescheduled to September 12th. This is the time that the Beacon Chain, which is PoS-based, will officially go live and set a milestone for the official transition of the Ethereum network to PoS.

How do we benefit from Ethereum Merge?

Despite Ethereum Merge will not immediately improve the scalability, it is the first step towards bringing the sharded chain and PoS-based network in with full functionality. By upgrading network data throughput to 64 blockchains, the sharded chains offer additional low-cost layers for application development and data storage. They also allow layer-2 systems to operate with low transaction fees while benefiting from the security of the Ethereum mainnet.

When the system is upgraded, Defi applications running on the Ethereum network will take advantage of the mainnet. Fast transaction speed along with low transaction fees will attract more users. As a result, more money will flow from another network to Ethereum. Ethereum’s ecosystem will be able to regain its dominance.

In terms of users, there are also a number of significant benefits. Firstly, the user experience will be improved by reduced gas fees and high transaction speeds. In addition, users can stake ETH into validator pools in exchange for rewards according to the PoS consensus mechanism. Finally, since the number of minted ETH per day will be considerably reduced, along with the sink of circulating supply due to a large amount of staked ETH, the price of ETH is predicted to skyrocket. Thus, ETH holders are likely to grab full their pockets from the Ethereum Merge.

Bottom line

In the meantime, there are many competitive blockchains in the market. The Ethereum Merge is the opportunity for Ethereum with the ambition to regain its dominance. And we, as users and developers, can absolutely benefit from this upgrade.