In recent months there's been quite a bit of talk of a "merge" for Ethereum, the world's second-most popular cryptocurrency behind Bitcoin. In this blog, we'll discuss what exactly the Merge was, why it's such a big deal, and what it means for the future of ETH and crypto as a whole.
Key Takeaways:
- The Ethereum Merge was a long-awaited plan to fully upgrade ETH's blockchain to a "Proof of Stake" system, something many believe is better than the "Proof of Work" system it used to use (and many other blockchains like Bitcoin (BTC) still use).
- This does away with the "mining" system of obtaining new coins, instead opting for a system of "validators" in the network.
- The Merge was completed on September 15th, 2022, and took a significant amount of community research, discussion, planning, and coordination to fully execute.
The Merge will certainly be remembered as one of the most significant events in the history of open-source software. It is difficult to think of a more astounding example of a community of hundreds of developers spread over a large number of organizations spending years of open-ended analysis and meticulous technical innovation. The upgrade required a "hot swap" of Ethereum's critical consensus mechanism, while it was running. All of this took place while simultaneously guaranteeing 100% uptime for millions of users, thousands of decentralized applications (dapps), and the security of hundreds of billions of dollars.
So what are the perceived benefits of this iteration of the Ethereum blockchain? Why is it an improvement to its predecessor?
The Merge has been under development for years to address various issues, the biggest being sustainability, scalability, security, and equality. To truly answer these questions and understand why it took place, we need to take a step back and understand one of the basics of blockchain: Proof-of-Work versus Proof-of-Stake technology.
In cryptocurrency and blockchain, there are two systems used that define how different blockchains function: Proof-of-Work (PoW) and Proof-of-Stake (PoS).
| These two systems define how new coins are obtained and how transactions are completed. Here, we'll outline a few of basics to the building blocks behind how new coins are generated and transactions are validated. In the future we'll dive deeper into these topics -- be sure to subscribe to blog updates if you haven't already so that you don't miss out. |
Proof of Work (PoW) is a consensus mechanism in which the prover must prove to others (the verifiers) that a given amount of effort went into doing something. The verifiers then check that this effort did happen. While the term has its origins elsewhere in computing, it was popularized by Bitcoin, the first cryptocurrency. Many computers, or miners, compete to solve the same complex math equation. When one solves it, it must prove to the other nodes in the network (other miners) that it solved the equation (which the others in turn verify). If the nodes confirm it is correct, the miner that solved it gets a block reward (a prize in Bitcoin) and a new equation generated (built off the previous equation's answer) that they all work to solve. Naturally, the more effort a node puts into it, the higher success rate it has of being the one that solves it.
While Bitcoin is the first and most popular PoW coin, many other popular coins also rely on the same proof system, like Litecoin (LTC), Monero (XMR), and Dogecoin (DOGE). Suffice to say, PoW is a popular system that has a proven track record of working well.
So, what's the downside? A main complaint with PoW is the amount of energy (relative to PoS) that PoW systems use. Because it comes down to a battle of computational effort, there are many computers using a substantial amount of energy around the world with the sole purpose of mining crypto like Bitcoin, which is costly and some argue is not worth it given the environmental damage it may cause (or that Bitcoin is not sustainable). This being said, new innovations in mining technology and legal pushes have begun to create a more sustainable ecosystem. For instance, crypto miners in the state of Texas, which is both known for its occasional power grid problems and its welcoming of crypto argue that that they can make the power grid stronger by working in tandem with state-wide supply and demand of power, creating an even flow that benefits everyone -- for instance, miners could buy more energy when supply outpaces demand, and lower their energy consumption when the grid demands it. With more promotion of Bitcoin, and new Bitcoin-related projects happening globally (like Bitcoin Lake in Guatemala) there are also new innovations to help with this problem.
Even with the potential power issues, there is an argument to be made that PoW is not very scalable. By itself, the Bitcoin network can only support 7 transactions a second (compared to something like the Visa payments network that can support 24,000 in the same timeframe). This means transactions oftentimes can take over 10 minutes to complete - imagine buying clothes or food in-person at a store and having to wait that long just for your payment to process!
There are some solutions that are in development to solve these scalability issues with PoW chains, like shard chains (which break up the blockchain for verifiers, cutting verification times), and the Lightning Network (which essentially does transactions 'on top' of the blockchain, only applying a net difference every so often as to lessen the load). However, these two both come with new security risks and other flaws that put them at a disadvantage.
Both PoW and PoS have a security issues where if a bad actor were able to take over a certain percentage of the network, they could validate falsely and take over the entire network. While this happening with either PoW or PoS is extremely unlikely, the way it is done between the two is different. For PoW, one would need to take over 51% of all computational power of the network to start approving false solutions from its own nodes and rejecting those from real ones. Large Bitcoin mining operations have invested millions into mining Bitcoin, and the constantly growing list of new operations and expansions make the hardware and electricity required to pull this type of attack off extremely unlikely from ever being achieved on a major coin like Bitcoin, but it is still theoretically possible. Additionally, because these nodes store rewarded coins "off-chain" in their own wallets, it is hard to 'punish' bad actors that try rejecting correct solutions or accepting incorrect ones in an effort to take over.
A bad actor could infiltrate a PoW chain like Bitcoin with a 51% attack, if they had an extreme amount of hardware and electricity behind them. It is unlikely this will ever occur, especially as more blocks get mined and the process becomes even more extraordinarily difficult.
Last but not least an important topic to briefly cover is equality, or that PoW blockchains are susceptible to economies of scale. As previously mentioned, the more effort a node puts into solving the equation, the more likely it is to solve it. Thus, the largest miners have more of an advantage than lesser participants, who have much smaller odds of getting rewarded. One way around this is to join a mining pool, where many participants work as one, and if they win, they get their relative portion of the pool's reward. Still, the barrier to entry to getting significant rewards is quite high, and some see this as unfair and unequal in creating a truly decentralized ecosystem.
Thus comes Proof-of-Stake (PoS), which responds to each of these points with an alternative.
Sustainability - Rather than have miners work through complex problems and in turn validate solutions, PoS nodes function via staking - validators invest earned tokens to run nodes that are randomly chosen to approve new blocks in order to collect rewards. The more one stakes, the more one has a chance of being selected to collect these rewards, instead of relying on the entire blockchain to validate. This is far more energy efficient than PoW mining - The Merge reduced Ethereum's energy usage by 99.95%.
Scalability - Instead of relying on a long, slow process of verifying new blocks added to the chain, PoS works as detailed above - new blocks are approved by a group of randomly selected nodes. This saves an enormous amount of time and resources over PoW, and makes PoS transactions much more rapid and scalable without having to rely on an additional technology or data layer that may be less secure like Bitcoin's Lightning Network or PoW Shard Chains.
Security - Because PoS systems rely on people staking their crypto into the system, it is also very hard to take over. If one person managed to obtain 33% of a network's staked tokens, they would be able to stop all transactions. They would only be able to 'take over' at 66%. However, that's where the rationale stops making so much sense: The bad actor would need to purchase a very large quantity of coins to get enough nodes to get anywhere near this amount, but many of those staked are uninterested in selling their share, especially as the price grows (which it would be as the bad actor purchases more). However, this isn't to say that PoS is without its security risks. Many agree that because staking happens 'on-chain' it is more susceptible to hacking and theft than PoW. Also, because of governance, increased staking, and other 'on-chain' activities that happen in PoS, there is more centralization of funds. This leads to additional risks of hacking, stealing, and fraud in governance voting.
Equality - Ethereum requires 32 ETH to start validating nodes. You can validate with less in what functions similarly to the mining pool discussed earlier but adding more past that 32 does not grant your node any additional power. PoS advocates argue this naturally gives PoS chains more equality, as everyone can participate evenly. While one user could operate several nodes and get rewarded more often, the barrier to entry to get started even fractionally in is extremely low compared to PoW.
Proof-of-Stake advocates see it as the future of cryptocurrency and blockchain technology.
There are many intricacies to understanding all the differences between Proof-of-Work and Proof-of-Stake, but the Merge was done to make Ethereum more sustainable, scalable, secure, and equal moving forward. While neither PoW nor PoS is perfect, PoS advocates argue that it is the future of cryptocurrency and blockchain technology and that the Merge is a testament to this. Indeed, it is important to recognize the achievement of The Merge, in which thousands agreed on what to do and how to it and executed it seamlessly. It is powerful evidence to the support that cryptocurrency and blockchain have behind it as people innovate and give it new and meaningful uses across all fields around the world.