It is called “The merge(the merger). On September 15, the Ethereum blockchain will switch from a consensus-based protocol to “proof of work” (proof of work) to a protocol based on “proof of stake” (proof of commitment). This update is expected as a major event by the cryptocurrency community. Ethereum is the second largest blockchain in the world (approximately $200 billion in capitalization), after Bitcoin.
What is “The Amalgamation”?
Ethereum is also the main blockchain used by NFTs, decentralized applications, and decentralized finance. In addition, it is a protocol on which several other cryptocurrencies are based, as it executes smart contracts.
The transition to consensus based on evidence of work, very gradual, has been in preparation for several years. But the moment of truth is Thursday. It is at this time (determined precisely when the difficulty of mining the last block on the proof-of-work blockchain will have reached a certain threshold) that the parallel Ethereum blockchain as proof-of-stake, created in late 2020 by the developers to testing the system will merge with the main Ethereum blockchain. Hence the name given to the event.
We will have to make the transition without interruption of service, which some compare to replacing an airplane’s engine in flight. Suffice it to say that in the ecosystem we are preparing for it as the bug of the year 2000.
How will Ethereum work after The Merge?
On blockchains using consensus-based proof-of-work, such as Bitcoin, block validation is done by solving complex computations, where the validator’s “stake” takes the form of computational power and energy used to perform these computations . . The new consensus mechanism – the way blocks of information are validated for access to the shared ledger – through an Ethereum-approved proof of stake relies on “validators” who strike (block or effort) 32 ether minimum on the blockchain.
Blocking this amount proves that they have an interest in the proper functioning of the network. In return for helping validate the blocks, they earn ethers every time they contribute (proportional to the number of ethers wagered). The validators are randomly drawn at each validation. The blocked amount can be entered if the behavior of the validators conflicts with the proper functioning of the chain. In this system, a validator who reports another dishonest validator also earns ether. The aim is to prevent cartel formation.
Users can collect in “shutting off swimming poolsto pool their ethers to reach the 32 ethers needed to validate the blocks, or surpass them to increase their chances of being selected to validate them. In this case, they split the rewards. $30 billion in ether would have already bet on the new blockchain. This ether will remain illiquid until the next protocol update, i.e. for 6 to 12 months, according to the Ethereum Foundation.
What are the consequences for the blockchain?
After The Merge, a block commit will occur every 12 seconds, compared to the current average of 13-15 seconds. In other words, when it comes to scaling, The Merge won’t speed up transactions on Ethereum much. The main expected benefit is the environmental benefit. Indeed, the developers claim that the energy savings compared to the proof of work will be 99.95%.
Other effects are expected. First of all on the financial aspect. The number of ethers won after The Merge will increase from 13,000 per day to 1600, according to the Ethereum Foundation, which should logically lead to an appreciation of the cryptocurrency. Moreover, according to Chainalysis, the staking mechanism could make Ethereum “an attractive alternative to bonds for institutional investors”thanks to potential annual returns of 10 to 15%.
Subsequently, miners who had invested in hardware to mine on the Ethereum proof-of-work version will have to convert, unless a forked – a version of the protocol adapted by the community, in this case the one who wants to continue using the proof of work – is attractive enough to keep their source of income.
This restructuring of the mining industry will change the ecosystem and incidentally should accentuate the price decline of graphics cards used for mining (a phenomenon that is already underway). Major mining companies have said they will reuse their capabilities for cloud and AI needs.
What are the risks of the update?
This is the first time an update of this magnitude has happened, so we can only speculate. However, the main risks are bugs with imaginable financial consequences, cyber-attacks during the switchover, and scams taking advantage of the event.
Normally, blockchain users and ether holders don’t have to do anything, the process should be transparent to them. But smart guys will inevitably try to take advantage of the opportunity for phishing attacks. As a precaution, cryptocurrency exchange platform Coinbase has scheduled to briefly suspend deposits and withdrawals on the day of the switch. Binance too.
Why does this revolution not appeal to everyone?
Proof-of-work proponents fear The Merge will make Ethereum a more centralized protocol susceptible to state interference as it will be in the hands of those with the most deployable ether. They are thinking in particular of platforms that serve as repositories on behalf of investors, such as Coinbase, Kraken or Binance, or even the Lido staking protocol. More and more regulated companies.
The other criticism relates to the security of the new protocol, which would be easier to attack by gaining 51% of the cryptocurrency mass in ethers than by accumulating 51% of the mining capacity. This argument is contradicted by Ethereum France, which believes that corrupting the blockchain is much more expensive with proof of stake than with proof of work.
In the magazine Time, one of the Ethereum developers explains that it currently costs $5 billion to take control of Ethereum with the proof-of-work mechanism (to buy the necessary hardware and electricity), while it would cost $20 billion costs with the proof-of-stake mechanism. In addition, the attack would cause the pledged amounts to go up in smoke, while the hardware used for mining cannot be physically and directly neutralized.
Will Ethereum solve its scaling problems?
The merger will not mean the end of developments on the Ethereum blockchain. Four more phases are planned in the program, designed, among other things, to accelerate the network’s capacity and speed of transactions to 100,000 per second (compared to less than 30 today), and to reduce “gas costs”. These ongoing charges on Ethereum are high compared to other blockchains. They can run into hundreds of dollars for a single transaction due to the limited capacity of the network, making certain applications obsolete. For them to really decrease, it will be necessary to wait for a “layer 2” (layer 2), such as that of the Bitcoin Lightning Network.
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