Crypto Market Monitor | Ethereum From PoW to PoS – The Merge

In this week Crypto Market Monitor, we discuss a key development in the Ethereum ecosystem. This is the Merge!
In a nutshell, here are our key findings:
– Ethereum will move from Proof of Work or POW consensus to Proof of Stake or POS consensus mechanism tentatively by the end of Q2, through a network upgrade called The Merge. The entire history of the mainnet, referred to as the execution layer, will be moved to the consensus layer of the Beacon chain.
– It is important to note that this upgrade will not reduce gas fees, and it will be addressed in the future upgrade called Sharding.
– The Merge on Kiln Testnet was processed on March 15th. It is primarily considered a success despite some errors which have been resolved. Application developers, node operators, infrastructure providers, and stakers are encouraged to test on Kiln.
Alright! let’s look at the Merge in details now
The Ethereum blockchain that we use today is Mainnet; it works on POW consensus mechanism. POW has limitations in scaling the network for high transactions per second throughput. It is also considered energy inefficient, given that miners must run computers non-stop to find and mine a block that keeps the network secure, and decentralised.
For Ethereum to scale and become energy-efficient and the most used blockchain, it must move from a POW consensus algorithm to a POS network. It took a long time to achieve this goal. It started in 2017 with ‘Casper the Friendly Finality Gadget’. From there on, the community moved on to the next challenge of transition from POW to POS in the safest way possible.
The solution to this transition problem started with the introduction of ‘the Beacon chain.’ It is an independent network with its POS consensus mechanism and runs in parallel with the Ethereum mainnet. The idea here is to move the POW chain with its history to the Beacon chain without disturbing the flourishing ecosystem of decentralised applications on the mainnet. The Beacon chain went live in December 2020 with a one-way bridge to deposit ether from the POW network to the POS network. As of 24th March, it has 320,000 active validators and 10.2 million ether staked on the network.

The Merge:
The two networks (Mainnet and Beacon) will not continue to exist independently, but rather the history of Ethereum on PoW blockchain will be preserved in its entirety while shifting the consensus layer to PoS. The process will be done through what is called ‘The Merge.’ Once completed, all new blocks produced will be through PoS, and the PoW consensus layer will be removed. No past transactions will be affected during this process, and the Merge is expected to happen in June of 2022.
Once the Merge is complete, all stakers on the beacon chain will be assigned to validate the Ethereum mainnet, and no mining will be required. Some features will still be held back from implementation to ensure safe migration from PoW to PoS, such as withdrawal of staked ether. A follow-up upgrade will enable it after The Merge.

Key points to note about The Merge:
– Individuals or entities holding ether will experience no change in their day-to-day activities as the changes are only related to the underlying consensus mechanism that secures the network.
– The existing Ethereum POW network will entirely migrate to POS, and the miners will no longer have the economic incentives to continue mining the POW chain. However, a limited set of nodes can continue to mine on POW through a fork of the network.
– The Merge will not reduce the gas fees on the Ethereum network, as its scope is limited to upgrading the consensus mechanism only. Sharding, a future upgrade of the network will help reduce the gas prices.
– The current ether issuance rate to POW miners is 12,000 ether per day, with the pressure of selling a significant chunk of it to cover the electricity cost. Post Merge, the daily issuance will fall to approximately 1280 ether per day: that’s a 90% drop with no sell pressure.
– There are always risks in implementing such extensive upgrades to the protocol securing hundreds of billions of dollars’ worth of assets. It is like changing the engine of a vehicle that is running at its full potential.

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