ETH 2.0: Ultimate User Guide to Ethereum's Merge
Ethereum will reach one of its pinnacle milestones this September – the titular Merge between the existing Ethereum Mainnet and its Beacon Chain – the newer, proof-of-stake layer, Ethereum 2.0 (ETH 2.0).
If all goes according to plan, this merge will drastically reduce Ethereum’s energy consumption while increasing sustainability, the new vision for Ethereum is supposed to ensure more security and scalability.
What does this merge mean for ETH users worldwide – and how will it work in practice? Read on as we explore the intricacies of the newest changes to Ethereum in-depth below!
What Is The Merge?
Ethereum’s vision has always been clear – a programmable, decentralized, and global blockchain. However, Ethereum has to overcome security, decentralization, and scalability challenges to achieve this goal.
ETH 2.0 is supposed to usher in an age of unprecedented scalability by exchanging the old proof-of-work protocol for a new proof-of-stake one. The latter is reportedly far more energy-efficient, addressing one of the main scalability concerns of Ethereum (and many other proof-of-work blockchains).
The many use cases for DeFi and other Dapps on Ethereum have significantly increased the demand for ETH over the past couple of years, leading to network congestion in the core structure of Ethereum – resulting in prohibitively high gas fees and energy consumption. For Ethereum to become the most globally relevant blockchain of the future, it will need to overcome these cost limitations that hinder even more widespread adoption.
Enter: The Beacon Chain.
When it was first proposed back in December 2020, it wasn’t integral to the Ethereum Mainnet. While this Ethereum-based blockchain didn’t handle smart contracts or process any transactions, it served another important purpose: creating a consensus engine in the Ethereum ecosystem.
It was always the plan for this consensus layer to replace the energy-intensive proof-of-work mining – and that’s precisely what will happen when the Beacon Chain merges with the Ethereum Mainnet on September 6th, 2022.
(Update: The Bellatrix Mainnnet Upgrade went live at epoch 144896, at approximately 7:35 AM ET on September 6.)
So, how do these two consensus mechanisms work – and what’s the difference between them?
Competing Consensus Mechanisms
Proof-of-stake and proof-of-work are consensus mechanisms; Consensus mechanisms are the security foundations of any blockchain. They keep any blockchain (including Ethereum) safe and secure by only letting genuine validators effectuate transactions on it.
They’re both called “proofs” because every potential blockchain validator has to provide proof that they’ve dedicated a certain amount of resources to validating transactions on the blockchain – in other words, energy (Proof of Work) or money (Proof of Stake). That’s how blockchains filter out malicious actors or fraudulent transactions.
However, there’s a fundamental difference in how PoW and PoS mechanisms decide which users can access the blockchain.
What is PoW?
Essentially, proof-of-work (PoW) is a mechanism in which computers on the blockchain compete for the right to mint the next block by solving complex mathematical problems first – and receive the block subsidy reward for doing so if they are picked in the random lottery of successful candidates. You’ve already heard of the colloquial name for this process: mining, it's called mining because the resources required to solve these “puzzles” are seen as the digital equivalent of the physical process of mining rare materials from the earth.
What happens once a miner solves its assigned mathematical problem? Well, the other miners or validators verify it, and then the miner is permitted to add a new block to the blockchain – which is basically a group of transactions. If everything was performed correctly, the miner would receive a reward in the form of their blockchain’s native token/cryptocurrency. In this case, that’s Ether.
What Is PoS?
Conversely, proof-of-stake doesn’t have miners – instead, there are only validators. They’re the ones who add new blocks and verify blockchain transactions. Every time a new block needs to be added to the chain, a validator is randomly picked to, as the name suggests, validate the transaction and the new block. Once the merge is complete, it’s estimated that this will happen every 12 seconds.
There are no complex equations to solve with superpowerful mining computers – to become a validator, you simply need to stake (hence the name) a deposit of around 32 Ether. This deposit ensures every validator has a tangible stake in the Ethereum network – and its success.
The number of new validators will also be limited by an activation queue, with a limited rate of new applicants chosen as validators. Just like PoW miners, these validators will receive Ether in exchange for keeping the Ethereum blockchain secure.
Pros and Cons of PoS vs. PoW
Why is Ethereum switching from proof-of-work to proof-of-stake? There are several pros and cons to consider regarding both consensus mechanisms.
One of the most significant advantages of PoS over PoW is energy efficiency – proof-of-stake algorithms are much more eco-friendly and sustainable. With a proof-of-work system, miners are forced to use incredibly powerful hardware and keep their computers running 24/7 – resulting in significant energy consumption.
On the other hand, proof-of-stake validators don’t require anything beyond an average laptop; PoS software is far less demanding because computing power isn’t at the heart of the transaction validation process.
With a PoS consensus mechanism, the blockchain randomly chooses validators, with the preference being given to those who hold more Ether – there’s no competition to solve a complex puzzle. That’s why it takes far less time for any transaction to be executed on a PoS blockchain – choosing a validator is much quicker than deciding the winner of a PoW competition.
Lower Barrier of Entry
If you want to become a PoS validator, your main investment will be buying the appropriate token – in this case, Ether. On the other hand, a proof-of-work miner does not only buy increasingly expensive computer hardware capable of mining; they also need to keep it running for as long as they want to mine crypto, resulting in a large electricity bill.
Unproven In Practice
Of course, there are certain problems with a proof-of-stake system as well. For one, before the merge, a proof-of-stake system has never been live tested on such a huge scale – it’s still not 100% certain that they’re as secure as a proof-of-work system on a global level.
However, that will change with the groundbreaking merge of Ethereum with its PoS sidechain.
We should also consider the danger of a crypto consolidation, where only a few validators with deep pockets could theoretically have control of the PoS blockchain. As a result, a group of entities that control most of the Ether tokens would also have control over most of the protocol.
Still, that’s more dangerous with younger blockchain networks that are just starting to issue tokens – in practice, anyone would have a hard time obtaining the necessary majority of all staked Ether in the world; it would be enormously expensive.
Threats To The Merge
While the technology behind the upcoming merge has been painstakingly tested for years, there are still worries of potential glitches. Also, the fear of centralization is not just miner propaganda – because Lido Finance holds over 30% of the world’s staked Ether, while Coinbase controls almost 15%.
Sure, their significant positions reflect their role as “managers” for tens of thousands of smaller stakeholders of Ether, and they don’t own most of that. However, centralization fears aren’t baseless.
For instance, law enforcement and intelligence agencies in different countries may see validators as legitimate targets for surveillance or censorship.
Whenever a new development happens, the scammers look for potential vulnerabilities and ways to utilize them or for possible victims that simply do not fully understand how the change affects them. This may also be a concern because many small-time investors may be tricked into believing there are some “steps” to “upgrading” to the new Ethereum 2.0 – or that they need to give fraudulent actors something for ETH 2.0 staking.
Bear in mind: as an Ether holder, you don’t need to do anything – all the changes to Ethereum related to the merger will be performed “under the hood.” But if you do want to participate in the transaction validation process of this exciting ecosystem, you can stake your ETH directly on NDAX before any Merge-inspired network congestions occur.
Also, there is speculation that many ex-miners of Ether might try to keep staking by themselves through a PoW fork. Naturally, this would spark confusion in the investor community.
Opportunities For The Merge
There is a number of benefits that the merge might provide to Ethereum users. For one, the lower barrier of entry of PoS algorithms than PoW ones means that Ethereum might become a more prominent Layer 1 blockchain – after all, earning Ether as a validator will be far simpler than doing so as a miner.
The continued growth of Ether’s market share among the largest blockchains might even lead to a Flippening – a long-awaited event among Ethereum fans. This is the colloquial name for the moment when Ether’s market cap might overtake Bitcoin’s dominance.
On top of this, the merge and switch to a proof-of-stake consensus mechanism will also allow for sharding – a process that segments the Ethereum network into a multitude of parallel chains.
This would be a huge paradigm shift, probably unclogging the Ethereum blockchain. While its current throughput is no more than 30 transactions every second, this number might eventually spike to 100,000 – while current high transaction fees could plummet in the long run.
Naturally, this would be a stunning increase in Ethereum’s usability, spreading its uses far beyond the current benefits of DeFi into other non-financial fields. Many killer apps built on a more efficient Ethereum could radically transform how we use and view blockchain technology – making it more widely used globally.
How to get involved in Staking Eth 2.0?
So, considering all of this – how do you become an Ethereum validator?
To do so, you’ll need a minimum of 32 ETH. Right now, The Beacon Chain has over 300,000 validators. And the more Ether you stake, the better odds you have of producing blocks. And you’ll receive an ETH reward for your validation duties every time you do.
However, for smaller investors, this is still quite pricey. When Ether trades at around CAD$2000, that 32 ETH minimum translates to around $64,000 – a steep expense for the average person.
Or you could join a staking pool – where many Ethereum stakers who can’t afford the 32 ETH minimum join together, delegate their funds and split the validation reward. NDAX of course provides Ethereum staking where users can earn a 5% APY on the ETH held in their account in as little as 3 steps: go to your wallet, click “Staking” and select ‘Ethereum’.
Naturally, as we edge closer to the merge, expect delays or network congestion the closer we get to the switch.
Please trade responsibly! This information is only intended as informational and educational and should not be interpreted as investment advice or recommendation. If you have any questions about staking or the Ethereum merge to PoS, please don’t hesitate to reach out to us on social media!