Ethereum Eth Merge Upgrade: Transition from PoW to PoS - Key Points to Understand

Quick Summary: Ethereum is about to make a historic change by transitioning from Proof of Work to Proof of Stake through the Merge event. This is a significant step in a series of major upgrades aimed at making the network more scalable, energy-efficient, and sustainable. The merger between the mainnet and the Beacon Chain is expected to be completed in September 2022.

Ethereum Development From 2015 To Present

Since its launch in 2015, Ethereum has become the leading decentralized computing platform, enabling thousands of projects to build on its blockchain. However, with the current infrastructure, the network struggles to handle the increasing volume of transactions globally. To address this issue, the Ethereum community has proposed a series of comprehensive upgrades including Beacon Chain, The Merge, The Surge, The Verge, The Purge, and The Splurge.

Why Does Ethereum Need an Upgrade?

A decentralized blockchain needs to maintain three core elements: security, scalability, and decentralization. As a network grows, the pressure to process transactions increases, which can easily lead to congestion, high transaction fees, and long confirmation times.

Limit of Proof of Work

Proof of Work has certain limitations:

• The number of transactions per verified block is limited.
• Blocks must be mined at a fixed rate ( for example Bitcoin averages 10 minutes per block )
• When demand suddenly increases, the network is prone to overload, and costs soar.

These issues are the reasons that pushed the Ethereum team to develop Ethereum 2.0 - a comprehensive upgrade aimed at addressing these limitations.

The Phases of Ethereum 2.0 Upgrade

Beacon Chain - Proof of Stake Platform

The Beacon Chain was launched on 01/12/2020, marking the first step in a series of major upgrades to Ethereum. It brings the Proof of Stake mechanism into the ecosystem, allowing users to stake ETH or run a consensus client to participate in securing the network. Currently, the Beacon Chain still runs in parallel with the mainnet.

The Merge Eth - The Union of Two Layers

The Merge is the next important upgrade. Simply put, it integrates two independent components in Ethereum:

• Execution layer (execution layer) - processing transactions
• Consensus layer (consensus layer/Beacon Chain) - coordinates security

After the merger, the mainnet will completely transition to Proof of Stake coordinated by the Beacon Chain.

Consensus Mechanism: From Mining to Validation

When the Merge occurs, Proof of Work will be replaced by Proof of Stake. Instead of mining, blocks will be created (by validators called nodes. These validators:

• Randomly assigned to validate candidate blocks
• Receive rewards in the form of transaction fees and stake rewards
• Helps the network save significant resources compared to PoW

PoS consumes much less energy than PoW, helping Ethereum to develop more sustainably.

) Beacon Chain Becomes a Hub of Consensus

After The Merge, the Beacon Chain will handle all network data, including layer execution transactions and account balances, instead of only handling a portion as it currently does.

Impact on ETH

Significant Change in ETH Supply

Ethereum launched with an initial supply of 72 million ETH. Under the PoW model, most of this supply is used to incentivize miners.

Currently: About 13,000 ETH are issued daily through mining and staking rewards.

After The Merge: Mining rewards will disappear, the daily issuance of ETH will decrease to only about 1,600 ETH, entirely from stake rewards.

This means the annual issuance of ETH will be reduced by 90%. According to the law of supply and demand, a decrease in supply can positively impact the price of ETH. However, the financial market is complex and influenced by many other factors, so it cannot be predicted with certainty.

ETH Users Do Not Need To Take Any Action

ETH holders can rest assured - they are not required to take any action to prepare for The Merge. Ether will still be accessible normally, and transaction history will be seamlessly merged with the Beacon Chain.

Other Upgrades: Sharding and More

Although there is no official announcement yet, Sharding is expected to be implemented around 2023 after The Merge.

Sharding - High-Level Scalability Solution

Sharding will help Ethereum increase scalability through data partitioning mechanisms:

• Create independent shard chains
• Each chain only contains a part of the entire blockchain data.
• Nodes can verify transactions more efficiently with a smaller dataset.

Sharding is a complex project that requires a lot of time and effort. However, if executed well, it could be one of the biggest wins for blockchain in terms of scalability.

The Sharding Process Consists of Multiple Stages

Version 1: The segmented chain will provide additional data for the network.

Version 2: The segmented chain will have the ability to store and execute code.

Cross-communication: The versions will activate communication with each other.

Other Upgrades: The Surge, The Verge, The Purge, The Splurge

According to Vitalik Buterin, these upgrades should not be seen as sequential stages, but rather as upgrades running in parallel with The Merge. Specific details are still under development.

Why Do We Need Many Scaling Solutions?

Ethereum is preparing for a distant future, in which it needs to handle a massive amount of transactions when widely adopted. With many parallel solutions:

• The network congestion ability has decreased significantly.
• Prevent single points of failure if a solution does not meet the requirements sufficiently.
• Increase network speed, transaction throughput, and reduce costs for users

In Summary

The Merge Eth is the second event in a series of important upgrades aimed at helping Ethereum increase its scalability. After completing all planned upgrades, Ethereum is likely to be ready to handle more transactions without compromising the security or decentralization of the network.

Note Risk

The price of digital assets is subject to high market risks and significant price volatility. The value of investments can decrease as well as increase, and you may lose all of your investment. Past performance is not a reliable indicator of future performance. You should only invest in products that you are familiar with and understand the risks. Consider your investment experience, financial situation, investment goals, and risk tolerance, and consult with an independent financial advisor before making any investments.