The New Network
One of the biggest and most anticipated events in crypto history has come and gone - the Ethereum merge. But what does this mean for the future of the network, the price of ETH, and are there any risks waiting around the corner for the network in the post-merge era? These are some of the questions that will be answered in this article.
On the 15th of September at 6:40 AM UTC, Ethereum successfully transitioned to Proof of Stake. It was a nail-biting moment with everyone (including myself) at the edge of our seats. Even more so, given that a few sync issues were found on the test net just moments before the merge was supposed to take place. Nevertheless, the block came, the code was pushed, and the merge was executed successfully. There was a great sigh of relief as Ethereum's price shot up in a brief rally, only to fall by almost 5% and continue dropping to around $1200. This naturally raised questions all over the ecosystem, and here are a few of the important ones.
What is PoW, and what is PoS?
Without getting too technical, for a block or a list of transactions to be considered valid, consensus needs to occur. In other words, nodes need to agree that the information is accurate (A node is any physical device like a personal computer that can receive, send, or forward data within a network).
There are different ways that this agreement can be reached. The most popular or most widely understood method of which is Proof-of-Work, wherein other nodes or 'miners' compete to solve a mathematical puzzle. This solution creates a cryptographic link (chain) between the current and previous ledgers (blocks) which can be validated by other miners, thus proving the authenticity of the blockchain as a whole and producing a new iteration.
This differs from Proof-of-Stake, where miners do not compete for the right to produce a block. Rather than being mined, the blocks are referred to as "minted". Users who want to be considered for inclusion in validating blocks must stake a specific amount of the network's cryptocurrency in a unique contract. The probability of being chosen as the next block producer is determined by the number of tokens they have staked. If users act maliciously, they may lose their stake due to their actions, incentivizing honesty.
Is The Merge A Good Thing?
Whether or not the merge was a good thing depends on what perspective you're looking at it. If you are looking at crypto through the lens of an active member in the space or a bystander who has no ties to the industry at all - there are several factors to consider:
Environmental:
The reduction in energy consumption that has been achieved by the move to proof of stake cannot be understated. The move to proof of stake has cut Ethereum's energy use by 99.98% and carbon dioxide emissions by 99.992%. The entire Ethereum network now uses less CO2 than a few hundred U.S households. When viewed in totality, the merge will reduce Global energy consumption by 0.2% - an impressive feat.
This was supposed to signal a positive sign for investors. However, probably, the green-friendly entities looking at Ethereum as an investment opportunity are still waiting on the sidelines until the hype around the merge truly settles.
Participation:
It's easier to operate and run a validator than to crack out a GPU and start mining. There's no need for racks and racks of machines taking up your garage, empty rooms, or large Warehouse facility somewhere in Iceland, for that matter. All you need is 32 ETH and a server - pretty neat.
Moreover, with a proof-of-stake system - non-staking nodes have more power in
keeping staking nodes in check (compared to maintaining miners on a proof-of-work network in check). This means that we can play our part in that decentralization by participating, and if you happen to be lucky enough to have 32 ETH, then you should consider setting up a validator and doing so.
Skepticism:
This is regarding the risk of validator centralization on the Ethereum network.
While minor centralization was always a concern, the extent of the
centralization on the new proof-of-state network is alarming. 42% of the
network was effectively within the control of the two largest holders of ETH (Lido and Coinbase).
The centralization of a supposedly decentralized network is a big No-No, but it's even more concerning at this particular time. With the potential for regulatory capture of Ethereum, it's perhaps no coincidence that on the same day the merge took place, Gary Gensler was up to his usual tricks on Capitol Hill.
During testimony in front of U.S politicians - he said that cryptocurrencies that allowed users to stake their coins could be seen as Securities. This assertion is based on the criteria of the Howie test and argues that the investing public is anticipating profits based on the efforts of others. This naturally threw up a lot of questions about how regulators will view proof of stake cryptocurrencies.
There is also the question of Ethereum's change in the narrative - opening itself up to scrutiny from the SEC and shifting away from the ideologies that founded this industry and, subsequently, Bitcoin.
How does the Ethereum Merge work?
Ethereum operated on a Proof-of-Work consensus method (similar to Bitcoin). The merge was an update to the network that changed this consensus method to Proof-of-Stake. The network split in two (forked) and thus resulted in two different networks - ETH, which was changed from PoW to PoS, and ETHW, which represents the old network operating on a PoW consensus method.
What's next for Ethereum?
Ethereum's roadmap is far from complete and promises even more colorful wordplay and innovative upgrades to the network. Here is the breakdown:
The Surge - This is the stage that will introduce sharding. This is seen by many as the upgrade that will bring most of the scaling benefits to the Ethereum network, as it will see the majority of the network split across several different blockchains known as 'Shard chains'.
Without getting too technical, this will allow computation to be done in parallel as each of the individual Shard chains will handle its own calculations - these will then be settled on the main chain later. This would also make some layer 2 solutions even cheaper and make nodes easier to operate as they won't need to store the entire blockchain individually.
Regarding scalability, transaction throughput should increase exponentially with the number of shards. If we were to include layer two scaling benefits, then there are some estimates that we could see Ethereum handling up to 100 000 transactions per second.
The Verge - this will bring with it the introduction of vertical trees. Now, these are a powerful upgrade to what is known as Merkle trees. This will optimize data storage and node size, further helping with scaling capability.
The Purge - the removal of spare historical data and the purging of
irrelevant data, essentially it will streamline storage and further help to
reduce Network congestion.
The Splurge - this is, in fact, a range of more minor miscellaneous upgrades that will ensure that the network can run smoothly while incorporating all those previous improvements. So if you're feeling discouraged by the current state of Ethereum, rest assured. There is still much to look forward to.