How Could the Ethereum Merge Impact the Cryptocurrency Market?

Ethereum is planning to merge its processing network and move from a blockchain that is proof-of-work to one that is proof-of-stake. The merger has many benefits, including reducing the energy costs associated with proof-of-work technology. The proof-of-work blockchain mechanism is used for authenticating transactions.

What is a Merge?

Although the Merge will see the Ethereum blockchain move to a proof-of-stake system, the truth is that Ethereum already operates a proof-of-stake network called Beacon, which was introduced in 2020. While this proof-of-stake network functions for processing transactions, it’s not yet used on the Ethereum network. To make this concept a reality, Ethereum is planning to merge the old proof-of-work network and a proof-of-stake network. The proof-of-stake arena is called the consensus layer, and the proof-of-work region is called the execution layer. The two layers differ in determining who has the correct record for making the blockchain’s next block.

The merge is expected to occur once the proof-of-work network gets to a problematic level that’s severe enough to tax the network. Instead of having a specific date, the merge is scheduled once the block hits a complex terminal number. Current expectations are for the middle of September 2022.

What is Currently Available?

The current Ethereum system is a proof-of-work system where miners compete with each other to solve a puzzle that verifies a transaction. The mechanism used is similar to the processing used by bitcoin to verify its transactions. Proof-of-work is a decentralized mechanism requiring that network members solve a mathematical problem to verify a transaction. In the bitcoin proof-of-work system, the problem solver receives a bitcoin as their reward for confirming the transaction. In this system, a solver can detect tampering using hashes and long strings of numbers that serve as proof of work.

How is Proof of Stake Different?

There are several differences and commonalities between proof-of-work and proof-of-stake in the new Ethereum system. In both scenarios, the validator gains some ether if they win the block. In the proof-of-stake system, a validator with a stake of at least 32-ether with the Ethereum network is randomly chosen to create blocks on the blockchain. Since there is no puzzle solving in the proof-of-stake scenario, there is less of a tax on the energy sector as the proof-of-stake validator does not need to solve a complex puzzle using computer power.

Some believe that the lack of strain on the power system will help the environment as it will use fewer fossil fuels to create electricity. This scenario will make a proof-of-stake system more environmentally friendly than the proof-of-work scheme. There is the expectation that the change to a proof-of-stake system from a proof-of-work system will cut the Ethereum energy cost by 99.95%.

Why Make the Change?

The Ethereum Foundation, which funds the ecosystem as a non-profit organization, believes that the proof-of-stake system will cut energy usage substantially. It will also change who can participate in the mining process. In the proof of stake system, those with the amount of ether will be randomly chosen. Only those with access to crypto mining machines that can solve a problem at lightning speeds can participate in the proof-of-work system. It is already possible for individuals to become proof-of-stake contributors to ether. All you need to validate on the Beacon Chain is to purchase 32 ether tokens. Then you will begin to generate rewards. Your staked ether will be locked up for 6 to 12 months after the merge. After that period, those who have staked the new merge system will be able to remove their stake.

Some counter the argument and say that proof-of-stake centralization can put the risks on actors who buy control of the network by purchasing several accounts with enough ether to qualify for proof-of-stake. Despite the change offering a less power-intensive way to validate a trade, Ethereum network cryptocurrency trading fees are not expected to decline until sometime in early 2023.

Will The Speed of Ethereum Change?

In the proof-of-work model, new blocks are placed on the blockchain every 13-14 seconds. There is the expectation that after the merge between proof-of-work and proof-of-stake, the blocks will be created on the blockchain every 12 seconds.

Will There Be Two Ethereum Systems?

Some have clarified that they are unwilling to move away from the proof-of-work system. These members of the Ethereum system have announced plans to fork the system and continue with a proof-of-work chain. Members of the proof-of-work group will clone the original blockchain and continue their work on a proof-of-work blockchain.

Can the Merge Fail?

The merge is the first of its kind in the Ethereum world and will be an experiment. For the merger to succeed, it will take a lot of effort, engineering, and coordination. The risks are enormous. The union could wipe out billions of dollars in value. The merge is poised to move forward following extensive testing and simulations. In the post-merger world, developers will try to expand the Ethereum throughput and decrease transaction fees across the network.

Summary

Ethereum is moving forward with a merge that will change the dynamic of verification. The plan is to move from a proof-of-work verification system to a proof-of-stake method. Proof-of-work verification requires that miners solve a puzzle, and the first to solve it can verify the transaction. In a proof-of-stake system, ether members need to hold 32 ether tokens, and they are randomly chosen to verify a transaction. In each situation, the verifier receives a reward for verification. The merger will occur when there is difficulty verifying transactions through proof-of-work. If the merge fails, it could cost the system billions. The goal will be to reduce the cost of verification, as proof-of-work does not require the energy output needed.

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