Blockchain protocol change: What is Ethereum's “The Merge”?

In an exclusive Masterclass for our Global Master's in Blockchain Technologies, Marius Van der Wijden, the software developer of Ethereum, discusses the network’s largest blockchain protocol change in history.Ethereum will be changing the way transactions are validated. This is a long-term process and the company will soon start the phase called “The Merge” (the second of three), that will precede the roll out of shard chains. Getting this right is a big technical challenge, but if done correctly, may transform the blockchain landscape. Understand what this blockchain protocol change is about and see what Marius has to say about it.Ethereum is a software platform that runs on a blockchain and that has an associated cryptocurrency called ether (ETH), which is the second-largest cryptocurrency by volume after Bitcoin. It is a decentralized open source platform which serves to execute smart contracts. It was created in 2015 by Russian programmer Vitalik Buterin and American entrepreneur Charles Hoskinson. Developers from all over the world can use this platform to create new applications (called “dapps”) to buy, sell, and use cryptocurrencies. But there are also other uses: buying and selling digital artwork, NFTs, gaming, and developer technology, among others. Although the network is mostly used by developers, there are other people who also invest in the Ether crypto for its potential to be worth more over time. Users have to pay a fee (in ETH) to create new tokens or decentralized apps. This price for using the platform is called “gas”. Fees get higher when more people join the network (this explains the rise in Ether’s value over the years).

• Supply: There is a finite amount of Bitcoins created, and you can buy & sell goods with it. Ether coins, on the other hand, can be infinitely created. But how many Ethereum are there? Well, although there is a max cap on Bitcoin of 21 million, such restrictions do not apply to Ethereum. To give you a snapshot of ETH movement, over 119 million ETH were in circulation by May 2022. 
• Transaction speed: Ethereum is quicker and has a more widespread adoption.
• Value: Bitcoin is just a store of value in a traditional currency, while Ethereum is a network and so has more future potential. The value it’s not on the coin itself, but on the blockchain network that’s being used. So what will Ethereum be worth in 2030? According to the Ethereum forecast price and technical analysis, in 2030 the ETH price is expected to cross an average price level of $49,740.33, and the expected minimum price value of Ethereum by the end of the current year should be $48,357.62. Moreover ETH can reach a maximum price level of $57,877.63.

“The Merge” is Etehreum’s largest protocol change in history, by which it will move from a Proof-of-Work to a Proof-of-Stake model. Basically, Ethereum will be changing the way transactions are validated. Under Proof-of-Stake, transactions are confirmed by addresses that have staked (pledged to a smart contract) lots of ETH. In other words, users will be able to validate transactions according to how many coins they contribute, or stake, to the network. To be eligible, potential validators need to stake at least 32 Ether. Under Proof-of-Work, on the other hand, crypto miners must complete complex puzzles to validate transactions, which requires a huge amount of energy and has a tremendous environmental impact. In Marius’ words: “We're going to take the wagons from the proof of work train (old) and append it to the proof of stake train (new). This is not easy: There’s a lot of engineering and data in those wagons”. Currently, Ethereum has both proof-of-work and proof-of-stake chains running in parallel. While both have validators, only the proof-of-work chain currently processes users’ transactions. Once the merge is complete, Ethereum is supposed to shift fully to the proof-of-stake chain, called the Beacon chain.Ethereum 2.0 (also known as Serenity) is designed to be launched in three phases.  This change is supposed to make Ethereum more secure and decentralized, among other things. "Phase 0" (or "Beacon Chain") was launched on 1 December 2020 and created the Beacon Chain, a proof-of-stake (PoS) blockchain that will act as the central coordination and consensus hub of Ethereum 2.0. "Phase 1" (or "The Merge") will merge the Beacon Chain with the current Ethereum network, transitioning its consensus mechanism from proof-of-work to proof-of-stake. It is estimated to happen in August 2022. "Phase 2" (or "Shard chains") will implement state execution in the shard chains with the current Ethereum 1.0 chain expected to become one of the shards of Ethereum 2.0. Shard chains will spread the network's load across 64 new chains. Estimated to begin in 2023.

• The Proof of Work consensus mechanism is not sustainable and not scalable long-term. (A recent UCL paper outlines the energy problems associated with proof-of-work)
• Proof of Stake makes participating in the network more attainable for many more users and not just large miners.
• The blockchain protocol change should make Ethereum faster and cheaper to use. Right now, Ethereum is beleaguered by slow transaction times and high costs. A simple swap on Uniswap for tokens worth $1 could cost you over $50 in transaction fees at peak congestion times.

In Marius’ words: “PoW uses an exorbitant amount of energy. It is estimated that around 0.1% of all the energy used worldwide is used by Ethereum. And 0.5% by Bitcoin. This doesn’t really paint an accurate picture, because between 60-70% of the energy used is renewable, but it’s still a lot. In fact, Ethereum produces 20K tons of C02 every day, so we’re currently working hard to reduce this”. “In PoW you can never be sure your transaction is final (if someone has more than 50 percent, they can create a longer chain that doesn't include your transaction). In PoS, on the other hand, we know how many people there are, and the chain with the most votes, that one is finalized and cannot be reverted”. Given Ethereum’s market position and the extension of blockchain technologies across multiple industries (like mobility & energy) and uses (like Notary services, Smart Cities, and Government initiatives), this uprecedented blockchain protocol change could have enormous impact worldwide. If you want to deep-dive into the technical aspects of “The Merge”, you can check out this link. And if you’re interested in more of this kind of industry-relevant conversations, in our Global Master’s we have many other Masterclasses you can have access to (About The Nano Foundation, Liechtenstein & Cardano, to state a few), and we’re constantly adding new ones as the industry evolves.