With the “Merge,” the Ethereum blockchain’s existing Proof-of-Work (PoW) consensus mechanism will be replaced by the Proof-of-Stake (PoS) consensus model, which is anticipated to be faster and more energy-efficient. However, shifting the second-largest blockchain from one system to another is a challenging and multi-step procedure. Therefore, it’s crucial to consider each step carefully.
In this blog, let’s get an overview of this Ethereum “Merge.”
What is Ethereum 2.0 “Merge”?
Ethereum 2.0 is the next iteration of the Ethereum blockchain that will employ a Proof-of-Stake (PoS) consensus mechanism instead of Proof-of-Work (PoW) to validate transactions through staking.
Ethereum 2.0’s staking mechanism will replace the Proof-of-Work (PoW) paradigm in which cryptocurrency miners employ powerful computers to accomplish complex mathematical operations known as hashes. Instead, the mining process uses a high amount of electricity to validate the Ethereum transactions before recording them on the public blockchain.
Proof-of-Work (PoW) system consumes a lot of power. For instance, the annualized energy consumption of bitcoin mining is presently 127 terawatt-hours (TWh). Thankfully, Merge is anticipated to cut Ethereum’s carbon footprint by up to 99.95%, resolving one of the cryptocurrency’s primary concerns.
Ethereum vs. Ethereum 2.0: What will happen after the “Merge”?
Since April 2022, Ethereum has operated on two parallel blockchains: a test chain that uses Proof-of-Stake (PoS) and the main chain that uses Proof-of-Work (PoW). With the “Merge,” the old Ethereum Mainnet blockchain (ETH1) and the brand-new Beacon Chain (ETH2) will be combined into a single, integrated blockchain.
Ethereum developers recently dropped the ETH1 and ETH2 terminology because it may confuse the users ahead of the Merge.
Some crypto investors may have been confused by what seems to be the two versions of Ether, that is, the native cryptocurrency of the Ethereum Network, on well-known cryptocurrency exchanges.
Users stake their Ether on crypto exchanges, which convert it from ETH to ETH2, with the exact pricing for both coins. These two forms of Ether will be merged into a single token once the process is finished.
What will be the impact of the Ethereum “Merge”?
According to some experts, the upgrade might help Ethereum expand again after other blockchain initiatives reduced its market share in the previous six months.
Some crypto experts predict that the markets will respond favorably to the Merge later this year. That’s because the Ethereum merge will enhance security and stability, speed up processing, and reduce Ethereum’s energy use by 98% or more.
Crypto researchers claim that connected altcoins may also see price hikes with this update. The initiatives that are constructed on top of Ethereum, such as Polygon, Arbitrum, and many more, will see favorable momentum. Meanwhile, the Ethereum ecosystem may exert extra pressure on rival protocols like Solana and Polkadot since the update will let the network expand, lower transaction costs, and increase interest in blockchain technology.
How will Ethereum update?
Ethereum is in its first stage of transition to what it calls the Beacon Chain, which uses the Proof-of-Stake (PoS) consensus mechanism.
When they were launched, Bitcoin and Ethereum employed a method called “Proof-of-Work (PoW)” to validate each blockchain transaction. A systematic procedure adds transactions to the blockchain, or digital record, in blocks. However, the Proof-of-Work (PoW) mechanism demands a lot of computational power since it requires all computer networks to agree and create new blocks.
By having network users stake crypto as collateral to testify for the new blocks added to the chain rather than having computers do it, Proof-of-Stake (PoS) models reduce this level of energy utilization. Proof-of-Stake (PoS) methods in crypto allow the ecosystems to circulate crypto in the same way that we circulate fiat dollars, much like banks need pools of their customers’ money to turn around and lend money out. Since the crypto has already been minted once, Proof-of-Stake (PoS) models need less time and effort to vouch for new blockchain transactions than Proof-of-Work (PoW) models.
What will happen after the “Merge”?
Merge’s main objective is to accelerate the transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS). Therefore, developers are attempting to remove features that might slow down the transfer to temporarily prevent users from withdrawing staked ETH after the Merge is complete. However, they will probably be fixed in a “cleanup” upgrade that comes after the Merge.
Although the Merge won’t instantly address scalability issues, it will assist in getting the network ready for Ethereum’s version of subsidiary shard chains, which will require a fully operational PoS network to function. Shard chains offer less expensive layers for apps and rollups to store data by distributing the network’s data load among 64 blockchains. They also make it possible for layer 2 systems to provide minimal transaction costs while gaining the advantages of the Ethereum Mainnet’s security.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.