After almost two years since the first phase implementation, the Ethereum network is ready to complete the highly anticipated merge. Below we run you through everything you need to know about why this is happening, what it all means, and how it might affect crypto payments.
Why the Ethereum Merge is Happening
Indisputably, digital assets cannot work effectively without a digital ledger where the data of the transactions can be stored. It would be like a bank without a ledger to record transactions or a company without a journal to record its revenues.
So, digital assets use blockchain technology as a digital ledger to record time-backed transactions. Its system is secured, private, and distributed between different computers in its network. Before storing data, it needs a series of verifications to reach a consensus. This can be done in two ways, either through a Proof of Work or Proof of Stake consensus mechanism.
Popular cryptocurrencies like Ethereum and Bitcoin use the Proof of Work mechanism to verify transactions and add the data to blocks before adding them to the blockchain.
The Proof of Work mechanism requires miners on the network to solve complex problems using specialized computers with high current requirements. While all the miners compete at the same time to solve this puzzle, the fastest one is allowed to execute the transaction (and be financially compensated).
This process uses a considerable amount of energy, leading many to question the environmental impact of cryptocurrencies. Understandably, the government and other international bodies cannot overlook matters like the environmental consequences of operating notable cryptocurrencies, or
the amount of electricity required in the process. A report from the University of Cambridge on the Bitcoin consumption index showed that Bitcoin mining consumes more energy than the whole of Belgium uses every year.
The second leading cryptocurrency, Ethereum, was roughly estimated only to use one-third of this energy. But Ethereum is on the verge of a monumental change that will substantially reduce its environmental impact and lay ground to improve its network, through the Ethereum merge.
What Is The Ethereum Merge?
The Ethereum merge was long anticipated within the industry, following a successful integration performed on a test blockchain called Goerli chain in early August. The Ethereum merge is a software upgrade that involves joining the network's existing main net, which uses the Proof of Work consensus model with the Beacon chain.
The upgrade is simply to shift from the energy-consuming Proof of Work model to a new Proof of Stake consensus layer. The essence of the upgrade is to make the network energy efficient and more secure and lay groundwork to enable more scalability for the update scheduled to take place between September 10 and 20.
According to Justin Drake, a researcher at the Ethereum Foundation, once a few upgrades launch in the next few weeks the groundwork will be established for the transition from one chain to another. He liked the process to a car switching from an internal combustion engine to an electric one.
"How do we do that? Step one: We install an electric engine in parallel to the gasoline engine. And then—in step two—we connect the wheels to the electric engine and turn off the gasoline engine. That's exactly what's going to be happening at the Merge," Drake says. "We've had this parallel engine of the Beacon Chain for a year and a half—and now the old 'gasoline' Proof of Work engine is going to be shut off."
How Will The Beacon Chain Work?
After successful integration into the Ethereum network, the merge implies that the network will use the Beacon chain and will be used as an engine to process block production. Thus, any miner trying to produce a block using the Proof of Work method will get an invalid return.
In other words, miners will be unable to validate transactions as the power will be passed to Proof of Stake validators. The Beacon Chain will be the consensus engine for all network data, including execution layer transactions and account balances. No history will be lost during the process as the entire transactional history of the Ethereum merges will be backed up.
How Will New Blocks Be Added To The Network?
By introducing the Proof of Stake consensus, the validator will take over the role of being a miner to process transactions and add a new block to the blockchain. Validators are rewarded for service at a proportionate cut of the network's transaction fees.
To become a validator, you need to deposit 32 ETH into a specific smart contract, staking the funds in the Ethereum network. If the validator tries to trick the system, e.g. if an invalid block is accepted by a validator, the network will cut some portion or its entire stake as punishment.
Each validator is selected randomly to validate a particular block and earn crypto rewards and fees. In contrast to complex machinery and using computing power to verify transactions, one only needs to stake ETH as a validator. This centers around the idea of securing a network through incentives rather than hardware. Thus, the process is more economical and enhances network security and operation.
"Ethereum’s proof of stake is “stick-heavy”—that is, penalty-based—rather than “carrot-heavy,” or reward-based. “The stick turns out to be 100 times more powerful than the carrot,” he says. “And the reason is very simple: You can only afford to give a 1 percent reward to validators because otherwise there would be too many ether tokens issued to reward them. But you can slash 100 percent of their ether if they start misbehaving,” says Justin Drake.
What Does The Merge Mean For Crypto Payment Gateways
After the merge, Ethereum is expected to be a bit faster by 10%. Thus, payment platforms that accept it can expect an increase in the usual Ethereum transaction speeds. Though, during the merge, people are expected to be on high alert for any scams.
While users can continue to use the cryptocurrency as per usual, they must note that there is no action required on their side, and ETH will continue to function as normal. All upgrades are taking place on the back end, so the only effect the merge will have on payment gateways is faster transactions and a reduction in transaction costs.
The new change taking place in the Ethereum space is exciting news to the crypto world, as people are confident about the transition and the long-term future of Ethereum. More interest has been diverted to its network as new projects are being built and developed on the base protocol.
The upgrade shows that the network developers have a strong plan for the future, are capable of implementing said plans, and are actively working toward the mass adoption of web3. This will provide the basic infrastructure to build web3's next iteration and thus invite investors and participants to join its call.
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