“Happy merge to all,” tweeted Ethereum founder Vitalik Buterin on Thursday afternoon. The entire global crypto industry celebrated the event. #Ethereummerge was a trending tag on Twitter. Over 40,000 people watched the “Ethereum Mainnet Merge Viewing Party” on Youtube.
Here’s why the entire industry was interested in “The Merge”.
What is Ethereum?
Ethereum is the second most popular cryptocurrency after Bitcoin. But, it's more than a medium of exchange or a store of value. Ethereum is generally defined as a “decentralised, open-source blockchain—a distributed public ledger—with smart contract functionality”.
Founded by Vitalik Buterin and Gavin Wood in 2015, Ethereum is a network powered by the Ether (ETH) token that enables users to make transactions, trade in cryptocurrencies, buy and store NFTs, etc. It is a platform on which decentralised apps and exchanges can be built.
What is Ethereum Merge?
‘The Merge’ is a long process of shifting the consensus mechanism of the blockchain from proof-of-work (PoW) to proof-of-stake (PoS). As Ethereum is a decentralised platform, it does not have a centralised authority like banks that validate and verify transactions between two people. Hence, the platform uses PoW as a consensus mechanism—a process in which all the members of the network agree and validate the transaction. This validation is done by the members of the network popularly called miners.
All the miners compete to solve complicated mathematical puzzles and the first one to solve becomes the validator, who adds the new block to the blockchain. Mining is done using computers and a hardware system that consumes enormous amounts of electricity.
On the other hand, in PoS, there is no competition to become a validator.
A validator is randomly selected by an algorithm from a pool of people who ‘stake’ their coins. This eliminates the need for miners. Staking means pledging ETH tokens on the network. One has to stake 32 ETH tokens to be a part of the pool. One lucky winner will become the validator who adds the clock to the blockchain. This is more or less like a lottery system. Hence, one has a higher chance of winning if one stakes more tokens. The major upside of this method is it is energy-efficient as it does not require computational power to validate.
Why is it called ‘The Merge’?
Ethereum introduced a PoS network called the Beacon Chain in 2020. However, transactions are not yet processed through it. In order to complete the process of changing the consensus mechanism, the Beacon Chain has to be merged with Ethereum’s PoW functioning network, also called as ‘mainnet’. Hence the term, ‘The Merge’. In the words of a researcher that spoke to CoinDesk, a global crypto news platform, the Merge is “the idea of switching out an engine from a running car.”
Why was Ethereum Merge a significant event?
To begin with, The Merge will make the Ethereum blockchain—the second biggest after Bitcoin—energy efficient.
Its developers believe this process will lower energy use by 99 per cent. According to a report by Crypto Carbon Ratings Institute(CCRI), Ethereum uses 23 million megawatt hours of power per year. With the Merge, the power consumption is expected to come down to 2,600-megawatt hours per year. This is a significant change because one of the biggest criticisms the decentralised networks face is that they are highly ‘power hungry’ in a world where climate change has becoming the biggest issue.
In addition, Ethereum investors are of the view that ‘The Merge’ will revive the fortunes of the Ethereum token which has lost 49 per cent of its value since hitting all-time high in 2017. However, the event has not showed any positive effect on the price of ETH as of now. In fact, at the time of writing this report, it has lost 9.81 per cent in the last 24 hours and was trading at $1,450.51.
The event is also important because the Ethereum developers expect ‘The Merge’ to make all the projects on the blockchain “more secure and scalable.”
Reports suggest the Ethereum blockchain houses $60 billion ecosystem of crypto exchanges, lending companies, NFT marketplaces, and other apps and projects. The crypto industry also believes that the event will make decentralised networks more attractive and adaptable for new projects.