If you’ve been hanging around in crypto circles, the last few months - you’ll have heard about the Ethereum Merge.
This event is set to be a game-changer in crypto, and will shape the landscape and future of the markets significantly.
The Merge will take place between the 10th and 20th of September, with parts of the Merge (such as the Bellatrix upgrade) having already occurred over the last couple of weeks.
So, what is the Merge?!
The Merge is going to drastically change the Ethereum blockchain’s energy consumption, meaning it will be far less energy consuming than Bitcoin.
Energy consumption is one reason many people are against cryptocurrencies, so the Merge could change public opinions on cryptocurrencies.
What will change?
Currently, the Ethereum blockchain, like the Bitcoin blockchain, operates on a consensus mechanism called “proof of work”. With the Merge, the Ethereum blockchain will be switching to another type of consensus mechanism, called “proof of stake”.
There are many types of consensus mechanisms that allow miners and actors to reach “consensus” to approve and append new blocks added to the chain - which is where the term “blockchain” comes from.
What does consensus mean?
Consensus is the system used by blockchains like Bitcoin and Ethereum to validate the authenticity of transactions and keep the security of the blockchain intact.
Consensus in crypto is about achieving agreement, trust, and security across a decentralized computer network.
Each cryptocurrency can use its own unique consensus protocol, or they can copy one that has already been put in place elsewhere.
How does it work?
In the PoW consensus protocol (the one used in BTC and currently ETH), miners compete to validate the next block of transactions.
They compete, because if they succeed before other miners, they get rewarded by earning a mining fee. This is paid for by people who make transactions on the network (network fees).
In order for the block to be appended to the blockchain, all miners must collectively agree on the block of transactions and distribute the information in the new block to other miners.
There is little incentive to go against the rules for personal gain, which is why the level of trust is so high for blockchain transactions using the PoW consensus protocol.
So, with proof of work, miners compete against each other to validate the next transaction and earn mining fees when their block is appended to the blockchain.
Mining takes up a lot of energy and has an upfront cost (varies in $$$) which also incentivizes miners to “abide” by the rules of the blockchain, because by “playing by the rules”, they will earn more than if they were to go against the rules.
PoS is another consensus protocol used by cryptocurrencies.
Users will have to stake their ETH to become a validator in the network.
Their responsibilities are the same as in proof of work: ordering transactions and creating new blocks.
How does proof of stake compare to proof of work?
👾 PoS is more energy efficient
👾 Lower barrier for entry - no need for super-high-end gear
👾 Stronger immunity to centralization
Unlike in PoW, PoS validators are selected at random, providing they have staked 32 ETH.
They’re also not competing, unlike in the PoW model.
They don’t mine blocks; they create or propose blocks.
If you attest to blocks that shouldn’t be validated - you will lose your stake. So, the stakes are literally high.
You’ll have noticed in both protocols, incentives are kept high for miners and validators to “do the right thing”.
In PoW, if you try to backtrack or validate transactions that shouldn’t be validated, you lose your hashing power. Your transactions will never propagate far if they are invalid, so you’ll never reap the network fee reward, and you’ll likely end up getting blocked for being a spammer by other nodes.
And in PoS, if you attest to malicious blocks, you lose your stake.
32 ETH worth… 👀 (although, you don’t HAVE to have 32 ETH. You can also join a staking pool.)
Incentives are very important when it comes to keeping the network healthy.
This is what creates such high levels of trust.
Why is consensus important?
Consensus protocols are important because they have a LOT of influence on blockchain networks.
Consensus protocols can affect the following, depending on the cryptocurrency in question:
- How transactions are verified
- How much energy is used
- Transaction speed
- Network fees
What does this all mean for crypto?
Well, when it comes to the Merge, switching to proof of stake is going to mean a reduction of up to 99% in energy usage, accelerated adoption of cryptocurrencies and acceptance by major financial institutions as well as private individuals, lower fees and congestion when interacting with the Ethereum network, and improved security and immunity to attacks.
With all that in mind, are you bullish on Ethereum? Or will you be switching to Ethereum Classic?