What is the Ethereum merge and how will it impact the blockchain?

31 Aug 2022

Image: © Dennis/Stock.adobe.com

The merge is estimated to make Ethereum 99pc more energy efficient, but some experts argue it fails to address other issues on the network such as scalability and cost.

A big change is set to hit the crypto space, with a long-anticipated upgrade to the Ethereum blockchain.

The upgrade, known as the Ethereum merge, will see the blockchain move from its current energy-intensive system to a more environmentally friendly mechanism. The non-profit Ethereum Foundation claims this upgrade will lead to more scalability, security and sustainability.

The merge is set to occur between 10 and 20 September. It is being hailed by some as a leap forward that will tackle the common crypto criticism of high energy use. However, some experts have argued that there are still various challenges that the merge fails to address.

What is the Ethereum merge?

Currently, Ethereum works on a proof-of-work system, which is a decentralised consensus mechanism.

It is maintained through the act of ‘mining’. In simple terms, this involves solving complex equations to create new coins and validate transactions on a blockchain network. This is also the method behind the popular cryptocurrency, bitcoin.

The process of crypto mining has been long criticised for the amount of energy it uses. A New York Times analysis last year claimed bitcoin mining consumes around 91 terawatt-hours of electricity annually, which is more than all of Finland.

The Ethereum upgrade involves merging this proof-of-work system with a proof-of-stake layer, which aims to remove the need for energy-intensive mining.

With this method, the network will rely on trusted validators to verify transactions. These validators would stake capital in the form of some cryptocurrency, which acts as collateral that can be destroyed if the validator “behaves dishonestly or lazily”.

What are the benefits?

Supporters of this consensus mechanism argue that it will lead to better energy efficiency and reduce the hardware barriers to entry. According to Ethereum’s website, the merge is expected to reduce the blockchain’s energy consumption by around 99.95pc.

The managing director of Cronos, Ken Timsit, said the merge overcomes a “contentious pain point in the chain’s evolution” by providing a solution to its “outsized energy consumption”.

The co-founder of the blockchain platform Lisk, Max Kordek, added that the merge isn’t “groundbreaking” as proof-of-stake blockchains have existed for years. However, Kordek said the Ethereum merge is “proof that it can change”, which shows the potential for larger improvements that can be adopted by the network.

“The merge will help global sentiment towards crypto and Web3 because the second biggest blockchain is becoming greener,” Kordek said. “This is also a necessary step for Ethereum to flip bitcoin, which I foresee happening in the next major bull run.”

The Ethereum website said the merge “sets the stage” for future scaling upgrades such as sharding, which involves breaking up the main blockchain into separate segments.

What are the issues?

While many are supportive of the change, concerns have been raised that other issues need to be tackled to help the mainstream adoption of the blockchain. Timsit noted several challenges that will persist after the merge.

“It does not improve remaining challenges around scalability, transaction fees or ease of use, with proof-of-stake blocks only being produced (roughly) 10pc faster than proof-of-work blocks,” Timsit said.

The CMO of Swirlds Labs, Christian Hasker, said the merge accomplishes a lot but does nothing to reduce the cost of transactions and only provides “a tiny increase in blockspace”.

Hasker also noted issues with the sustainability claims as Etherum’s Beacon Chain, which introduced proof-of-stake to the ecosystem, depends on around 410,000 validators to produce the blocks in the chain.

“As such, their energy consumption will remain significantly higher per transaction than on some other proof-of-stake networks,” Hasker said.

The approaching upgrade has led to a surge in mining, as some anticipate a price rise in the wake of the merge. The number of people mining the cryptocurrency has reached a four-year high, CoinTelegraph reports.

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Leigh Mc Gowran is a journalist with Silicon Republic