Checked crypto news headlines lately? You may have noticed a little tidbit here and there about The Merge. Nothing major of course, it’s just the biggest Ethereum network update ever!
But, what is it? And what does it mean for you? We’re glad you asked.
Without further adieu, let’s dive into the topic on everyone’s lips this week:
The Merge can be explained in pretty simple terms.
The specifics are far more complicated, but this will be the end result.
However, to fully understand the implications The Merge has, you’ll need a little bit of that sweet, sweet elixir we like to refer to as: context.
Ethereum, the network, is one of the earlier blockchains to emerge after the genesis of Bitcoin. Founded in 2014, Ethereum uses the same style of consensus mechanism that Bitcoin uses, called Proof of Work, though its utility goes beyond simple transactions due to smart contract technology.
Blockchains were designed for transacting in a peer-to-peer environment, and there needs to be some sort of validation to ensure transactions are correct.
Without getting too far into the weeds, Proof of Work allows certain “nodes”, or users’ machines within the network, to validate the accuracy of these transactions. Proof of Work is a mechanically intensive process, literally. It requires physical computers to solve complex problems in order to work, and computers use quite a bit of electricity.
Now, think of the electricity a home PC might use multiplied by several thousand. That might be the electricity used by just one server farm dedicated to the “work” aspect of Proof of Work. As you can imagine, the energy bills are considerable.
However, there is a newer consensus mechanism used to validate some blockchains.
Proof of Stake doesn’t require much mechanical power. Instead, it requires user buy-in. Users can stake their cryptocurrency assets, which is a bit like loaning them to the network itself. The users who stake enough of their assets become the validators in this system. If they don’t validate accurately, their stake will be slashed, resulting in a major loss in assets that hold real value, thus incentivizing validators to act in good faith.
How is this relevant? Well, for several years now, the Ethereum network has been gearing up for a major update.
The Ethereum blockchain is updating from Proof of Work to Proof of Stake.
And that’s the gist of The Merge in so many words, though it’s a bit more complex than that. (OK it’s a lot more complex than that.)
First and foremost, Ethereum’s network will use about 99.95% less energy than the current Proof of Work consensus mechanism.
While the environment is probably happy about that, people everywhere are also breathing a sigh of relief about the lower energy costs. Less energy consumption also makes the Ethereum network far more scalable, as the sheer energy cost of maintaining the network is no longer such an obstacle.
Higher scalability has interesting implications for the network. It brings with it the potential to decrease barriers to entry, which in turn could encourage more people to participate. It also allows users who didn’t have equipment for Proof of Work, or the money to purchase such equipment, to become potential validators.
Next up, validator rewards. With the former Proof of Work mechanism, validators or “miners” would need heaps of computing power to participate. For their work, they’d be rewarded newly minted ETH. Most miners, especially individuals or small groups, weren’t likely to see many rewards due to high competition. Proof of Stake allows anyone with a device, an internet connection, and a minimum amount of ETH to become a validator.
Why else should you care?
Remember those mining rewards we mentioned? With a Proof of Stake system, users that stake the required amount of Ether have a chance at being rewarded staking rewards. These come in the form of newly minted ETH, and are rewarded for their honest participation as a validator.
The minimum requirements for validators is a stake of 32 ETH, a device on which to host, and a 24/7 internet connection. Being chosen to validate isn’t a sure thing and depends on various factors, but it’s much less difficult than “mining”.
This opens up a slew of new opportunities to participate, earn rewards, and create new applications. It also incorporates more of the Ethereum community in the minting process.
How does this relate to iTrustCapital clients?
While iTrustCapital currently only lists Polkadot in the beta feature for staking, The Merge could create the potential for Ethereum to be explored as a possible option someday, which is an exciting prospect!
The Ethereum network allowing for Proof of Stake will have short term effects on the network itself.
Ethereum may not be available to trade while The Merge is being implemented, which is expected to occur between now and September 20th.
Why isn’t it an exact science?
Well, the update launching the transition, named Paris, isn’t connected to a time or date, but rather a value. The value in question is called total terminal difficulty. We won’t get into the specifics of difficulty here, but when Ethereum’s total difficulty hits 58750000000000000000000, The Merge will initiate.
For our clients, expect any Ether or Ethereum network coins to have potential trading pauses when this happens. iTrustCapital will inform our clients if trading is going to be paused or offline. Mark your calendars and schedule accordingly!
The Merge is an awesome moment for those of us who are interested in crypto! Even if you’re not a crypto enthusiast, it can be fun and exciting to learn about what’s happening in the industry. This particular update is a pretty big deal, and we’re glad we can help educate our clients and anyone else looking for more information.
A TL;DR for those of you who don’t have the time to read all the way through!
Ethereum is moving from Proof of Work to Proof of Stake between now and September 20, 2022. The event known as The Merge is a series of updates culminating in this transition. It will save lots of energy and help expand the Ethereum network. You’ll want to make sure you’re prepared for any pauses in trading throughout this timeline, especially if you’re an iTrustCapital client.
Ta-da! You’re all set for The Merge.
For more detailed information and a full dissertation on The Merge and the Ethereum Network, you can head to ethereum.org, which is publicly available to everyone.
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