Ethereum “Merger” is the most anticipated event in the crypto world

Awaited Ethereum code blockchain upgrade could finally happen this summer. Last week at the ETH Developers Summit Shanghai Web 3.0, Ethereum co-founder Vitalik Buterin said the “merger” would be completed this summer. This transformative update will transition Ethereum from a proof-of-work model to a proof-of-stake consensus mechanism.

What is Ethereum 2.0?

Ethereum 2.0 is an entirely new version of the Ethereum blockchain. It will use the proof-of-stake consensus mechanism to verify transactions through staking.

Ethereum 2.0 mechanism will replace the proof-of-work model, in which cryptocurrency miners use the most powerful computers to perform complex mathematical functions known as hashes. Instead, the mining process requires an ever-increasing amount of electricity to validate Ethereum transactions before they are written to the public blockchain.

Health check systems consume vast amounts of electricity. For example, bitcoin mining currently consumes 127 terawatt hours (TWh) of electricity annually. Today, this exceeds the energy consumption of all of Norway.

ETH currently has an annual electricity consumption roughly equal to that of Finland, producing a carbon footprint similar to that of Switzerland. Fortunately, the Merger is expected to reduce Ethereum’s carbon footprint to 99.95%, removing one of the main criticisms of this cryptocurrency.

How is Ethereum 2.0 different from Ethereum? 

In April 2022, Ethereum launched two parallel blockchains, one running with proof-of-work and the other a test chain with proof-of-stake. The Merger will later merge the legacy Ethereum blockchain Main net (ETH 1) and the new Beacon chain (ETH 2) into a single blockchain.

Ethereum developers have recently abandoned the ETH 1 and ETH 2 terminology due to concerns that it could confuse users before the Merger.

Investors who own Ether (ETH), the native cryptocurrency of the Ethereum network, may have been puzzled by the fact that there are two versions of the coin on popular cryptocurrency exchanges.

When users list their Ethereum on some exchanges, it is converted from ETH to ETH 2, and the prices of ETH and ETH 2 are identical. Once the merge is complete, these two versions of ETH will merge into one token.

Ethereum: transition from mining to staking

Staking is a mining replacement process that verifies Ethereum transactions after completing the merge.

It requires users to lock up a certain number of cryptocurrencies to be able to participate in the transaction verification process. Staking is a process that replaces mining to validate Ethereum transactions after the merge is complete. In the proof-of-stake model, the algorithm chooses which validator gets the right to add the following block to the blockchain-based on how much cryptocurrency they validator staked.

Investors must stake at most minuscule 32 ETH to become an Ethereum validator. There are currently over 300,000 Ethereum validators. And the more ETH each validator stakes, the more likely the validator is to create blocks. And when the blocks are made, he is rewarded in Ethereum for fulfilling his validation duties. 

Currently, staking returns on the Beacon chain Ethereum is between 4.3% and 5.4% per annum.

Since Ethereum is trading at around $1,900 with a minimum requirement of 32 ETH, which is over $60,000, staking can be pretty expensive for the average investor.

But individual investors can also join pools, which are groups of Ethereum holders who pool their resources and share rewards. Most major cryptocurrency exchanges also provide staking services for investors unwilling or unable to own 32 ETH.

The Energy Problem of Cryptocurrencies

The main criticism of Bitcoin code, Ethereum and other altcoins working on the proof-of-work mechanism is related to the enormous energy costs for their mining.   

In recent years, investments based on environmental, social, and governance standards have become increasingly popular. A recent survey showed that many investors would consider investing elsewhere if they knew their cryptocurrency investment was negatively impacting the environment.

CEO of bitcoin mining company GEM Mining John Warren noted a linear correlation between bitcoin’s rise in price and its energy consumption. But Bitcoin does not currently plan to move to a proof-of-stake verification model. This model, according to Warren, does not make sense for Bitcoin.

“While there is certainly a lot of room for growth in the proof-of-stake ecosystem, Bitcoin is the underlying protocol for all cryptocurrencies and therefore needs the most robust and secure consensus model,” says Warren.

He says that the energy expended on a sanity check demonstrates the safety and reliability of the model.

“You could think of Bitcoin as primordial collateral, and security is paramount to its protocol, which is best achieved by adhering to proof-of-work,” says Warren.

Stacey Worden, CEO of the Algorand Foundation, says that the energy consumption of a cryptocurrency is a significant factor in its ability to scale efficiently.

She says subsidized or low-cost energy is needed to scale proof-of-work cryptocurrencies, which is why crypto prices have been hit so hard in 2022.

“On the demand side, proof-of-work protocol’s ability to scale will be limited by the public’s willingness to tolerate fossil fuel-based protocols in general and the preference for the growing availability of carbon-negative alternatives,” Worden says.

Ethereum and Bitcoin

The most popular cryptocurrencies, which account for 63.6% of the global crypto market capitalization, are Ethereum and Bitcoin.

During the past three years, the price of Ethereum has skyrocketed 648%, more than doubling the 250% gain in Bitcoin over the same period. 

The Merger would make Ethereum a more attractive investment than Bitcoin, but that doesn’t necessarily make Ethereum a threat to dethrone Bitcoin as the world’s leading cryptocurrency.

Chris Kline, COO and co-founder of Bitcoin IRA, says that Bitcoin and Ethereum complement each other rather than compete in the crypto market.

“Bitcoin and Ethereum serve different purposes. Bitcoin is a proof-of-work, limited asset, while Ethereum is the backbone of Web 3.0. Both serve as important and distinct elements of the overall digital asset ecosystem”, Kline says.

While crypto investors are looking forward to the Merger later this summer, the next big event on the road to proving Ethereum’s impact will come as early as June.

Ethereum is expected to complete a significant merger trial in June using the Ropsten test net. Once the Ropsten upgrade is complete, Ethereum developers have two more test nets to upgrade before the Ethereum main net merge.

What happens after the Merger?

Essentially, the merge aims to speed up the process of moving from proof-of-work to proof-of-stake. To speed up the transition, the developers are working on reducing features that may cause delay and temporarily limit the ability to withdraw invested ETH after the merge is completed. However, they are likely to be removed in a post-merger update.

While the Merger will not immediately address scalability issues, it will help prepare the network for a version of Ethereum shard child chains that will rely on a fully functional PoS network. By distributing the load on the web across 64 blockchains, shard chains provide additional lower-cost layers for applications and data storage packages. They also allow Tier 2 systems to offer low transaction fees while benefiting from the security of the Ethereum main net.

The entire crypto world is looking forward to the arrival of Ethereum 2.0 and wishes this most crucial currency for the crypto world to grow and prosper.

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