Everything about Ethereum’s make-or-break upgrade

Blockchain history is about to be made. Ethereum will soon enact a critical upgrade that will have ramifications for the whole crypto space.

Known as “The Merge,” the upgrade will change the network’s consensus mechanism to a faster, more eco-friendly system known as proof-of-stake (PoS).

Photo credit: Jievani

Ethereum will attempt to merge its mainnet — along with the ability to run smart contracts and record the full history of the blockchain — with its proof-of-stake Beacon Chain. This has never been done before, and many believe it’s crucial to the crypto ecosystem that Ethereum succeeds.

After facing several delays and setbacks in the process, Ethereum’s developers have become cagey about setting a firm date for the upgrade. However, they have confirmed that they are now trialing the process on several testnets before rolling it out on the main chain.

Ethereum is no stranger to bold innovations. Its release in 2015 created programmable blockchains that allow developers to build decentralized applications (DApps) on the Ethereum blockchain without needing to use centralized cloud servers.

Ethereum’s native token, Ether (ETH), has been one of the top-performing assets of any class. Since its release, it’s increased in price by about 12,500%. This is because the network has created value via the vast number of DApps and other projects that use it — not least of which are non-fungible tokens, which have become prominent in recent years.

“The core value proposition for Ether grows as the number of tokens, smart contracts, and developers choosing to interact with the Ethereum network increases,” said Fidelity Digital Asset Management in a recent report. The power of this kind of network growth has already been observed in the rise of social media companies like Facebook, which increased in value as its network expanded.

The Merge will end Ethereum’s reliance on proof-of-work (PoW) technology. The most famous user of PoW is Bitcoin, and eco-conscious critics are quick to criticize the large amounts of energy the consensus uses.

However, Bitcoin actually uses more renewable energy than any other industry. Furthermore, the PoW system could be seen as more egalitarian, as every mining computer has an equal right to validate a transaction.

PoS, on the other hand, creates a network by having validators lock up their ETH to participate in the network. This uses much less energy than a PoW consensus.

To become a validator on Ethereum, you have to stake 32 ETH (currently worth over US$34,000), which is a high barrier to entry. This leads people who have small amounts of ETH to pool their resources by using tools like Lido and Rocket Pool, giving these protocols a disproportionate opportunity to influence the network.

This risk is mitigated by the fact that any untoward behavior is penalized, and the right to validate a transaction is assigned randomly. Even though it might sacrifice some aspects of decentralization, Ethereum’s co-founder, Vitalik Buterin, believes the new PoS network will be safer and more efficient.

If The Merge is successful, the next step for Ethereum will be to roll out 64 shard chains that will ease congestion on the network. Think of it like surface area: The shards will increase the surface area of the blockchain, allowing it to absorb more activity while charging lower gas fees.