Ethereum was and is the most important blockchain platform for smart contracts and dApps. Even though challengers like EOS, Tron, or Cardano become more and more relevant, Ethereum manages to hold its position in the market. Hundreds of crypto projects rely on Ethereum, especially in the booming DeFi space. On 07/01/2020, Ethereum announced a 3-phase switch to Ethereum 2.0. Before that, the update is supposed to bring great new features and improvements, but the multi-year switch implies uncertainty for miners, programmers, and also investors. In September, it is now scheduled to happen. The so-called “merge” is set to make the blockchain even more dominant.
The Merge — Photo by Nenad Novaković on Unsplash, edited by the author
The Ethereum merge was delayed several times over the past few months. The delays were primarily caused by the fact that the testing of the network on the Beacon Chain kept going on and on. By doing so, the developers want to make sure that the switch to proof-of-stake works perfectly and that there are no hiccups.
The Merge — Ethereum.org
Now, the date of the “The Merge” has officially been confirmed. According to a blog post by the Ethereum Foundation, the upgrade will be supposed to be fully completed between September 10 and 20.
The update, taking part in two phases, “Bellatrix” and “Paris,” will happen on September 6 and between September 10 and September 20, respectively.
The London-Upgrade about a year ago, marking one of the first steps toward Ethereum 2.0, which was also able to move the price significantly. Read more here:
Ethereum: Why the “London” Update Boosts The Price
Proof of Work vs. Proof of Stake
With the Merge and the transition of the consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS), Ethereum wants to finalize a massive project in mid-September. For several years, the foundation has been aiming to reduce power consumption by 99 percent.
Consensus mechanisms like the very ones used by Bitcoin or Ethereum 2.0 are defenses against so-called Sybil attackswhich attackers could normally use to gain authority over a blockchain.
A Sybil attack is an exploit against an online network in which a small number of entities attempt to take control of the entire network by using multiple accounts, nodes, or computers.
Thus, these mechanisms establish rules that nodes must follow to attach data to a blockchain. The two mechanisms most commonly used are Proof of Work and Proof of Stake.
As of September, the new Ethereum will then operate under the Beacon Proof of Stake Chain. According to Ethereum, the consensus method would be called Gasper and would be a combination of “Casper the Friendly Finality Gadget (Casper-FFG)” and the “LMD-GHOST Fork Choice Algorithm”.
Together, these components form the consensus mechanism that secures proof-of-stake Ethereum.
Which Is Better? Bitcoin’s PoW Or Ethereum’s PoS?
The never-ending debate about which is the better Sybil resistance mechanism can hardly be answered in objective terms. Both solutions have arguments in favor or against.
Bitcoin’s proof of work offers an extensive, seemingly impenetrable network of miners and node validators. In addition, there is decentralization due to the distribution of mining sites around the world. One drawback is scalability. With only seven transactions per second, the network seems outdated and clumsy. Also, the enormous energy consumption is a disadvantage that many critics condemn in the strongest terms. Nevertheless, this in particular is considered a “feature” in the scene — and not a “bug”.
Ethereum’s Proof of Stake, on the other hand, can operate in a virtually entirely sustainable manner. The switch is said to save 99 percent in energy costs. Along the way, the transaction rate is increased, which should make the network even more widely used. One drawback that stands out is the increasing centrality. The more big investors get into cryptocurrency, the less decentralized it becomes.
No definitive solution can be found. Vitalik Buterin, the founder of Ethereum, already noted it in 2014 and referred to the blockchain trilemma.
Blockchain trilemma… choose two! — created by the author
Here, the properties of decentralization, scalability, and security are in a triangle with each other. Achieving all three would be optimal for a blockchain. However, at least in theory, only a maximum of two properties can ever be achieved.
By increasing scalability, Ethereum looses decentralization. Bitcoin is so slow because of security and decentralization. While the Bitcoin fork Bitcoin Cash (BCH) can handle more transactions per block, it is far more centralized than its big brother.
The crypto project Fantom, for example, seeks to solve the trilemma. According to the developers, Fantom attempts to solve this problem by achieving asynchronous Byzantine fault tolerance (“aBFT”). Fantom’s aBFT consensus enables asynchronous processing of transactions. This is intended to increase the speed and throughput of transactions compared to Bitcoin or Ethereum. Read more here.
The apparent scaling problem of ETH will not be solved overnight by the Merge. The Ethereum Merge will initially only change the consensus mechanism of the ETH Blockchain.
However, the merge paves the way for several other upgrades (Surge, Verge, Purge, Splurge) that aim to address the scaling problem in the coming years.
Coming updates — twitter.com
Now the upgrade has, as mentioned, been divided into several phases, and the name Ethereum 2.0 has fallen into disuse or at least is now inappropriate.
The Merge consists of the phase where the mainnet merges with the Beacon Chain, while, soon after, the entire transaction history will be adopted and the support of smart contracts on the PoS network enabled. Finally, once mining is removed from the network, stakers and validators come into play.
At that point, the sharding will be introduced, in the upgrade called “Surge.” Sharding is the act of dividing a database or, in this case, the blockchain, into several smaller parallel chains known as shards. Ethereum, thanks to Surge, will have 64 shards, distributing the workload over 64 new chains, and will simplify running a node, drastically reducing hardware requirements. Validators and other users will then be able to run their shards, validating transactions and preventing the mainnet from experiencing excessive congestion.
This way, gas fees can finally be reduced, making them acceptable — even for smaller transfers.
“Purge,” on the other hand, should improve the efficiency of the network by decreasing the memory required by validator nodes, while “Splurge,” finally, should significantly improve network utilization by, for example, employing zero-knowledge protocols. Read more on zero knowledge protocols here.
What is likely to change immediately after the merge, however, is that Ethereum Layer 2 scaling solutions will become less expensive.
For example, upgrades such as the EIP-4844, which lowers transaction costs on Layer 2 networks, can only be implemented on a proof-of-stake Ethereum network. The adoption of Ethereum L2s should most likely benefit from the Merge.
Check Ethereum Layer 2 Solutions
2. Staking Instead Of Mining
The upgrade will change the Ethereum Blockchain’s consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS). Simply put, the ETH network will be backed by investors and their capital in Ethereum instead of miners in the future.
Thus, validators, rather than miners, will confirm transactions, process them into blocks, and attach them to the ETH blockchain.
To the disadvantage of many Ether miners, this could lead to the end of a multi-billion US dollar industry. As a response, some investors are worried that miners will try to manipulate the Ether Blockchain to prevent the merge.
However, the largest Ethereum mining pool, for example, has already announced that it will switch to Proof of Stake. So it is highly unlikely that miners will influence the merge on a large scale.
3. Lower Power Consumption
The power consumption of the Ethereum network should decrease significantly with PoS. This also ensures that environmental friendliness continues to increase. This is a clear benefit of Proof-of-Stake, which could help Ethereum’s reputation.
Technically, the merge only means that block validators decide to create a new block based on a changed consensus mechanism (Proof of Stake).
This code modification only affects the Ethereum protocol and does not apply to individual applications. Both Layer 2 blockchains and DeFi protocols are not affected in any way by Merge.
In addition to the technical and governance implications this has, it also has a direct impact on the tokenomics of ETH.
At the time of writing, Ethereum is still governed by PoW, which means that there are miners who get rewards for adding blocks to the network and validating transactions. According to ethereum.org, the current ETH issuance is:
– About 13,000 ETH per day for mining rewards
– Approximately 1,600 ETH per day for staking rewards
Once the Merge occurs, only the 1,600 ETH per day for staking rewards will remain. This reduces the total ETH issuance by a whopping 90 percent.
This means that with the switch to Proof-of-Stake, the issuance of Ether Tokens will decrease in the coming months. This should increase the value of Ether Tokens. We might see some deflationary tendencies. An increase in the Ether price seems likely in the next few months with this.
In comparison, halving (Halving) Bitcoin reduces the supply by 50%. Of course, it is also true that BTC halves periodically, but even so, a 90% reduction in supply is a huge change.
Analysts expect a strong impact on the value as soon as the upgrade is released. At least for now, the merge succeeds in creating a sense of optimism for Ethereum and also highlights the upcoming technological differences with Bitcoin. As investments in the token are much more accessible as a result, the merge is expected to have a positive impact on the Ethereum price overall. In addition, ETH’s appeal to institutional investors could increase as it acts like a debt instrument thanks to the benefits of staking.
Ethereum 2.0 Merge: Price Prediction, Maximilian Perkmann on Medium
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In the coming weeks, investors are eagerly awaiting to see if we could see a rise or fall in the Ethereum price as a result of the Ethereum Merge.
Ethereum is the second largest innovation in the blockchain world, right after Bitcoin.
Looking at its economic potential, Ethereum may even succeed in replacing Bitcoin as the top performer. This case, which is purely fictional so far, is called flipping.
Ethereum’s invention can lead to the world taking big steps towards decentralization, resulting in more freedom and less censorship.
“Ethereum’s transition to proof-of-stake has been a loooong time coming,” — Ethereum Foundation
An investment in the Ether token could now be interesting before the Merge takes place. After all, there is a chance that Ethereum could rise in price in the following weeks. Otherwise, the investment could be rewarding, especially in the long term, as the next bull market is expected to come again.
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