Everything You Need to Know About the Ethereum Merge

Ashley_Buckwell · October 2022

Ethereum’s move from Proof of Work to Proof of Stake

Ethereum is an open source, distributed software platform that is based on blockchain technology. Ethereum has its own native cryptocurrency called ETH and a programming language called Solidity. Blockchain is a distributed ledger technology that keeps a permanent, tamper-proof list of records.

Originally based on the Proof of Work (PoW) consensus mechanism, Ethereum moved to Proof of Stake (PoS) in September 2022, in a complicated transition known as the Merge.

The Ethereum blockchain was first described in a proposal in 2013, and its development was crowdfunded through a cryptocurrency issuance sale known as a premine in 2014. The crowdsale was a huge success—60 million ETH tokens were sold for $18.3 million USD worth of Bitcoin, which amounted to approximately 30 cents per ETH token, a solid discount when considering today’s price.

Ethereum applications and use cases

Ethereum enables developers to build decentralized applications. The platform also supports smart contracts, which are a type of digital contract. According to the Ethereum Foundation, Ethereum can be applied to codifying, decentralizing, securing, and trading almost everything. It can be used to do the following:

Buy and sell cryptocurrencies like ETH and other fungible tokens.
Host smart contracts and decentralized apps (dApps).
Carry out decentralized finance activities.
Exchange nonfungible tokens.
Power Ethereum-based enterprise software independently from the public Ethereum chain.
Play Ethereum-based video games, where users can earn real cryptocurrency from playing the game.

Scalability challenges

Although it is currently the most relevant blockchain, Ethereum’s original infrastructure could not scale its operations in a way that could attend to growing global demand. As blockchains grow more popular, they must ensure that they can match the global need for computation. Failure to do so can result in congestion of the network, which is when blockchain capacity is overwhelmed by the number of pending transactions. Often, this leads to higher transaction fees. To combat the lack of scalability, the Ethereum team proposed a set of changes that would lead to an evolved Ethereum blockchain that uses the PoS consensus mechanism.

Ethereum is one of the earliest players in the cryptocurrency space.

Ethereum 2.0 is a major change to the Ethereum network. The goal is to increase transaction throughput for the network from 15 transactions per second to tens of thousands of transactions per second. This will be achieved by splitting up workloads among many parallel blockchains that share a common consensus PoS blockchain. The transition to ETH 2.0 is happening in three phases:

The Beacon Chain. Launched in December 2020, this created the PoS blockchain that acts as the central hub of Ethereum 2.0.
The Merge. This merged the history of the PoW Ethereum blockchain with the Beacon Chain, marking the full transition from PoW to PoS.
Shard chains. This will spread the network's workload across 64 new networks, with Ethereum 1.0 expected to become one the shards of Ethereum 2.0.

What is the Ethereum Merge?

The Ethereum mainnet successfully merged with the Beacon Chain on September 15, 2022. The ecosystem now uses the PoS consensus mechanism to secure its network.

Instead of mining, blocks are minted (or forged) by nodes called validators. One node is randomly appointed periodically to validate a candidate block. These validators are incentivized to do so with transaction fee tips and staking rewards. Since nodes do not compete to add new blocks, fewer computing resources are used than in PoW. Instead of investing in mining hardware, validators invest in ETH—the more ETH staked, the more likely a validator will be randomly appointed to validate the next block.

Tokens

Ethereum’s transactional history was merged with the Beacon Chain, but the ETH cryptocurrency remained as is. ETH token holders do not need to claim new “PoS ETH” or “ETH2” tokens. Balances remain the same after the Merge, and users can use the network as if nothing has changed.

While Ethereum users did not need to take any action, Ethereum software providers and validators had to update their software to ensure they were communicating with the latest version of the network.

What are the effects of the Ethereum Merge?

Transaction fees. Ethereum transaction fees are not expected to change as a result of the Merge. Future network updates may help to address Ethereum’s high network fees, but these updates are not expected until 2023 at the earliest.
Transaction speeds. On average, PoW Ethereum blocks were issued once every 13 or 14 seconds. Since the merge, PoS blocks are issued in regular 12-second intervals.
ETH token price. The Merge introduced changes to the rate at which ETH is issued and how it is distributed. These changes could be positive or negative depending upon whom you ask. The previous model had a token issuance system that distributed approximately 13,000 ETH tokens per day in mining and staking rewards. Since the Merge, mining rewards are no longer provided, which has reduced new ETH token issuance to approximately 1,600 ETH per day in staking rewards.
GPU prices dropping. Prices for some GPUs have crashed since the Ethereum merge. GPUs that are highly sought after for mining PoW cryptocurrencies like ETH, such as the Nvidia RTX 3080, have become significantly cheaper. However, with slated releases of Nvidia’s GeForce RTX 40-series and AMD’s powerful new Radeon RX 7000-series before the end of 2022, no one is expecting latest generation GPU models to ever become cheap.
Energy consumption. PoS offers no environmental advantage versus PoW; it merely obscures the energy purchases made by the people that own its validating infrastructure. Any part of the security budget that was previously used to purchase energy for machines will instead be used to purchase energy for the people who own the validators. In other words, with PoS, users pay fees to validators, who take the money to buy energy for themselves. With PoW, users pay fees to miners, who buy energy for machines that foster renewable energy innovation and reduce waste methane emissions.

Ethereum has already cemented itself as the most popular blockchain network for smart contract applications, and the innovations being developed on its network are likely to accelerate as its user base grows. For many, the Merge is just the beginning of turning Ethereum into something great.

*The opinions reflected in this article are the sole opinions of the author and do not reflect any official positions or claims by Acer Inc.

About Ashley Buckwell: Ashley is a technology writer who is interested in computers and software development. He is also a fintech researcher and is fascinated with emerging trends in DeFi, blockchain, and bitcoin. He has been writing, editing, and creating content for the ESL industry in Asia for eight years, with a special focus on interactive, digital learning.