Every Sunday, an email will arrive in your inbox detailing a specific topic to help you understand it better.
The biggest crypto event of 2022 is coming soon. Sometime next month Ethereum, the world’s second-largest crypto blockchain, will change the way it processes transactions, a move that will (hopefully) make the network more efficient, sustainable and scalable.
The ‘Merge’, as it has been dubbed, will see Ethereum – the blockchain on which the majority of smart contracts and non-fungible tokens (NFT) live – transition from a ‘proof-of-work’ to a ‘proof-of-stake’ protocol.
Before diving deeper into the Merge, it’s important to understand these two crypto consensus mechanisms.
Like Bitcoin, Ethereum uses proof of work (PoW), which requires users to solve complex mathematical problems to validate transactions and keep the network secure.
Although this method is effective, it isn’t very efficient. People who solve these problems, known as miners, must spend massive sums on equipment and electricity to be able to do so, and earn rewards.
Proof-of-stake (PoS), on the other hand, does away with energy-intensive mining altogether. Instead, validators stake their own crypto assets in exchange for the chance to validate new transactions on the blockchain. An initial winner is selected at random to validate a new block, and other validators can attest to its accuracy.
Since this system randomises who gets to validate transactions, rather than using a competition-based mechanism like proof-of-work, it uses much less energy.
How will the Merge happen?
The plan consists of three main phases. The first of these is the launch of the Beacon Chain. This is a PoS blockchain that the Ethereum network will switch to when it transitions out of PoW.
The Beacon Chain went live in December 2020 and runs parallel to the main Ethereum chain, which is called Mainnet.
In the second phase the Mainnet and the Beacon Chain will combine and Ethereum will begin operating as a PoS blockchain.
The final phase of the upgrade to “Ethereum 2.0” is expected some time next year. It will enable a process called ‘sharding’ which would significantly reduce data congestion and transaction fees by splitting the Ethereum blockchain into several smaller chains for different parts of the database.
When that happens, Ethereum will be able to handle thousands of transactions per second – compared to the 7-15 per second it can handle now.
What are the implications?
If Ethereum successfully transitions from PoW to PoS it will prove that it’s possible to have a decentralised and permissionless network that’s also energy-efficient. This would give a huge boost to Web3 projects aiming to build on Ethereum.
Despite the crypto winter, there is currently a lot of interest in Web3. Venture investment into Web3 has been accelerating, with many developers continuing to enter the blockchain space.
“This time is very crucial to look at companies that are solving long-term problems,” an executive said. “Even though the market has come down and FOMO (fear of missing out) has reduced, no longer it is about who is raising what amount; it has become about building for the users and solving actual problems.”
Perhaps the Merge couldn’t have come at a better time.
Thanks for reading🤗
Hit 💜, if you enjoyed the article. You can forward this mail or share it on social media. It will help us reach more curious readers.