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What is the Ethereum Merge?

October 4, 2022

The past Ethereum mainnet protocol (which is based on proof-of-work; PoW) has merged with the fully operational Beacon Chain proof-of-stake (PoS) blockchain system and continues as PoS; this transition is known as "The Merge." 

Ethereum's recent upgrade modified how the blockchain records and verifies newly created crypto transactions. Intentionally or not, Ethereum was always supposed to migrate to proof-of-stake. However, the change required a complex technological effort — a potentially disastrous gamble.

Like Bitcoin's blockchain, the original Ethereum network was powered by the proof-of-work concept, in which nodes (individual computers connected in a network) competed to solve increasingly difficult mathematical puzzles. Those that succeed can then mine the subsequent transaction block and issue brand new tokens. 

eth merge diagram

The upgrade shifted Ethereum on to the proof-of-stake mechanism, which uses far less resources and is safer for the environment. This method involves an algorithm that gives greater weight to nodes that have a larger quantity of a network's coinage.

Simply put, the reward for their "stake" in the network is more valuable than the reward for their computing power under the proof-of-work protocol.

Beacon chain node (Eth2) vs PoW chain (Eth1) 

Historical records, the deposit contract core, and validator slashes/exits are all examples of the kind of consensus-related 

Operations that can be found in the current Beacon block, but there are no "transactions" like there are in the Ethereum proof-of-work block. 

Transaction data, smart contract interactions, and other fundamental state roots, parent hash, etc. are all stored in the Ethereum PoW block. The miners in a given block make the final call on which blocks to add to the chain. However, after the Merge, things are different. 

Why did the Ethereum Merge happen? 

Some estimated that the Ethereum network's energy consumption might drop by as much as 99% if the switch is successful. 

However, the proof-of-work model used by the Bitcoin network consumes far more power than the proof-of-stake approach. Ethereum's move to the less energy-intensive proof-of-stake is seen as a significant step, particularly by those concerned about the detrimental impact on the environment caused by cryptocurrency transactions. 

It will also pave the way for future developments in the network, such as improved transaction efficiency. 

ethereum energy consumption graph after the merge

How will Ethereum Merge impact your ether holdings?

In other words, the Ethereum Foundation claims that ether holders should take no action. However, beware of potential cons. The Ethereum Foundation advised users to double-check the legitimacy of any messages they get from a cryptocurrency-related service, such as a wallet, exchange, or application. 

"If you are a user and you just want to send some Eth from one person to another or use a DeFi application, it really doesn't have any kind of material change for you," says Chris McCann, a partner at Race Capital. 

What changed after The Merge? 

Increased time to block finality 

After a block is built, it is sent to the network's validators, who check its validity and place a network-wide vote of confidence. 

Unlike the "longest-chain" approach used in PoW blockchains, this new method of determining which blocks are final is significantly less prone to double-spend attacks and hard splits, although it does require more time. 

Miners are replaced by validators 

When they migrate to PoS, the miners are replaced by validators. One just needs 32 ETH to stake and three pieces of software—an execution client, a consensus client, and a validator—to take part in the network as a validator now, rather than a strong mining setup.

New penalties like "Slashing" add stakes to staking 

Along with proposing blocks and submitting verifications, validators can "slash" other validators who fail to protect network security by monitoring their activities for malicious intent. 

Provable attacks on the Ethereum network, such as double voting (proposing two blocks for the same slot) or submitting conflicting attestations, might result in a severance of network privileges (e.g. signing two different attestations in one epoch). 

"Whistleblowers" or "slashers" are the validators which look for slashable occurrences. A whistleblower will broadcast a slashable event to the network so the next block proposer may add the proof. Block proposers are rewarded for killing rogue validators. Whistleblowers aren't rewarded. Whistleblowing is humanitarian and not lucrative. 

Slashing isn't necessarily violent. Lazy validators can be removed from the network. A validator can be slashed accidentally by not updating slashing protection on failover servers or utilizing duplicate keys. 

A cut validator loses ETH gradually. Network activity determines the real quantity. Slashed validators might be permanently banned from the protocol and network. 

Slashing is different from inactivity penalties, which are lost payments when a validator is unavailable or unable to validate. 

Block reward subsidy is reduced by ~90%

Under PoW, miners were rewarded with newly minted ETH for adding a block to the blockchain. Under PoS, validators who correctly propose new blocks are rewarded. Under PoS, this block reward is lowered by approximately 90% because validators don't experience large mining costs and need less network subsidies. 

Ethereum Foundation says PoS issuance lessens sales pressure. 

Fixed block times may change the way some users transact 

The Merge changed block timings. In the prior PoW paradigm, blocks might be verified at any time. Miners and MEV searchers couldn't estimate when the next block would be verified. 

PoS confirms blocks every 12 seconds. Every millisecond is no longer equal as those closer to block confirmation carry greater value for certain trading tactics, giving competitors less time to respond. This might cause a surge of transactions in the seconds before a block is verified. 

Competition between automated systems has shorter time spans, requiring lower latency infrastructure to detect and respond. More data is needed, but this may affect gas prices. 

Much money is spent exploring how set block times would affect gas prices. Blocknative believes a new phenomenon will disrupt the network and gas sector post-Merge.

With Shakudo, you can use the same code for deploying on Ethereum, non-EVM, or EVM-compatible chains. What’s more, you can get started with Shakudo for free!

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