If you’ve done any research or invested in crypto, you’ve probably heard of Ethereum or Ether (ETH), the largest altcoin and second-largest cryptocurrency by market cap. Also, for applications such as smart contracts and NFTs, Ethereum plays an important role.
Ethereum has been steadily gaining traction with investors over the years. For the end of this summer, the so-called “Merge” is planned. The Ethereum blockchain will be switched from its current proof of work consensus to proof of stake. Among other things, this will result in huge energy savings and a smaller carbon footprint.
What is the Ethereum Merge and why is it being done? Read this article to find out what it is all about and what it means for you as an investor.
What is the Ethereum Merge?
Ethereum is notable as the first cryptocurrency to introduce smart contracts. Smart contracts allow the blockchain to be programmable and run under certain conditions. These contracts are self-executing and allow the terms between two parties, for example between a buyer and a seller, to be written directly into lines of code. Today, most smart contracts and many other crypto applications run on the Ethereum blockchain. This has made the network very popular, but it has also led to congestion, high fees and high energy consumption.
The Ethereum developers had planned for scaling from the beginning. For this purpose, sharding will be introduced. It will reduce network congestion and increase transactions per second by creating new, parallel chains known as “shards”. The upcoming Merge will set the stage for future scaling. Because essentially, the Merge means switching from proof of work to proof of stake. And the current consensus method of proof of work is not suitable for sharding.
The Proof of Work model, as applied to Bitcoin, creates competition between miners by allowing them to solve complex cryptographic puzzles to validate transactions and thus earn a fixed amount of Bitcoin. The proof of work model is relatively simple, and as the value of crypto grows, more miners are incentivized to join the network, increasing its security and power. However, proof of work is very energy-intensive and can also lead to scalability issues.
The proof-of-stake model, on the other hand, is based on a network of validators who stake their cryptocurrency, in this case, their ETH. In return, they have the opportunity to update the blockchain, validate new transactions and receive rewards.
Right now, Ethereum's proof of work (ETH1) and proof of stake (ETH2) blockchains are running in parallel. Through the Merge, the Ethereum Mainnet blockchain (ETH1) will combine with the new blockchain (ETH2) to form one unified blockchain.
Why are upgrades necessary on Ethereum?
There is no doubt that the current Ethereum network is the leading platform for decentralised apps (dApps) and performs all tasks reliably. However, improvements are constantly being made to realise the full potential of Ethereum and optimise aspects such as transaction times, costs and sustainability. For this, the Merge is an important step, because it sets the stage for the subsequent upgrades that have already been announced: “Surge”, “Verge”, “Purge” and “Splurge”.
One of the main problems to be solved by the upcoming upgrades is the slow transaction speed. Currently, the Ethereum network can only handle about 13 to 15 transactions per second. While this may initially seem like a lot, with thousands of people potentially trying to make a transaction at any time, transaction speed can slow down rapidly.
The new Ethereum will be able to process transactions faster because the sharding distributes the data across multiple chains. This means that several transactions can take place at the same time, which leads to a significant improvement in performance.
The announced upgrades are also intended to address the problem of high transaction fees on the Ethereum network, also known as gas fees. At peak times, these range from $1.50 to hundreds of dollars per transaction.
Unfortunately, the fees will not yet be significantly reduced by the Merge, but there is hope. While gas fees will remain the same for a while, the Merge is an important part of the big upgrade taking place on Ethereum.
The goal is to lower gas fees, and merging the blockchains brings us one step closer. With the “Shard Chains Upgrade” planned for next year, Ethereum's scalability and capacity will improve and gas fees will become lower.
Perhaps the most important reason for the Merge is that the current Ethereum network is incredibly energy intensive. Researchers estimate that the existing network uses nearly the same amount of energy as the entire country of Finland and has a carbon footprint comparable to that of Switzerland. Fortunately, the Merge will help solve some of these environmental concerns, as it’s expected that the proof of stake model will reduce Ethereum’s energy consumption by at least 99.95%.
The proof of work model is so energy-intensive because it relies on computers for mining. However, as discussed earlier, proof of stake mainly relies on network participants, so large amounts of computer energy won’t be required to run the blockchain.
What will the Merge mean for investors?
The Ethereum Merge isn’t just beneficial for the network, but also for investors. Many analysts believe that the Merge could push Ethereum prices to new heights. Indeed, the announcement on July 15 of a tentative September 19, 2022 date for the Merge sent ETH price more than 40% higher over the subsequent three days.
Ethereum already makes up a large part of many long-term investors’ portfolios. The Merge is an important step in the roadmap to make Ethereum more scalable. It is hoped that the network will be able to handle thousands of transactions per second in the future. This means that adoption by the wider population will increase, which in turn will lead to greater investor engagement.
Additionally, the Merge will also help make the network more secure for investors. This is because the more blocks verified on the Ethereum blockchain, the more secure the network becomes. As Ethereum adoption grows, the protocol will become more secure against all forms of attack.
Ethereum mining vs Ethereum staking
Once the Merge is complete, staking will replace mining on the Ethereum blockchain. This is the most important innovation of this upgrade.
Mining operates on a proof of work model. It requires miners with specialized computers to solve complex mathematical problems to confirm new transactions and earn rewards in the form of new crypto. Mining requires powerful graphics processing units (GPUs) to perform complex calculations to solve puzzles. GPUs use huge amounts of energy to perform these calculations, which is one of the main reasons there is great concern over crypto’s environmental impact.
Carbon and climate change are at the front of everyone's minds. The switch to proof of stake will likely win Ethereum some admirers among climate-conscious critics and investors. Ethereum is showing itself to be a future-facing blockchain by shifting to proof of stake, which will significantly reduce its energy consumption.
Staking differs from mining as it requires investors to lock up a certain amount of crypto to participate in the transaction verification process. In a proof-of-stake model, an algorithm selects which validator gets to add the next block to an Ethereum blockchain. The selection is based on how much cryptocurrency the validator stakes. To become a validator, you need to stake at least 32 ETH. Currently, there are over 300,000 Ethereum validators, but this number is expected to grow through the merge. The more you stake as a validator, the more likely you are to produce blocks. Every time a validator produces a block, they earn rewards in the form of Ethereum for completing these duties.
The highly-anticipated Ethereum merge is just around the corner. With this upgrade, the crypto world can become greener and we should see wider adoption.
But the merge is only part of Ethereum's roadmap. After the switch to proof of stake, more technical upgrades will follow that will, among other things, significantly improve the network's scalability.
Now that the launch of the new developments is near, it might be a good time to get in before mass adoption hits the market. ETH and many other digital assets can be bought and traded quickly and easily here at SMART VALOR. We will also be making our new Staking offering available on the platform soon.
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