The Ethereum Merge, an event that radically changed the core functionality of one of the biggest blockchain platforms, has significantly reduced energy consumption and enhanced the chain’s scalability. As a sustainable, climate-friendly ecosystem, Ethereum 2.0 is expected to witness a huge user base in the long run.
This article will be looking at what actually is Ethereum merge, and why it is so important. We will also check the potential changes in ETH’s price for the long term after this upgrade. Let’s begin.
What is Ethereum Merge?
Ethereum Merge refers to the migration of the Ethereum blockchain from the proof-of-work (PoW) consensus mechanism to the proof-of-stake (PoS) mechanism. It was completed on September 15, 2022. Ethereum’s energy consumption has drastically decreased by 99% as a result of this change, making it far more environmentally friendly.
How Does proof-of-work (PoW) Work?
Initially, Ethereum had a validation system similar to Bitcoin where the transaction data, network security, and consensus are validated by the participants called miners without the need for a central authority. Named proof-of-work (PoW), the technique was first proposed by Cynthia Dwork and Moni Naor to block spammers, 16 years before Satoshi Nakamoto created the Bitcoin.
PoW works by creating proof that a transaction is valid by complex calculations. The calculations happen in a block where a hashing algorithm sends specific data to the block. The block adjusts the variable fields to reach a value lower than the algorithm’s difficulty target. When the value is reached, the block is solved, and it serves as proof of the transaction.
The blocks are created by the miners who compete to solve the hash, and the winning miner will be rewarded. At the time of Ethereum’s release in 2015, the miners were rewarded with 5 ether (ETH). In 2017, it was reduced to 3 ETH and in 2018 to 2 ETH. Implementation of PoS replaced the miners with validators.
How Does proof-of-work (PoW) Affect Energy Consumption?
Apart from the security it offers, the PoW consensus consumes high computational energy, and most of it is wasted because of its competitive nature. Among the large number of miners with high computational powers that compete to solve the block, only one miner will be selected.
How Does proof-of-stake (PoS) Work?
PoS was introduced as an alternative to the energy-intensive PoW mechanism. It omits miners, and the validators are chosen to create new blocks based on the ETH they hold to stake as collateral. Holders lock up their ETH to be picked up randomly as validators, and they receive rewards for legitimate transaction blocks. If they approve fraudulent transactions, they will lose their stake.
The larger the staked amount, the higher the chances of being selected as a validator. This system is implemented by merging a consensus layer from the Beacon chain and an execution layer from the Ethereum mainnet. While the execution layer manages smart contracts and transactions, the consensus layer deals with blocks, confirmations, and rewards.
How Does Proof-of-Stake (PoS) Reduce Energy?
Since there are no miners to compete, PoS doesn’t need high computational powers and it can execute more transactions in less time. Before the merge, a single transaction in the Ethereum blockchain used around 200 kWh of electricity. A 99% reduction means an incredible achievement.
How Does the Merge Affect Ether’s Price?
Ethereum is now in a better position to meet ESG (Environmental, Social, and Governance) standards thanks to the significant drop in energy use. This could draw in more institutional investors to the coin. Another advantage of Ethereum’s PoS mechanism is that it reduces ETH’s supply by burning a portion of the transactional fees, increasing its demand in the long run.
Other Major Blockchains that Work on PoS
Various blockchains implemented proof-of-stake before and after Ethereum’s merge. Here is a small list:
- Cardano: Cardano uses a PoS protocol called Ouroboros, postulated by Aggelos Kiayias at the Annual International Cryptology Conference in 2017
- Solana: With its hybrid PoS and proof-of-history (PoH) mechanism, Solana provides high-speed transactions.
- Cosmos: As an open-source framework used by developers to build PoS blockchains, Cosmos is a major protocol in the PoS realm.
- Polkadot: As a blockchain with smart contract functionality similar to Ethereum and Cardano, Polkadot uses the Ouroboros to implement the PoS mechanism.
- Tezos: Tezos is so popular mainly because of its energy-efficient foundation to secure coins and other digital assets, implemented with the PoS consensus.
Conclusion
After two years of the merger, Ethereum is now a prominent eco-friendly blockchain used by millions of web3 enthusiasts. It has witnessed an adoption from the institutions in the countries that set climate-friendly goals for the future.
In the future, we can expect more upgrades such as increasing transactions per second and decreasing the gas fee, and also an increase in ETH’s market cap. Finally, follow our website regularly for ETH’s price predictions and other blockchain-related articles.
