The whole crypto community holds its breath waiting for the most grandiose event that is about to happen. Ethereum is on the edge of the most significant event in its history. A large-scale update called The Merge is planned for the Ethereum network, which involves changing the consensus algorithm from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
The goal of the upgrade is to make this blockchain platform more scalable, secure and decentralized.
The actual activation of the Merge will happen with the "Paris" update, around September 15th, when the cumulative Terminal Total Difficulty (TTD) reaches 58750000000000000000000. TTD specifies the final Proof of Work block, after which the Proof of Stake consensus takes over.
With the change of consensus the era of mining will finally be closed. After the transition of Ethereum to PoS, miners in the network will be replaced by validators. They will confirm new transactions with the help of stakes and receive a reward in Ethereum coins (ETH) for this work.
To clearly understand what is happening, let's take a closer look at the basic concepts of the blockchain and figure out what consensus algorithms are and what are the pros and cons of PoW and PoS algorithms.
Each blockchain has its own protocol as a set of rules and actions, aimed at transferring data. Protocol is a critical component of Blockchain technologies that allow interaction of network nodes, transmission of data and block mining confirmation. A node is one of the many devices that runs the blockchain protocol software and usually stores a history of transactions. Nodes are connected to each other in a decentralized network.
The consensus algorithm ensures that the rules of the protocol are followed and that all transactions are authentic. In other words, it is responsible for ensuring that all the nodes of the network agree with the adding of a new block. In this way, the consensus algorithm maintains the integrity and security of the network.
Proof-of-Work and Proof-of-Stake are currently the most used and well-known consensus algorithms. In fact, there are many more consensus algorithms, but for now we will consider only these two.
Proof-of-work (PoW) is used widely in cryptocurrency mining, for validating transactions and mining new tokens. It is a mechanism that allows the decentralized Ethereum network to come to a consensus or agree on things like account balance or the order of transactions. This prevents users from “double spending” their coins and ensures that the Ethereum network is extremely difficult to hack or to fake.
To participate in a transaction, network members need to solve an arbitrary mathematical puzzle to find the hash and publicly prove the work done in order to avoid cheating the system.
A hash function is a function that converts an array of input data of arbitrary length into a bit string of a fixed length, performed by a certain algorithm. The conversion performed by the hash function is called hashing. The result of the conversion is called a hash. The hash calculation process requires a lot of energy, which only increases as more miners join the network.
The first miner who is lucky to find a solution gets the right to add a block to the chain. Moreover, it gives the ability to receive a reward for the work done and this is the main motivation for mining. All nodes are competing with each other, increasing the capacity of computing resources in order to be the very first node to receive a reward.
The main disadvantages of PoW:
- Mining requires an enormous amount of energy. Nodes in the network are competing with each other, constantly performing complex calculations. But as a result, most of the work is done for nothing, since the reward goes to only one node. Bitcoin mining consumes more energy than countries like Switzerland or Greece;
- Low speed and poor scalability. PoW blockchains are sorely lacking in speed. For example, the maximum throughput of the Bitcoin network is only 7-10 transactions per second. Such low rates are not suitable for mass and everyday use;
- Users have to pay fees to miners for the verification of transactions. The more users in the network, the higher the commission. For the small transactions, commissions can even exceed the amount of the transfer itself;
Proof-of-Stake (PoS) reduces the amount of computational work required to validate the blocks and transactions that keep the blockchain secure. Computing power (block validation) is replaced by staking. Staking is the process of blocking cryptocurrency assets in order to earn rewards or interest.
This algorithm gives the right to create the next block in the blockchain to the node that has more balance - the amount of resources, for example, cryptocurrency coins. The node does not receive a reward for the creation of the block. The reward is paid for the transaction.
The main advantages of the PoS algorithm:
- Low power consumption compared to PoW algorithms;
- No special equipment needed;
- High speed and scalability. For example, the transaction amount increases up to 2000 per second;
- Low commissions;
- Participation in the evolution of the project. Validators are taking part in voting on the future development of the project;
But aside from the fact that Proof-of-Stake is younger and less tested compared to Proof-of-Work, the biggest concern about the PoS algorithm is the risk of centralization. The validators, who have the larger amount of coins, will eventually control the majority of the network. Therefore, blockchain developers have been working on new versions of the PoS algorithm in recent years to solve this issue.
So, what will happen when the cumulative difficulty of Ethereum mining finally exceeds the assigned TTD value? After crossing this milestone, there will be no more mining here. Network users (wallets) will stop accepting blocks from miners and will be waiting to get them from PoS validators.
The updated version of the protocol after the transition is called “Paris” and will continue the line of European capitals after: “Berlin” and “London”. On the evening of September 11, almost 84% of wallets were ready for the transition.
To become an Ethereum validator, you need to have at least 32 ETH as a deposit. In order to optimize the calculations, staking participants are divided into committees - groups, the members of which are determined randomly. They include from 128 to 2048 validators.
Time in Proof-of-Stake Ethereum is divided into slots (12 seconds) and epochs (32 slots). A randomly selected validator proposes blocks in each slot. This validator is responsible for creating a new block and sending it to nodes in the network. A committee of validators votes to agree on the validity of the block that was proposed. Committee members are shuffled after each epoch.
By June 2022, the energy consumption of the Ethereum blockchain was 112 TWh per year. As a result of replacing mining with staking, this amount will decrease by 99.95%. This will not affect the operational processes of the protocol and the economics of projects, but it will allow Ethereum to avoid criticism from the “greens”. In addition, Ethereum will become more attractive to investors who take into account environmental issues. The developers claim that after PoS implementation, each node will require no more electricity than a regular PC.
The Ethereum roadmap includes the implementation of a technology called sharding, which is necessary to increase the scalability of the blockchain. Sharding is the division of a common database into fragments and distributed storage of information by nodes. This update will allow the Ethereum network to grow in line with the increasing load.
Sharding will reduce hardware requirements and allow the node to run on laptops and smartphones. The update is planned to be integrated in 2023, but the final date depends on the effectiveness of the Merge - transition to Proof-of-Stake.
There is no doubt that the Merger is one of the most significant events in the history of cryptocurrencies, which may have far-reaching consequences, from unpredictable fluctuations in the price of Ether to global changes in the crypto industry at all.