SUMMARY
With Ethereum Merge, Ethereum is switching from proof-of-work consensus to proof-of-stake consensus mechanism, reducing energy consumption by 99.95%
Ethereum miners announced ETHW hard-fork ahead of the 'Merge'
Polygon plans to pause the Polygon Wallet Suite UI during the merge
Ethereum’s transition from proof-of-work (PoW) to proof-of-stake (PoS) will propel us toward a more open, environmentally friendly, and decentralized Web3: Sandeep Nailwal, cofounder, Polygon
The D-Day has finally arrived. With $200 Bn at stake, Ethereum has successfully merged with the Beacon chain and its consensus layer, which so far was based on PoW, has changed to PoS.
The Ethereum Merge signifies the following things:
- Complete transition from PoW to PoS consensus
- Reduction in Ethereum’s energy consumption by 99.95%; will help Ethereum-based entities’ ESG ratings
- Ethereum capable of future upgrades, including sharding
- Upgraded with zero downtime
- DApps will not need to do anything special to prepare
In contrast to what many believe, the Ethereum Merge will not reduce the gas (transaction) fee. However, with further upgrades, there’s immense scope for scalability and gas fees reduction, believe analysts.
Prasanna Lohar, CEO of Block Stack and cofounder of India Blockchain Forum, said, “In theory, the Merge will make Ethereum more efficient and quicker, with shorter processing times during peak network usage by removing energy-intensive process known as mining. The Merge results into The Beacon Chain that doesn’t change anything about the Ethereum we use today. It is an essential precursor to upcoming scaling upgrades, such as sharding. It involves splitting the Ethereum into smaller and more manageable segments.”
What Is Ethereum Merge?
Bitcoin and Ethereum are among the grand old blockchain protocols. What Bitcoin is believed to have done for cryptocurrencies at large, Ethereum is said to have done for DeFi. Many including Sandeep Nailwal, cofounder of Polygon, count Ethereum as more promising than Bitcoin. However, both blockchain protocols have deployed PoW as their consensus mechanism.
PoW and PoS are the two most popular consensus mechanisms which verify every transaction in the blockchain before they get printed into the block.
While PoW is believed to be more robust, it’s a power-thirsty mechanism which burns a lot of electricity in the process. For example, Bitcoin consumes about 127 Terawatt-hours of electricity, which is more than the entire annual electricity consumption of Norway.
In contrast to PoW mechanisms which require miners to solve cryptographic puzzles, PoS mechanisms require validators to simply hold and stake tokens. It also uses 99.9% less electricity than PoW.
According to a recent report released by the White House, as of August 2022, Bitcoin was estimated to account for 60% to 77% of total global crypto-asset electricity usage, while Ethereum was estimated to account for 20% to 39%.
US President Joe Biden on March 9, 2022 directed the White House Office of Science and Technology Policy (OSTP) and its partners from the Executive Office of the President and across federal agencies to examine the connections between distributed ledger technologies (DLT) and energy transitions, the potential for these technologies to impede or advance efforts to tackle climate change at home and abroad, and the impact these technologies have on the environment.
Ethereum developers realised this much in advance that to keep up with the ongoing DeFi advancements, Ethereum has to be energy efficient and ESG compliant. However, Ethereum is too large to make such upgrades and a possible downturn during the upgrade will be a costly affair for all the decentralised applications (DApps) that are directly or indirectly running on Ethereum. Any glitch may impact Ethereum stored in people’s wallets too.
To avoid these, Ethereum developers came up with ETh 2 Blockchain called Beacon Chain, which is based on PoS in December 2020. Beacon Chain has thrived since then with over 400K validators.
Ethereum Mainnet is now set to merge with the Beacon chain without any downtime. The merge is not expected to cause any inconvenience to the traders and DApp developers.
“One significant outcome that is expected post-merger is a fundamental change in the functioning of the chain, opening doors to many more use cases. Ethereum would now compete directly with all the other PoS-based blockchain networks,” said Minal Thukral, executive vice-president, growth and strategy, CoinDCX.
The ETHW Hard Fork
With Ethereum’s plan to move PoS, miners who may have invested huge amounts of money on PoW hardware may have to look for other jobs. Shivam Thakral, CEO, BuyUcoin said, “The proof of work miners from the Ethereum blockchain will shift to other networks which will increase the mining activity on those networks.”
Meanwhile, a group of Ethereum miners have announced hard fork plans ahead of the Merge. A hard fork refers to the change in a blockchain network that effectively results in two branches, one that follows the previous protocol and one that follows the new version.
A group of Ethereum miners earlier tweeted, “ETHW mainnet will happen within 24 hours after the Merge. The exact time will be announced 1 hour before launch with a countdown timer and everything including final code, binaries, config files, nodes info, RPC, explorer, etc. will be made public when the time’s up.”
The mainnet will start at the block height of the Merge block “plus” 2048 EMPTY blocks as padding to make sure that the chainID switches to 10001 successfully and the chain is the longest chain of ETHW. Therefore, the Merge block + 2049 will be the 1st block on ETHW that may contain any transactions. Block rewards for the empty blocks will be directed to the 1559 multi-sig wallet, it added.
Minimal Impact On DApps
Chaturvedi said that the impact on DApps will be minimal as speed and fees aren’t getting much affected. There again the risk is with the PoW hard fork where most DApps have said they won’t support the hard forked chain and only support ETH PoS chain. So there could be heightened volatility in DApp specific tokens if a fork happens.
Seconding this, EPNS’ cofounder Harsh Rajat said, “The only noteworthy change is going to be the fact that we have moved away from the Kovan and Ropsten testnet and moved to the Goerli network since the other Ethereum testnets are deprecated. Apart from this, the merge doesn’t require any changes in the way smart contracts behave on-chain.”
Polygon To Pause Polygon Wallet Suite UI During Merge
Polygon has been primarily developed as a layer 2 blockchain ecosystem around Ethereum. Nailwal called the relationship between Polygon and Ethereum symbiotic.
A greener Ethereum opens the door to higher adoption which will in turn increase the need for layer 2 scaling solutions that will bring real adoption to Web3, he said.
“The merge will erase 60,000 tonnes (99.91%) of Polygon’s carbon footprint at a time when cutting back on CO2 matters more than ever before. Reducing energy consumption aligns with our recent, inaugural Green Blockchain Summit, where we discussed collective solutions to environmental problems as an industry,” said Nailwal in an email.
Polygon has planned to pause the Polygon Wallet Suite UI during the merge. Nailwal said, “DApps running on Polygon will not need to do anything special to prepare…We suggest you make a plan on what, if any, action you’ll take on your project during the merge.”
How The Ethereum Merge Impacts Polygon And Other L2 Layers
Commenting on how the Merge would impact Polygon and other sidechains, Lohar said, “This Merge will not result in lower gas fees so there is no impact on current DApps or 2nd layer solutions, rather it will help to enhance scalability of Ethereum and Ethereum-based other platforms.”
Seconding this, Parth Chaturvedi, crypto ecosystem lead at CoinSwitch, said that there’s a misconception that the Merge will reduce gas fees or increase transaction speed. The Merge will change how blocks are created. It doesn’t address how individual transaction costs can be reduced. The gas fees will stay around the same level as under the PoW mining system.
So, the layer 2s like Polygon remain very much relevant. In fact, most L2s already use PoS as their consensus mechanism, he added.
In the long-run, further upgrades are expected to bring down gas fees and increase scalability.
Since the scalability solution is technology-based, it may end up boosting the performance of layer 2 scaling solutions keeping them better than Ethereum PoS, L1 platform 5ire’s cofounder Pratik Gauri said.
“In terms of other layer 1s competing with Ethereum, there seems to be a sea change happening because staking is becoming a lot more attractive investment proposition, both because users are fast adapting to and becoming more comfortable with staking. Ethereum, being more eco-friendly, is more suitable for investors with sustainability commitments, especially institutional investors,” he said.
However, automated market makers (AMMs), such as Uniswap and QuickSwap, will need to rework their algorithms to ensure they keep running smoothly, Gauri added. The Merge will affect how liquidity pools are managed by AMM software and how various stablecoins are propped up with collateral.
On a concluding note, BuyUCoin’s Thakral said that the shift will have an impact on other crypto assets and significant price movements can be expected across crypto assets post the Merge. The Ethereum Merge marks the beginning of energy-efficient crypto operations which will help in driving mass adoption of crypto-related products and services. Similar initiatives can be expected in the future to provide a level-playing field to the crypto industry around the globe.
