After years of delays, the Ethereum merge is finally here. In just a few days, the Ethereum mainnet will transition from proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism. But before that, what is the difference between PoW and PoS
PoW and PoS use algorithms to validate cryptocurrency on a blockchain network. The main difference is how they choose and qualify users to add transactions.
The PoW consensus algorithm uses complex problems for miners to solve using high-powered computers. The problems are solved using trial and error. The first miner to complete the puzzle or cryptographic equation gets the authority to add new blocks to the blockchain for transactions. When the block is authenticated by a miner, the digital currency is then added to the blockchain. The miner also receives compensation with coins.
On the other hand, in PoS, miners pledge an investment in digital currency before validating transactions with proof of stake. To validate blocks, miners need to put up stake with coins of their own. Miners also show how long they have been validating transactions. The choice for who validates each transaction is random and uses a weighted algorithm based on the amount of stake and validation experience.
There has been a lot of speculation about what will happen after Ethereum merges to become PoS, which has resulted in some misconceptions. Here are clarifications on some common misconceptions about The Merge and what the actual impact might be.
1. The Merge will reduce gas-fees
The Merge will not lower gas fees directly. According to a recent clarification by the Ethereum Foundation, the technical upgrades do not specifically consist of codes that will reduce the gas fees for a user. However, it must be noted that the upgrades create the necessary technical environment for gas optimization in the future.
2. The Merge will increase transaction speeds
The Merge will not bring a noticeable difference to the transaction speeds of Ethereum. However, the transition will allow a new block to be created every 12 seconds compared to the previous 13.3 seconds. In all technicality, this can be considered an increase in speed however the increase is so insignificant that it will go unnoticed by the average user.
3. The Merge will allow withdrawals of staked ETH
People waiting to reap their staking rewards from their ETH locked for years will sadly have to wait longer. The Merge does not enable staking withdrawals meaning that your staked ETH will continue to remain locked and illiquid. The good news is that withdrawals are planned to be enabled in the Shanghai upgrade, which will occur 6 to 12 months after The Merge.
What are the positive implications of The Merge for Ethereum?
One of the biggest criticisms of Bitcoin and Ethereum is their negative environmental impact because of the inefficiencies of PoW. In the United States alone, Bitcoin mining creates an estimated 40 billion pounds of carbon emissions. If you combine Bitcoin and Ethereum together, they consume more energy than the entire country of Thailand (population: 90 million). To put this into perspective, reports suggest that currently a single Ethereum transaction has a carbon footprint equivalent to 140,893 Visa credit card transactions or 10,595 hours of watching YouTube.
These statistics are clearly a major incentive for Ethereum to transition towards PoS. Eliminating the need for miners has a tremendous positive impact on energy efficiency. So much so, that according to Ethereum’s website, The Merge will reduce Ethereum's energy consumption by 99.95%.
It’s important to remember that during his speech at the Ethereum Community Conference (EthCC) in Paris on July 19, 2022, Ethereum co-founder Vitalik Buterin said that Ethereum will only be up to 55% complete after The Merge. While moving to PoS is a huge step forward, much of the desired scalability will only be achieved later in the roadmap. By the end of it, Buterin stated that Ethereum could reach up to 100,000 transactions per second. Time will tell when these goals are realized, but we can expect bigger updates that will improve scalability with the next Shanghai update which is supposed to happen in the next 6 to 12 months.
How will The Merge impact you?
The successful transition to PoS for Ethereum can open up many technological opportunities for the future. The creation of a technical environment where possibilities of scaling upgrades such as sharding and staking withdrawals are a big plus for holders of Ethereum, and the wider cryptocurrency industry too. While this upgrade may not necessarily make a huge impact, it sets up the stage for future innovations and encourages developers and companies to stay creative.
Another way The Merge might impact you could be the price of Ethereum. Although the technical upgrade will not impact the price directly, we can expect high volatility in the short term due to extreme speculations. We advise you to exercise caution and take calculated risks with your assets! Also, please be aware that no action is required from your end regarding any of your assets on Ethereum, they will still be accessible after The Merge.
The Merge is a crucial step for Ethereum that is in line with its vision for increased scalability, security, and sustainability. The Merge is only moving forward now because its developers have run through many successful tests and Merge simulations. With that said, there’s still a small chance that the Merge might fail, but such an outcome seems extremely unlikely. We are excited about The Merge and how this will help the blockchain industry advance towards mainstream adoption.