The Ethereum Merge is coming

For years, crypto enthusiasts have been talking about something called the Ethereum Merge, sometimes known as Ethereum 2.0. It’s an event that’s been talked about for a while, almost as long as Ethereum existed. But what is it, and how will it affect your crypto portfolio?

Most people know Ethereum as a cryptocurrency, ignoring that Ethereum is, in fact, a decentralised global software platform powered by blockchain technology. The native cryptocurrency of the platform is called Ether. This technology allows users to build other applications on the Ethereum blockchain. It's like an operating system for a computer, but it's decentralised, and instead of being run by Microsoft or Apple, it's run by many computers that verify and process transactions. 

The Ethereum Merge is a major change in how the system operates. One of the biggest changes is that the network will shift from a proof-of-work system to proof-of-stake. Before we explain all that, let’s look into why this change is happening.

Why is Ethereum upgrading?

Photo by cottonbro

When Ethereum was first launched, it had three main issues: scalability, security and eco-friendliness. The update is supposed to address all three. 

The first improvement will happen on Ethereum scalability. Currently, Ethereum can handle 15 transactions per second. Whenever the network gets busy, the cost of transactions increases because all these transactions compete with each other. For each transaction, we have to pay higher and higher prices, up to $50 for one single transaction and sometimes even more. This means that, if you want to send $10 in Ethereum, you'll have to pay $60. With the new Ethereum 2.0, the network will start a process that, once finalized, will enable it to perform up to 100,000 transactions per second and potentially even more. 

Next up is security. The new update will also make Ethereum much more resistant to hackers, and it will be much more difficult to attack it. 

And last but not least, the network will become much more eco-friendly. Networks like Ethereum and Bitcoin, or cryptocurrencies in general, are open networks, and anybody can download the software, log their computer on and act as an operator on the network. Currently, Bitcoin and Ethereum use a consensus mechanism called proof-of-work, which requires lots of computer power and, because of that, is environmentally hazardous as it uses lots of energy. Ethereum is migrating to a proof-of-stake system, which is supposed to lower Ethereum energy costs by 99%. But how does it work exactly?

How is Ethereum upgrading?

Photo by Olya Kobruseva

We already told you that Ethereum uses a consensus mechanism called proof-of-work. A consensus mechanism is a way for a group of people to agree on something. In the case of Ethereum, they agree on all the transactions happening on the blockchain. Imagine a car race; all the cars line up for the race, and when the race starts, every car speeds up to the finish line as fast as possible. The fastest car is the winner, and when this happens, we reward it. 

However, if you scale this, every car that ran the race technically wasted energy, especially if it participated in various races and kept losing. That's a very basic explanation of proof-of-work, but instead of cars, you have to imagine various members of the network trying to solve an arbitrary mathematical puzzle to prevent anybody from gaming the system. The first member who solves the puzzle, validates the transaction and receives its reward. 

But let's go quickly back to our race cars and see how this update will change the energetic impact of validating transactions. With proof-of-stake, there will be three big changes to keep it energy efficient. First, to become a validator, a car will have to put up collateral, aka its stake. You can see it as a security deposit, which they will lose if they approve fraudulent transactions. 

Number two, instead of letting a bunch of cars run, there will be only one of them participating in the race, which will be directly responsible for validating the transaction. Lastly, we'll shorten the race so it'll be easier to win. This way, no one will waste energy or electricity while running the race, which corresponds to validating transactions. 

The second big thing that will help upgrade the Ethereum platform is the Beacon Chain. 

The Beacon Chain is a proof-of-stake mega blockchain that went live on 01/12/2020. It doesn't handle transactions or smart contracts, but you can think of it as the heart of Ethereum 2.0. Right now, it exists separately from the Ethereum blockchain, running alongside the first version of the blockchain until we'll switch to it. The Beacon Chain is also responsible for selecting our cars - the validators - who get to validate the proof-of-stake blocks. Without getting too technical, the Beacon Chain aims to coordinate the entire Ethereum network. 

What is sharding?

Imagine you want to go to work, and there is only one highway, a very crowded one, and your usual 10 minutes drive is now taking 3 hours. This is the current situation with Ethereum: there is only one lane. 

But imagine how much faster your daily commute would be if somebody made another 63 lanes on the same route, allowing many more cars to travel at once. That’s what sharding is. A total of 64 lanes will work together so that the vehicles will travel much faster, allowing the split of the infrastructure of the Ethereum network into smaller pieces. Each small piece can also operate independently from each other with the goal of scalability. These shards will allow the storage and accessibility of data. Still, they won’t be used for executing code like the current blockchain. In very few words, sharding is the ability to split the load of the entire network among a bunch of smaller chains. The existing blockchain will become one of the 64 shards to keep all the old data from the old blockchain together with the new 63 blockchains. This process is also called docking and marks the last time we’ll actually use proof-of-work in the Ethereum network. 

What does it mean for me?

Photo by Miguel Á. Padriñán

Ethereum was always supposed to be upgraded in phases. These changes were slowly happening while you were busy with your investments, but now we're close to the final step, despite multiple delays. In the latest announcement from the Ethereum Foundation, the update, which will take part in two phases, "Bellatrix" and "Paris," will happen on September 6 and then between September 10 and 20, respectively.  

But what does that mean for you? During this delicate phase, keep an eye on scammers. Don't send your ETH to anyone who wants you to "upgrade to ETH2", as those tokens don't exist. 

And if you own some Ether or have invested in it, no need to worry. You don’t actually have to do anything! We support the upgrade to the proof-of-stake consensus mechanism, and your assets will be safe during the Merge. You can sit back, relax, and watch it happening. 

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