You are currently viewing The Merge: Ethereum’s Vision to more Scalability, Security, and Sustainability |  by Stephen Alagbe |  Coinmonks |  Sep 2022

The Merge: Ethereum’s Vision to more Scalability, Security, and Sustainability | by Stephen Alagbe | Coinmonks | Sep 2022

Ethereum is the second-largest cryptocurrency after Bitcoin and holds 18% of all transactions. It was more of filling the gap of Bitcoin’s deficiency and improving on it. With a market capitalization of nearly $213 billion, we can also assume that Ethereum is a better version of Bitcoin. This does not make Bitcoin less valuable since it has no direct competition as a store of value asset compared to Ethereum. However, Ethereum on the other hand, Ethereum has created a different and new business model, product, and services that have opened what once looked like transactions for a privileged few to what can be enjoyed by the vast majority with crypto adoption.

Ethereum is a one layer one blockchain that facilitates dAPPS and smart contracts. $ETH is the token powering the network, and it is used to pay gas fees and facilitate transactions. Unfortunately, Ethereum has a major problem — it operates on a proof of work (POW) consensus, limiting its ability to scale effectively. POW also means miners must validate transactions leading to the tremendous processing power to support mining activities.

Proof of Work is a consensus mechanism used to validate new blocks in a blockchain network. It is designed to keep digital transactions secured without trusting a third party. In a POW consensus mechanism, miners compete to solve a complex mathematical puzzle to generate a new block and get a reward for their work.

Unfortunately, POW can only enable a TPS (transaction per second) of 13. With Ethereum’s transactions now exceeding 1m+ a day due to demand, the increase in network usage has led to slow transaction speeds and high gas fees.

The increase in the transaction means the Ethereum network can’t handle the demand, and the market grew impatient, leading to alternate L1s or “ETH killers.”

L1s are smart contract platforms, giving Ethereum a run for its money and aiming to become legitimate competitors to the second-largest player in terms of smart contract platforms. They are Layer-1 blockchains that can mitigate the flaws of the first mover and improve functionality and scalability that Ethereum lack.

With faster and cheaper chains, these layer-1 blockchains are experiencing a rapid user inflow, while on the contrary, Ethereum’s market share by TVL on DeFi Llama has declined from 100% to 55% in the space of 2 years.

Now that several L1 players are finally living up to expectations, the Ethereum team had no choice but to find a solution. Finally, they arrived at a reasonable conclusion — Ethereum must transition from POW to increase scalability and speed and reduce transaction costs.

Enter “The Merge.”

With the Merge launch, the price of Ethereum is most likely to go up as new users, use cases, and more projects are built on it.

Initially, ETH 2.0 was the term everyone was familiar with. Still, Ethereum decided to scrap the terminology as it was confusing (ETH 2.0 sounds more like a software upgrade) and couldn’t capture the team’s vision. The Merge is Ethereum’s official transition from proof-of-work (PoW) to proof-of-stake (PoS).

The phases started at the end of 2020 and will continue until 2022. Also, we can split the major upgrade into three categories:

  • Beacon chain (completed)
  • The MergeMerge (June 2022)
  • Sharding (2023+) Shards make Ethereum faster and less computation-intensive. Shards break up the Ethereum database for efficiency and speed improvements.

The first upgrade launched the beacon chain in the network. Phase 2 will merge the Beacon Chain and the existing Ethereum chain.

Presently, Ethereum issuance is declining from 15k/day to 1.5k/day. This represents a 90% cut in emissions. This decline in emissions is very positive, as currently, Ethereum’s issuance is causing a +3.2% yearly inflation. The change to POS will mean it uses -99.95% less energy.

After the Merge, the Ethereum supply will decrease by -0.9% (based on 7d supply data). It will finally be deflationary.

Secondly, rewards for POS validators are substantially increasing. Staking rewards are projected to be ~10% post-merge.

One of the biggest drivers of future crypto growth is institutional adoption. With environmental concerns becoming a key stakeholder consideration in the modern era, blockchains with environmentally sustainable models have an advantage over other chains.

• Decentralization/Security: The MergeMerge requires a minimum amount of nodes & makes it easier to run a node

• Sustainability: PoS uses roughly 99% less energy than PoW

• Scalability: Opens the door for sharding, which may someday allow for 100k TP.

You will have to stake your ETH! To run a node, you need to stake 32 ETH, and you have to lock up ETH until the Merge. After the transition, rewards will not go to miners but to stakers instead.

However, not everyone can afford the 32 ETH required to stake. Presently, there are some providers charging a fee to solve those problems.

These protocols are pretty simple:

• You deposit ETH — as little as 0.01 ETH

• The protocol stakes the ETH to a validator for you

• You receive a liquid (sellable) wrapper representing a right to that staked ETH

• The staked ETH accrues interest

• You can use the liquid wrapper on DeFi

RocketPool, Lido, StaFi, etc., allow you to stake with Ethereum, although they vary slightly in mechanics/decentralization/composability.

They let you earn interest with a liquid ETH token wrapper. You can also invest in the governance tokens of the protocols themselves.

The future of Ethereum is very intriguing. It is no doubt that the Merge will cement Ethereum’s place as the smart contract king. This potential to onboard the next hundred million users will move us towards mass adoption while not compromising on the most critical aspect of blockchain — decentralization.

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