On Wednesday September 15th at around 1 AM eastern time, the Ethereum blockchain will experience "The Merge." It will switch from proof of work to proof of stake.
One of the advantages of a blockchain is that it's very difficult to manipulate and alter the ledger. Unlike a typical database you can't just get write privileges somehow, and go to town. When people ask "how is a blockchain difference from a database?" that's one of the answers.
Part of the way a blockchain achieves this is buy dividing up the maintenance of the records among a lot of participants, making it difficult to become the participant that writes the latest record to the chain, and requiring a lot of approval of those changes.
Proof of work is the way Bitcoin, and up until now, Ethereum, managed to qualify people- aka nodes-- to write the records -- aka blocks. Proof of Work requires participants who run nodes on the blockchain to solve intense computer programs in order to qualify to write to the chain. In Bitcoin you get rewarded with a coin for doing this. Hence the term "miners." And hence the need for lots of energy-using computers to crunch away doing nothing else but solving these computations.
There's a lot of concern about the energy use of proof of work, especially as these cryptocurrencies are used more widely. So the people who use Ethereum decided to switch the entire blockchain to proof of stake. What, pray tell, is proof of stake?
We'll do a whole episode of Know A Little More on Proof of Stake later this year, but here's the short version. It can work in different ways but none of them require the use of a lot of energy to crunch computer problems. Ethereum is doing it by requiring a stake of 32 ETH tokens to become a validator. You cannot spend that stake while you're a validator and you can lose some or all of it if you do not carry out your duties or if you try to manipulate results. Instead of the first node to solve a problem getting to write a block- like you do with proof of work, in Ethereum's proof of stake system, committees of 128 nodes are chosen at random to validate a block of transactions. To encourage folks to operate nodes, everybody who participates gets a fee paid in ETH. When 2/3 of the 128 validators on a committee validate a block it is added to the chain. Ethereum estimates there are around 420,000 validator nodes ready to go after the merge.
All right let's talk about what the Merge actually is. For almost two years, validators have been running a test version of the Ethereum blockchain on a proof of stake system called the Beacon Chain. That one will be merged into the official Ethereum Blockhain. There's no set time for the merge, but nodes are upgrading to the new system. As more of them switch to proof of stake, the mining difficulty of the old proof of work system rises, something represented by a value called Terminal Total Difficulty or TTD. Once TTD passes a certain very large number, the proof of work chain should stop and within 12-15 minutes the proof stake system will take over. That's expected at around 1 AM eastern time September 15th, which may or may not have happened, depending on when you're listening to this. If it hasn't, you can get up to date predictions on when it will happen, at bordel.wtf or just search Ethereum merge on Google Once the merge is done, it's estimated that energy use on Ethereum will fall by around 99.95%. Proof of work miners can keep trudging on but their blocks will be rejected by upgraded clients. So what will go down?
Once proof of work stops, new blocks will be proposed on the proof of stake system every 12 seconds in slots. Slots are grouped into epochs which happen every 6.4 minutes. A block is considered finalized after 2 epochs are confirmed by 2/3 or more of the validators. When the second epoch after the merge is finalized without incident, that means the first post-merge transactions are now finalized and things are going smoothly. Of course in reality, it might also take longer to finalize. People may have bugs. Participation rates may waver. None of that is necessarily fatal. Most test network merges have seen 10-20% drops in blocks, errors that then need to be remedied, and can be. They generally get back to normal within an hour. So the thing to watch for will be whether you're seeing "block block block" or "empty slot, empty slot, empty slot." You'll also want to see high participation, meaning everybody's systems are working and connecting to the network properly. A participation rate above 67% means things are good. The Beacon Chain has seen participation rates consistently at 99.5%.
Side note. This was a pretty democratic decision years in the making, and most ethereal nodes are on board. However, some folks look at all that expensive mining equipment they bought and wonder if there's something that can be done with it. So a small group plans to fork Ethereum and keep going on proof of work. They're calling that forked token ETHW. They plan to give a 24 hour pad after the Merge until they start their new mainnet. So it's not antagonistic, more opportunistic. We'll see if that gets any traction.
OK back to the Merge. Let's assume there's a bit of messiness, but things get finalized, bugs get worked out and by the morning of the 15th when most of you are listening to this, everything is running relatively smoothly. I will pause for your laughter if it's not. But let's say it eventually does run smoothly. What will be the effects? Here are some of the things folks are expecting
- Instead of investing in equipment and provisioning power, you just need money to get into Ethereum mining. So it will attract a lot more traditional financial people.
- Transactions will go faster. You don't need mining computers cranking away, which speeds things up, and there's also a procedure-- called shard-ing-- that lets 64 validator committees work at the same time, meaning Ethereum should process transactions at least 64 times faster than it did under proof of work.
- Staking will get nodes a 4% return at start and could go up. Expect businesses that offer to hold your ETH in a stake wallet for you and pay you interest for the privilege.
- Unlike bitcoin, Ethereum is not just a coin or store of value. The Ethereum blockchain is built to be good at smart contracts, so lots of crypto businesses use it for things like governance. You may have heard of Decentralized Autonomous Organizations or DAOs. A lot of these operate on Ethereum. The ability to earn returns on staked ETH expands what kind of businesses they can try. Some think ETH could even pass BTC in value
- Because staked ETH looks more like a traditional financial investment, financial regulators like the US SEC may reevaluate their hands off stance, and are more likely to view it as as security.
Paid subscribers, keep scrolling for a sneak peek at the rough draft of the script for About Proof of Stake. Coming to he Know A Little More podcast later this year.
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