HomeAlt CoinsThe Definitive Handbook on Merger and Ethereum's Shift to Proof of Stake

The Definitive Handbook on Merger and Ethereum’s Shift to Proof of Stake

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On September 15, an historic event occurred in the world of blockchain. Beacon Chain merged with the Ethereum mainnet, marking the first change in Ethereum’s consensus algorithm. This article explores the Merger and its significance for the community.

Key Points:
– The Merger involved upgrading the Ethereum network’s consensus algorithm from Proof of Work (PoW) to Proof of Stake (PoS) in order to enhance scalability, security, and decentralization.
– The process began on September 6, 2022, with the successful Bellatrix upgrade on the Beacon Chain. The Merger was completed on September 15 as part of the Paris upgrade, effectively transitioning Ethereum to a PoS network.
– With the transition to PoS, validators have replaced miners on the network. Validators hold a certain amount of ETH and contribute to creating and controlling new blocks. They receive rewards in newly minted ETH, earning around 4-4.5% on their assets in the PoS pool.
– Future upgrades for Ethereum include a new Ethereum Virtual Machine (EVM) supporting multiple programming languages for smart contracts, and the introduction of spoofing.

When Did the Merger Take Place?
The Ethereum team initially launched the separate Beacon Chain network, which included a smart contract for staking ETH. Users could lock their funds on this chain. As of August 29, 2022, there were over 420,000 validators holding 13.47 million ETH on the Beacon Chain.

The Forced Fork began with the Bellatrix upgrade on September 6th, and the Merger became active on September 15th. After the Forced Fork, the Beacon blockchain became Ethereum’s mainnet, with registration data and funds in the deposit agreement remaining intact.

When Can ETH Be Unstaked?
Anyone who staked ETH on the Beacon Chain before the Merger agreed to lock their funds until the Merger was activated. The lockout period has currently been extended for an additional 6-12 months until the completion of the Shanghai upgrade. However, validators started earning ETH rewards immediately after the Merger.

Why Did Ethereum Switch to Proof of Stake?
Prior to the Merger, Ethereum utilized the energy-intensive Proof of Work algorithm for block creation. PoW required significant energy consumption, limited scalability, and raised the barrier to entry for miners due to expensive hardware requirements. The transition to PoS addresses these issues and moves towards resolving Ethereum’s blockchain trilemma.

The energy consumption of the Ethereum blockchain in June 2022 stood at 112 TWh per year, equivalent to a medium-sized country. By replacing mining with staking, this energy consumption decreased by 99.95%. Developers claim that running a node now requires the same amount of electricity as a regular PC.

Additionally, the PoS upgrade enhances security by requiring a substantial amount of funds to be locked, with the risk of losing them if validators act dishonestly. The algorithm change is also necessary for Ethereum’s planned scalability upgrades.

Proof of Stake and Ethereum
The PoS algorithm considers the weight of validators’ game by the number of coins staked. The amount of Ether locked determines the node’s reward. To become a validator, a minimum of 32 ETH must be deposited.

Staking participants are divided into committees, typically consisting of 128 to 2,048 validators, which can be combined into blocks. The consensus process is divided into epochs lasting approximately 6.4 minutes, with each epoch containing 32 time intervals of 12 seconds. Within these time intervals, blocks are created. Committee groups are distributed across time intervals and form chain elements.

Staking Profitability
Validators’ earnings on the Ethereum network consist of a premium and a basic commission. With the switch to PoS, the fixed block reward became outdated. Validator income is based on the additional emission of ETH, which changes dynamically each period. The annual emission of new coins is calculated based on the total staked funds.

At the end of August 2022, Beacon Chain validators earned approximately 4.5% annually, with shareholders who acquired the funds earning around 4%. Analysts suggest that ETH staking revenues may range between 7% and 13% per year following the Merger but will decrease over time.

ETH Price After the Merger
Experts anticipate that the Merger will impact the cryptocurrency market. Glassnode reports a positive outlook on ETH prices in September 2022 based on OI indicators and the ratio of calls and puts, predicting a price range of $2,200 to $5,000. Former BitMEX CEO Arthur Hayes believes ETH will rise to $3,000.

After the Merger, Ethereum’s price may exhibit a different dynamic compared to the rest of the cryptocurrency market, according to Chainalys researchers. Ethereum’s deflationary burn mechanism and increasing institutional adoption of Ether contribute to its growth. The number of ETH whales has also increased.

Ethereum Miners and PoW Forking
The Merger has made Ethereum mining increasingly unviable due to the hard bomb. Some miners may turn to Ethereum Classic (ETC), a legacy fork of Ethereum, or Ravencoin (RVN) as alternatives. A small part of the Ethereum community, consisting of miners and equipment manufacturers, plans to initiate a fork called Ethereum PoW (ETHW) to save the PoW algorithm. The mainnet fork release must occur within 24 hours of the Merge activation. However, major projects such as Uniswap, Chainlink, Ethermine, and OpenSea have declined to support the Ethereum PoW fork.

ETH holders may receive an airdrop of the ETHW fork cryptocurrency, and Binance and Bybit have announced their intent to distribute free coins. Similar situations occurred with the Bitcoin Cash fork in 2017. The future of ETHW is still uncertain, and major centralized exchanges have yet to make final decisions on supporting it.

Other Updates
The Ethereum roadmap includes implementing horizontal partitioning to increase blockchain scalability by dividing the common database into pieces. Beacon Chain enables the coordination of validators’ work and their distribution between shards. The algorithm implements segment synchronization and provides access to network state information. The updated mainnet’s nodes will store part of the blockchain, and special algorithms will verify data validity.

Horizontal partitioning will reduce hardware requirements and allow nodes to run on laptops and smartphones. The update is planned for 2023, subject to the effectiveness of the PoS migration.

The next steps after the Merger will contribute to Ethereum’s evolution and the continued development of the network.

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