July 30th will be the 7th birthday of the Ethereum Network and Ethereum. This is a cryptocurrency for about 35 years. However, there are no signs that the network will slow down. In a Twitter thread launched in March 2022, Ethereum core developer Tim Baiko said the long-awaited Ethereum “merge” upgrade went “a few months later” on the originally planned timeline. I confirmed that it will be done. Last week, the market was pleased to see Ethereum’s Seporia testnet successfully switch to Proof of Stake, one step closer to merging.
Since merging has a significant impact on participants across the Ethereum ecosystem, from miners to developers to end users, fidelity to a successful project migration should always be prioritized over speed. Despite the delays, the Ethereum (ETH) network maintains a greater lead than its rivals, Layer 1 smart contract platforms, in terms of both user activity and development. In other words, allowing Ethereum to focus on its product quality and allow other competing network chains to catch up and attract attention is probably the best thing for a well-functioning ecosystem and the multi-chain industry. did.
From PoW to PoS
Ethereum Marge changes the basic way a network protects itself from Proof of Work (PoW) to Proof of Stake (PoS). This is important because PoW follows a mechanism similar to Bitcoin. With Bitcoin, power-hungry computers on the network compete with each other to validate and protect transactions. PoW is safe, but the invalid block sent when the miner (a special network node that acts as a payment to confirm the transaction, which is a special network node seeking a reward for newly coined coins) consumes power in the replication process, is It consumes a lot of energy because it is punished by the submerged computing power and energy. In fact, according to ConsenSys, a blockchain software technology company founded by Ethereum co-founder Joseph Lubin, the network’s carbon dioxide emissions are comparable to many small nation-states. In addition, when each validator competes, the network becomes congested and gas charges increase.
On the other hand, in the PoS consensus mechanism, the validator node takes over the role previously occupied by the miner. That is, it processes transactions and creates new blocks on the network in exchange for a proportional reduction in network transaction charges. Validators protect their networks by “staking” their own Ether. The more Ether (economic benefit) a validator bets on, the more likely it is to be selected to join the network and become a validator, so that you can be rewarded through transaction fees. .. If invalid blocks are accepted by the validator, some of those bet assets will be cut as a penalty.
Validators use their own Ether for staking rather than exchanging raw computing power to mine new coins, so more to ensure continuous network security and operations. It is considered to be economically coordinated and motivated. The steps from mining to staking are estimated to significantly reduce network energy consumption.
Why you need to merge now
There are two ways of thinking about whether the merger will benefit Ethereum or it will be detrimental. Proponents of the current PoW model claim that mining has driven Ethereum’s growth and is what it is today.
But the big picture is witnessing the rapid rise of Web 3.0, especially the enthusiastic activity of non-fungible tokens (NFTs), the growth of decentralized finance (DeFi) projects, and the flood of venture investment. And developers go into wider blockchain space. The two biggest bottlenecks to Web 3.0 growth are (A) a shortage of raw native blockchain development talent and (B) an environmentally sustainable way to meet the growing demand for distributed / distributed computing power. Is to do it with.
For this reason, many within the digital asset community feel that Ethereum merging needs to be done sooner. Under the resulting PoS mechanism, Ethereum 2.0 addresses many of PoW’s current challenges, making networks scalable and relevant to the world of Web 3.0. Gas charges will be similar to PoW charges for initially rewarding validators. Migrating to PoS sets up sharding, divides the network, improves transaction throughput, and reduces costs.
However, as a long-term builder and investor, you should always keep in mind the diversification between asset classes and counterparties. For PoW and PoS discussions, clear diversification options and security opportunities within network processes are highly welcomed by end users. In other words, the PoW process works in some cryptocurrencies and Web 3.0 industries, and PoS is better in others. The main benefit of upgrading ETH 2.0 to PoS is to provide native network users with options and choices on how consensus is achieved within the preferred technology stack for a particular business model. ..
Ethereum can also be the largest and most established smart contract platform, but it’s not the only one. The advantages that Ethereum is currently enjoying may still be challenged by other Layer 1 programmable smart contract networks that employ PoS variants, such as Cardano and Solana. Marge enhances Ethereum against these rivals, and the development of Layer 2 networks built on top of Ethereum also further assists in scaling Layer 1 networks. In short, despite delays, competitive leads are established and qualified and calculated steps towards merging ensure that Ethereum remains competitive in the near future.
Broad meaning of merging
Not surprisingly, merging has widespread implications. Most clearly, while other blockchains use PoS, the successful adoption of Ethereum provides evidence that energy-efficient and sustainable consensus mechanisms can work on a significant scale. This could facilitate even more ambitious Web3.0 projects built on the network.
Barriers for individuals to become validators and therefore be rewarded are also reduced during the transition. The mining industry requires large capital-intensive investments in hardware, logistics, and power negotiations, all usually starting with a total investment of US $ 1 million. However, to become a validator at PoS, you only need to bet 32 Ether (about US $ 35,100 at the current price). Microholders can pool Ether and benefit from staking.
While momentum is gaining behind the diversification of network mining processes, we believe that current miners are likely to invest their earnings in betting under the new mechanism. Beiko’s tweet should have been the clearest signal to date, but for rejecters, there’s always Ethereum Classic (ETC) running on PoW.
Fewer Ethereum (ETH) will be issued in the future. In the so-called “Triple Half Benning” after the merge, the new block reward will drop from 12,000 ETH to 1,280 ETH per day, increasing rarity and limiting token issuance inflation. , And will probably continue to support the value of ETH.
In addition, once sharding is complete, additional benefits can be expected to reduce costs and speed up transactions. In summary, from a crypto universe perspective, the results of multiple upgrade proposals to the Ethereum 2.0 network provide the user base with more scalable, sustainable and secure network diversification options. Therefore, we can expect more institutional investors to enter this field. However, keep in mind that staking requires centralization, as more resources tend to control the network. That’s why engineers are taking a hybrid approach where native network users choose PoW and PoS.
In general, we see markets with great confidence in the Ethereum migration and long-term future. Companies are launching broader portfolios, new projects are being built and developed based on basic protocols, and in the case of Intrinsic Network Tokens (ETHs), investors are encouraged to adjust their investment strategies to include them in larger sizes. I am doing it. The proof of stake system makes sense.
Upgrades such as merges play an important role in the ongoing development of blockchain networks. As the edge of Web 3.0 approaches, a modern Layer 1 network is essential to accelerate the next iteration of the Internet and provide new opportunities for both participants and investors.