Ethereum, the second largest blockchain network, completed its upgrade to a new system for processing transactions on 15 September 2022.
In this article we discuss what the upgrade known as the “Merge” means and why it is such an important development in the blockchain/crypto market.
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Before we go any further, it is worth pointing out that there are two ways in which a transaction in a blockchain network can be processed or validated, known as Proof of Work and Proof of Stake. At risk of potential oversimplification, a PROOF OF WORK (POW) verification mechanism requires thousands of computers on the blockchain network to solve complex maths problems in order to validate a transaction (and that the data submitted to verify the transaction is accurate) or, strictly speaking a group of transactions known as a “block”.
Whereas the PROOF OF STAKE (POS) verification mechanism requires a group of computers in the blockchain network to stake their own supply of the blockchain’s native currency as collateral to validate each block of transactions.
What is the Merge?
The way that Ethereum fundamentally works has now changed. Ethereum has traditionally utilised the POW mechanism to validate transactions on the network, however the “Merge” that took place on 15 September saw Ethereum transition from using the POW mechanism to the POS mechanism. The milestone has been hailed as one of the most significant moments in blockchain’s short history by fans and is likely to become a landmark event in the development of blockchain technology.
Why is the Merge a good thing?
One of the biggest criticisms of blockchain technology, and cryptocurrency as a result, is its environmental impact. This is because when the POW mechanism is being utilised a “race” takes place to see which computer on the system can validate the block of transactions first, and where the winner is rewarded with a payment of the blockchain’s native currency. Naturally the more computing/processing power that a “miner” possesses increases its chances of “winning” the race and the upshot to lots of computers being in the race has been fast validation times and therefore quick transactions taking place. However, it has resulted in the huge “mining” rigs being built all over the world where banks and banks of servers draw huge amounts of electricity 24 hours a day with the sole motive of trying to win each race to validate the next block of transactions. To put this energy consumption into context, prior to the Merge, the computers validating transactions on the Ethereum blockchain network had been consuming as much energy as a medium sized country, such as Finland for example.
To put this into more context, the Bitcoin blockchain, which uses a POW mechanism, is thought to consume more energy than the entire country of Argentina.
The big benefit of the POS mechanism that Ethereum now uses is that a much smaller number of computers on the network are required to validate transactions, as the computer which validates the transactions is chosen at random on the basis, in part, on the amount of the blockchain’s native cryptocurrency that is staked. The removal of the “race” and with it, the number of computers required to validate transactions, drastically reduces the computing power needed; thus reducing Ethereum’s energy consumption significantly.
It is estimated that the Merge will cut Ethereum’s energy consumption by around 99.95%. Given that this environmental stumbling block has now been removed, it will be interesting to observe how the blockchain market reacts and whether it will result in increased business and consumer confidence in the space.
You can read more about the Merge here and if you have any questions about Blockchain, Ethereum or the Merge, please contact a member of our Technology Sector Team.
