What major changes will the Ethereum merger bring to the crypto industry?

Without good questions, there are no good answers:

Why is this upgrade of Ethereum seen as the third revolution in the blockchain world?

Will this upgrade really make gas fees drop significantly?

Why does the upgrade reduce energy consumption by 99.95%?

If the upgrade causes deflation, is it a good thing for the Ethereum network application?

There is no doubt that the Ethereum “merger” is the number one event for the entire crypto industry in 2022.

When it comes to Web3, we have to mention the king of public chains – Ethereum. The birth of Bitcoin in 2008 brought blockchain technology; in 2013, Ethereum closely integrated blockchain and smart contracts, allowing various blockchain applications to be developed on the blockchain, and promoting a large number of new applications. Also formed an ecosystem of Web3 applications.

Although it has the largest developer community in the world, it also has the largest number of DAPPs. But its use experience is not good. At present, the Ethereum blockchain of PoW algorithm will pack a block every 15 seconds, and each block will contain 150-300 transactions, and only 10-20 transactions can be processed in one second.

If this is to develop a Web3 application that grabs red envelopes, compared to WeChat, the group friends on WeChat have all finished and sent [Thank you boss], but the Web3 red envelope grabbing interface is still going around in circles, this is unbearable!

Moreover, such an Ethereum network often experiences network congestion. At this time, if you want to make a transaction faster, you will pay more gas (gas), which can even cost hundreds of dollars in fees at peak times.

Due to these reasons, the processing speed of Ethereum cannot even support ordinary commercial applications, let alone become a “world computer”.

In order to achieve the goal of the world computer, at the beginning of its birth in 2014, Ethereum set up four development stages: Frontier (frontier), Homestead (homeland), Metropolis (metropolis), and Serenity (quiet).

Now that the first three phases have been completed, the fourth phase, Serenity, is the final form of Ethereum, which is Ethereum 2.0. Its biggest change is to introduce sharding, beacon chain, and convert PoW mining to PoS mining.

As the leader of encrypted ecological applications, Ethereum accounts for half of all application-oriented public chain TVLs with $120.43 billion TVL. For the giant ship of Ethereum, every slight change may affect thousands of applications on the chain and Millions of ordinary users are like replacing the underlying cabins and engines sailing in the sea, which is not only difficult, but also involves a wide range of aspects. This is also the reason why the entire shard upgrade of Ethereum has been repeatedly delayed. If the merger goes smoothly It will lay the most solid foundation for the smooth arrival of the sharding era.

After the merger of Ethereum, what major changes will it bring to the crypto industry?

The proportion of TVL in each public chain Source: defillama

What is an Ethereum merger?

An Ethereum “merge” refers to the merging of the Ethereum mainnet and the beacon chain (ie The Merge, formerly known as the docking), or more specifically the beacon chain (the consensus layer) and the existing chain (the execution layer) , and discarded the PoW part of the original execution layer. Once the merger is completed, it marks the end of the Ethereum POW consensus era, the ETH main network will be verified by the stakers, and the POW node miners will withdraw from the historical stage.

Why merge?

The most essential reason is to solve the problems of insufficient performance and high GAS of the Ethereum network. With the development of the Ethereum ecosystem, expensive transaction fees and low scalability have seriously restricted the development of the ecosystem, and users’ needs for improvements in Ethereum have become more and more urgent. Fragmentation will fundamentally solve this problem of Ethereum. One problem, and before opening shards, “merging” is the basis for building shards.

Only through the combined POS consensus mechanism can pave the way for subsequent shard chain upgrades, and shard chains can safely enter the Ethereum ecosystem. At the same time, there is a fatal problem that is also driving the “merger”, and that is Ethereum’s Difficulty Bomb.

“Difficulty bomb” is a mechanism algorithm that adjusts the difficulty of the chain according to the block time. The purpose is to promote POW miners to switch to POS. The simple explanation is: under the mechanism of “difficulty bomb”, with the increase of block height, the difficulty of producing blocks will increase. With exponential growth, the end result is that miners are unprofitable after measuring costs. The main purpose is to force node upgrades, abandon POW to POS, and avoid forks. However, if the merger and sharding cannot be completed before a certain block height, the difficulty bomb will in turn threaten Ethereum itself, resulting in slower block production and further network congestion.

After the merger of Ethereum, what major changes will it bring to the crypto industry?

Ethereum’s “difficulty bomb” formula

In fact, this problem has occurred five times, that is, the “difficulty bomb” has been delayed five times. The developers mainly delayed the “difficulty bomb” by using pseudo block numbers to replace the original block numbers. The core of the upgrade is to simply postpone the difficulty bomb:

  • 2017 : Byzantine Update
  • 2019 : Constantinople Update
  • 2020: Muir Glacier Update (delayed difficulty bomb only)
  • 2021 : London Update
  • 2021 : Arrow Glacier update (delayed difficulty bomb only)

According to EIP-4345, after 5 delays, the difficulty bomb may explode around June 2022. It is because of this mechanism that developers need to complete the “merge” before June, or else they will again Choose to postpone the difficulty bomb. Recently, Ethereum core developer Tim Beiko tweeted that the Ethereum merger will not be completed in June, but will be completed within the year. If this is the case, then the proposal to postpone the difficulty bomb may be put forward in the near future, especially with the development of the Ethereum ecosystem to the current size, the actual implementation of the difficulty bomb mechanism has become more and more difficult, and there is room for the implementation of the trick. Getting smaller and smaller.

Lower security costs because less energy is required to reach consensus.

For PoW, the revenue needs to pay for all the hardware and energy used by the miners, otherwise no one will go to mine. This requires large issuance and quick selling of Ethereum in exchange for fiat to pay the bills.

This is not the case with PoS. PoS only needs to pay speculators some income to make people willing to deposit capital instead of investing directly elsewhere. Apart from a regular computer and internet connection, there are no large bills to pay. So the rate of return need only reflect the opportunity cost and risk involved.

more sustainable.

The security of a chain is basically proportional to its market capitalization. Either PoW (higher value token reward = more reason to play by the rules = more miners = harder to break consensus) or PoS (higher value staked token = more reason to play by the rules to avoid losing collateral) It’s all like that.

A newly issued token essentially transfers value away from all token holders and redistributes it to specific people. Other things being equal, selling these tokens can extract value from the network.

This opens the door to many scaling solutions in the future: data sharding, stateless, light clients, and more.

This will help reduce code complexity in the future by separating the execution and consensus layers.

Appeasing the environment and gamers is certainly a positive side effect, but it’s not the main reason for switching to PoS. The switch is more due to external factors, Ethereum as a protocol does not have much control over the entire network, such as energy production, GPU supply chain, etc.

But this is also the real situation of PoW. Whoever has money can buy more mining machines and make more money. In mining, ROI is also getting better with economies of scale. Centralized mining operations can get better hardware discounts and move to places where electricity is cheaper. Independent small miners simply cannot compete with it in reality. With PoS, everyone gets proportionally the same amount, whether their stake is $10 or $10 million.

It may be centralized, but there’s no reason for those big mining operations to attack the network and cripple it, since they’ve invested millions in infrastructure. So… maybe you have no problem with the existence of large centralized entities, just dissatisfied with their huge interests in the network?

This is where it gets interesting: the more lockers, the lower the reward per person. It also means that all costs will be priced in by the market itself. If the staking yield is too low, then the reward doesn’t justify the cost, and people pull out and invest elsewhere, a move that pushes the yield back up. Likewise, if the yield is too high, it will attract more capital to pull the yield back.

In terms of inflation. Let’s say the market sees 5% as the ideal yield, with 3% coming from the issuance. In this way, about 30 million ETH is mortgaged every year, and 900,000 new ETH will be issued. With a total supply of 120 million ETH, the inflation rate is 0.75%. As long as the gas fee is higher than 23gwei, EIP1559 will burn more ETH than this amount. I want to stress that Ethereum will soon become a deflationary asset with yield.

“ETH has never had a supply cap, and they have been changing monetary policy.”

For years, Ethereum’s goal has been to “secure the minimum viable issuance for the network,” placing network security above the capped supply of control. No update to monetary policy has increased supply inflation. Low inflation has been the goal since day one.

Once the burn rate of EIP1559 matches the issuance rate, there is an equilibrium point that acts as an effective supply cap – again market forces determine the valuation of Ethereum’s block space.

There is no “Ethereum Central Bank” arbitrarily adjusting interest rates and printing money to cronies. The market itself determines how much inflation/deflation there is, and there is no single entity that controls Ethereum the way a central bank controls fiat inflation rates.

After the merger, what changes will it bring?

As Ethereum’s most important upgrade to date, when this upgrade is complete, we will see the following changes:

1. Reduce gas fee

High gas fees are the main obstacle for ordinary users to try Ethereum. Gas fees fluctuate based on transaction demand. A large number of transactions in a short period of time usually clogs Ethereum, in which case miners prefer to choose transactions that offer higher gas fees. However, when Ethereum adopts PoS, transaction processing is simpler and can avoid congestion caused by mountains of unprocessed transactions.

2. Improve network throughput

Sharding is another important upgrade of Ethereum following the Ethereum merger. Sharding horizontally splits the database into multiple shard chains, all of which can process transactions independently of the mainnet.

PoW blockchain records transactions on a chain. For example, since Bitcoin mined the genesis block in 2009, all transaction history has been recorded on the chain. This limits the ability of the blockchain to process transactions: Bitcoin can only process 7 transactions per second, while Ethereum can only process 10-15 transactions per second.

Ethereum.org predicts that 64 shard chains will be available when shards are delivered in 2023. Each chain can validate transactions to offload the Ethereum mainnet, significantly increasing network throughput.

3. Democratize network participation and distribute rewards more equitably through new incentives, validators and innovations.

When Satoshi Nakamoto designed Bitcoin 13 years ago, the intent was for everyone to participate in the verification and recording system of transactions. It looks like Satoshi Nakamoto’s plan was off track, as quite a lot of things are required to participate in Bitcoin verification. From 2013 to the present, Bitcoin mining difficulty has increased 279,000 times. This means that expensive advanced miners are required to generate enough computing power to compete with peers, and the current Ethereum is also facing the same problem.

The high threshold of equipment is not conducive to attracting more validators to participate in the protection and construction of the network.

Under the POW mechanism, if you want to become a verifier, you need professional machine hardware, the threshold and cost are high, and it is more difficult for ordinary users to enter. However, under the POS mechanism, the threshold for node operation is greatly reduced, and there is no more competition for computing power The equipment requirements for hardware are also greatly reduced.

Ethereum’s transition to PoS means that the competition for computing power will become less severe. Validators do not have to have super miners, server-level equipment is sufficient.

PoS not only reduces the resource requirements for validating nodes, but also aims to reward all participants, not just those with the most computing power, and each node will have an equal chance of being rewarded. Upgrading to PoS will make Ethereum more open and diverse. Diversity of clients, validators and Layer 2 will also ensure a healthy and scalable network that democratizes participation.

However, the minimum pledge standard of 32 ETH is still a high threshold for most people, so pledge service providers such as RocketPool, Secret Shared Validators, ankr, etc. appeared, not only can pledge with a standard lower than 32 ETH, but also launched many More convenient and fast staking tools, decentralized non-custodial agreements, etc., further reduce the threshold of verifier funds and technology.

After the merger of Ethereum, what major changes will it bring to the crypto industry?

We still measure the degree of decentralization of POW and POS Ethereum from the data. As of April 11, 2022, on the current Ethereum mainnet, the number of active nodes in the world is 2410, while on the beacon chain, active verification There are already as many as 340,000, and the latter is 150 times that of the former. In this sense, the latter is obviously more decentralized.

4. Green and environmental protection, will reduce energy consumption by 99.95% in each transaction

According to the current consumption of Ethereum, the electricity consumption per year is 111TWh, which is approximately equal to the electricity consumption of the Netherlands in one year, but after switching to POS, the cost of each node per day is equivalent to the electricity consumption of a household computer. According to the calculations of the Ethereum Foundation, after switching to POS, the energy consumption of the ETH network will drop by 99.95%, and the annual power consumption is equivalent to that of a medium-sized town.

After the merger of Ethereum, what major changes will it bring to the crypto industry?

Ethereum Energy Consumption Index (TWh) Data source: digiconomist

A single transfer can use as little as streaming an hour of Netflix (234 watts) or brewing a pot of coffee (40 watts). Ethereum will make the world a better place, not hurt it.

5. Full deflation, reducing the issuance of ETH and providing stronger security for end users and the DeFi industry

The merger will also limit the supply of ETH, making it more scarce, and therefore more valuable, by reducing the number of tokens created for payment to validators (90% reduction), and by destroying tokens collected as transaction fees instead of They are passed to miners. The cost of the attack chain will also increase significantly (10-20x). Based on the current 350,000 validators (10 million ETH staked), the cost of attacking Ethereum is 51% of the $34 billion.

According to Bankless estimates, the current output of Ethereum is about 12,000 per day, but after the conversion to POS, the daily output is only 1,280, which means that the daily output of ETH will be reduced by 89.3% after the merger. In addition, the original POW mechanism The fixed output cost will form a fixed selling pressure, and under the POS mechanism, because the pledger does not need to consume electricity, the selling power will be smaller, which is also one of the important reasons why many people in the industry are optimistic about the development of Ethereum after the merger. Of course, the combustion mechanism of 1559 is also an important factor in deflation.

6. Increased pledge income

At present, the number of Ethereum pledged in the beacon chain has reached 10.772 million (current value is about $34.47 billion), and the rate of return is about 4.6% annualized. After the merger, the net transaction (ex -base) fees, the yield will likely rise from the current 4.6% to ~10-15%, an increase of about 2-3x.

7. Lower GPU prices

The consensus algorithm of Ethereum (called “Ethash”) is specially designed. There are a group of miners in the digital circle. They buy graphics cards to mine with computing power and obtain the block reward ETH on the Ethereum blockchain. The higher the demand for computation on the Ethereum network, the more miners get paid (gas fees), which makes them want to buy more GPUs to make more money.

In 2020, after the price of ETH rose sharply, miners competed with gamers for graphics card production capacity in order to obtain more benefits, which directly led to the doubling and doubling of graphics card prices in the past two years, and gamers were miserable. High GPU prices also have a huge impact on other applications of GPUs, such as neural networks.

After the merger, miners will no longer hoard graphics cards, so the price of graphics cards will definitely decrease. In fact, after entering 2022, graphics card prices began to fall.

8. Expand the Ethereum ecosystem.

A large number of Dapps run on Ethereum, including chain games Axie Infinity, CryptoKitties, DeFi protocols Uniswap, Yearn, and various DAOs.

A high load has a significant negative impact on the EVM, causing a dramatic drop in network processing speed. The EVM is difficult to patch because its code is written in a complex programming language called Solidity. According to the main Ethereum developers, Ethereum 2.0 will introduce Ethereum Web Assembly (eWASM) designed by the World Wide Web Consortium to replace the EVM.

eWASM allows developers to program in simpler languages ​​such as C++, Rust, etc. In addition, eWASM is also compatible with current web standards, making it easier to run in common browsers. Users can access dApps without the need for extensions.

The greatest benefit of eWASM is its impact on the developer ecosystem. With more language options, more developers will flock to Ethereum, bringing more innovation and creativity to the community.

What is the whole upgrade process like?

In the new version of the roadmap, the entire upgrade process is still divided into three stages, namely:

1. Beacon Chain: The Beacon Chain has been launched, and the chain will become the core of future Ethereum sharding. The Ethereum pledged by the current user is stored on this beacon chain;

2. The Merge: The Merge stage is the upgrade we are about to face, including the switch from PoW to PoS, and the current merger of the Ethereum main chain and the beacon chain, so this stage is also called The Merge;

3. Shard Chain: At this stage, Ethereum will expand from one chain to the final state of a total of 36 shard chains, and it is expected that transaction performance will be greatly improved with the implementation of shards;

After the merger of Ethereum, what major changes will it bring to the crypto industry?

The Beacon Chain went live at the end of 2020 and operates as a PoS. At present, there are more than 400,000 active validators, and nearly 13 million ETH mortgages have entered the beacon chain to maintain the consensus, and the operation is very good.

After the merger of Ethereum, what major changes will it bring to the crypto industry?

The original chain still operates as an execution layer in the form of PoW, and Ethereum has entered a stage of PoW+PoS mixed mining, paving the way for the entire network to transition to PoS. According to the roadmap, Ethereum will undergo a “merge” in 2022, and then shard.

After the merger of Ethereum, what major changes will it bring to the crypto industry?

Merge is to merge the beacon chain run by PoS with the original chain run by PoW, and stop the PoW part of the original chain. This upgrade represents the official switch of Ethereum to PoS consensus. This will bring drastic changes to the mining of Ethereum, because after Ethereum is converted from P0W to PoS mining, the original PoW miners will no longer be able to participate in Ethereum mining.

After the merger of Ethereum, what major changes will it bring to the crypto industry?

On March 10, 2022, Ethereum developer Marius Van Der Wijden announced the launch of the Kiln merged public testnet, and completed the transition from PoW to PoS on March 17. On April 12, Ethereum implemented The first shadow fork in history was used to test the mainnet merger, as a rehearsal for the next formal merger.

Tim Beiko has tweeted that the Ethereum merger will be completed within 2022.

While the merger cycle is long, developers working on Ethereum do not need to worry about the transition, as common APIs for pre- and post-merger architectures and reuse of existing components will ensure a seamless transition and guarantee an uninterrupted experience for developers . This means that there is little to no chance that existing applications will need to be redone.

Why do you save so much electricity after the merger?

Another major change in Ethereum 2.0 is to convert PoW mining to PoS mining.

The disadvantage of PoW mining is that it costs electricity. Building consensus on the Ethereum blockchain is based on a cryptographic puzzle that must be solved by nodes on the Ethereum network, which is called PoW “Proof of Work”. The more popular Ethereum becomes, the more computational work it takes to validate its blockchain, which makes nodes on the network use more electricity.

We can understand PoW mining as everyone earning ETH rewards by obtaining block qualifications through mining machine calculations. In order to protect the stability of the chain, it will automatically adjust the difficulty of the questions to ensure a stable number of blocks in a certain period of time. Because the pie is a certain amount, the more miners there are, the more it will roll in. This consumes a huge amount of electricity every year. According to Digiconomist data, miners around the world consume as much as 93.98 trillion watt-hours of electricity each year, or nearly 94 billion kilowatt-hours of electricity. It’s so power-hungry!

After converting to PoS mining, you can obtain block qualification by staking ETH and earn rewards. From offline equipment mining to online pledge mining. In this way, everyone will vote peacefully in the future to decide who will be responsible for the calculation of the next block, which perfectly solves the problem of wasting electricity and energy.

After the merger, will it be possible to significantly reduce gas fees and improve performance this year?

The merger will not immediately lead to dramatic improvements in gas and performance. Because the merge only changes the consensus mechanism, in fact, it will not have any impact on the current user experience of Ethereum today.

The gas and network performance issues involved will have to wait until future updates to the Ethereum roadmap (such as sharding) will directly help improve gas costs.

Why will sharding go live will lead to a dramatic improvement in Ethereum’s performance?

Ethereum 2.0 improves the processing capacity of the network by introducing shard chains. The current plan is to establish 64 shard chains, and each shard has a group of verifiers responsible for packaging and verifying blocks.

We can think of the merged Ethereum as a shard chain with the ability to execute transactions and smart contracts – Shard 0, which is one of the final 64 shard chains. Imagine that the same transaction pool now has so many chains processed at the same time, as if a highway suddenly becomes 64 in width, the processing speed will inevitably be greatly accelerated, and everyone’s experience will be smoother.

However, the shards need to communicate with each other, and these shards need to have a central system, which is like the human spine to coordinate the movement of the limbs. The Beacon Chain is the central part of the entire Ethereum 2.0 network, or the “command and control center”. It will randomly assign validators to the shard chain, and will also serve as the hub to help shards achieve cross-sharding communication to ensure the security of the entire system.

After the merger of Ethereum, what major changes will it bring to the crypto industry?

After the merger, can the PoW version of Ethereum continue to be used?

Can’t. With only one Ethereum, the entire network will switch to the PoS consensus mechanism.

If any node were to continue mining the PoW version of Ethereum, they would be on their own minority fork, and the economic value of their block rewards would be far less than their operating costs. Since miners are incentivized to be for-profit, it is expected that all PoW participants will immediately start mining with their hardware on other non-Ethereum PoW blockchains.

Summarize

For the entire Ethereum ecosystem, the encrypted world and the Web 3 field, the “grand merger” event of Ethereum 2.0 is a far-reaching event. It can be said to be the third major revolution in the blockchain world.

Ethereum’s move to PoS is a groundbreaking move that may be followed by other cryptocurrencies, or even prompt some organizations or governments to fully embrace cryptocurrencies. On the other hand, this approach can greatly boost the adoption of Ethereum and bring the cryptocurrency to a better future.

Of course, the fourth stage cannot be accomplished overnight, but must be carried out in steps.

For ethereum miners, the launch of ethereum 2.0 will destroy their jobs. This is the second largest mining ecology on the earth. A large number of miners may not give up their mine resources easily. There may be a fork of Ethereum 2.0.

Judging from various analyses and the expected results after the merger, this revolutionary upgrade of Ethereum is very exciting.

After reading, please think about the following questions:

1 After the upgrade of Ethereum, what impact will it have on other digital currencies?

2 What would happen if the miners of Ethereum were dissatisfied with their jobs after the upgrade and forked?

3 When is it expected that the gas fee will actually drop?

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-major-changes-will-the-ethereum-merger-bring-to-the-crypto-industry/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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