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Mind Of Mav

Ethereum 2.0; Next Big Thing or Next Big Blunder?

 
 

The Ethereum developers announce the biggest and most drastic upgrade in the history of the crypto currency for August: the merge. With him, Ethereum should finally switch from Proof of Work to Proof of Stake. This of course raises many questions.

The Ethereum “merge” could happen as early as August. This was recently announced by several Ethereum developers, including core developers Preston Van Loon and Tim Beiko as well as Vitalik Buterin.

The “merge” means an event that the Ethereum scene has been looking forward to for a very long time: the merging of the current Ethereum blockchain with the “Beacon Chain”.

With this step, ETH 2.0 becomes reality: Ethereum will shake off the miners and henceforth become a proof of stake blockchain. No more farms with graphics cards and Asics, instead servers called validators that compete for the blocks through frozen ethers. Just like it was planned from the start.

The merge will be the largest and most serious change that a large blockchain has ever dared. It will fundamentally change the basic architecture of Ethereum. What we know today as the Ethereum blockchain will become an “application chain”. This rotates around the Beacon Chain, which went live at the end of 2020. It is the control center of Ethereum 2.0, which is to become a structured association of several blockchains. 

This will be about what will actually change as a result of the merge, what will depend on whether it will actually take place in August, and what will come after the merge.

What would change?

First, Ethereum’s energy requirements will decrease massively. This should please anyone who is concerned about the high power consumption of Bitcoin and Ethereum , and it is also the main purpose of the exercise.

Where there are no miners, there are no power guzzlers. According to the Ethereum Foundation , energy consumption will fall by 90 percent, from around 100 terawatt hours a year, as the Digiconomist generously estimates, to a few gigawatt hours.

It should be interesting for investors that the output of new ethers will also be significantly reduced. Because validators need less electricity and less hardware than miners, and therefore less capital. There will be no fixed formula for how many new ethers will be generated per block – it’s quite complicated as the reward goes to different actors depending on the circumstances – but the output is expected to drop by around 90 percent. Coupled with EIP-1559 fee burning , Ethereum could even become deflationary: the money supply could decrease rather than increase.

After all, Proof of Stake is supposed to be safer. Conceptually, the thresholds for possible attacks have been significantly increased, which is why a transaction, once it has been confirmed, should achieve a significantly higher degree of “finality”. Learn more about Proof of Stake and Finality here .

On the other hand, the hope that many people are probably placing in the merge should be in vain: that Ethereum’s sometimes horrendous fees will fall. Because the merge itself affects the scalability minimally at best. This will be the task of upcoming upgrades, which will activate further application blockchains on which the load of Ethereum should be distributed. The technical term for this is sharding.

The merge becomes the basis for better scalability. But he can’t do it himself.

How likely is the date?

The date of the merge is no coincidence: in August, Ethereum’s “Difficulty Bomb” will be ticking louder and louder.

The Difficulty Bomb increases the difficulty of mining exponentially. If not mitigated by a hard fork, the network will freeze. This should force a hard fork and make it cleaner. You can learn more about the Difficulty Bomb here .

Whether the merge actually happens in August depends on what happens before then. The developers are currently testing the merge with multiple clients and networks. They are currently still carrying out “shadow forks” which simulate the merging in the test networks.

“Now we’ve pretty much completed all of that,” developer Tim Beiko describes the current situation, “and we’ll have three testnets to make sure everything is going well before we venture to mainnet.” First that will be Fork the Ropsten testnet, on June 8th. Then Goerli, then Sepolia. And if everything goes smoothly on these three test networks, the real Ethereum blockchain should follow in August.

Vitalik Buterin has already warned that the merge could be delayed if everything doesn’t go as smoothly as optimists expect, or if the developers still find details that they want to polish and polish.

The markets also have doubts. On PolyMarket you can place bets on when the merge will take place . A “no” for August 1 costs 98 cents, a yes 2 cents. For the first of September, however, the quotas are more balanced again.

What does the merge mean for users and dapps?

The merge was designed, explains the Ethereum Foundation , “to have a minimal impact on how Ethereum works for end users, smart contracts and dapps.” Still, there are some small changes worth noting.

For example, the block hash is no longer generated by miner hashing, giving it a much weaker random variable than before and replacing it with a different value.

The intervals between the blocks also change somewhat. So far, it takes about 13 seconds to find a new block. After the merge it will be exactly 12 seconds.

And while with proof of work there is always a risk of reorgs, that is, a block or short series of blocks being discarded retrospectively, post-merge blocks are final when they have confirmation.

These are all rather details that hardly play a role for most dapps and smart contracts. Nevertheless, numerous applications – decentralized exchanges, NFTs, block explorers, staking pools – participate in the tests on special testnets to ensure that the transition runs smoothly.

Is there a risk of a price collapse because the merger will release 13 million ethers?

Most in the Ethereum scene are looking forward to the merge. Through him, Ethereum gets rid of the accusation of being a climate sinner, and through him, Ethereum is supposed to become safer.

However, the prospect of the merger could also make some investors frown. The stakers named validators have currently frozen almost 12.5 million ethers (more than 20 billion euros). The merge frees them. So, is a flood of Ether threatening to flood the markets and ruin the price of Ethereum?

In fact, the risk is quite small. Because the ethers will not be available immediately, but only with an update that is planned about half a year later. In addition, the ethers locked in validators cannot be fully extracted immediately. There is a limit to how much ether can be withdrawn per unit of time, which would currently take more than a year to thaw all ether.

In any case, many staking pools are already offering to replace the ethers frozen on the beacon chain with tokens (aETH, bETH), which is why there is already a market for those ethers. Should there be an urgent need to liquidate the staked ethers, this could already be satisfied now. However, this seems to be rather low, since the frozen ethers bear interest of 6-10 percent.

What comes after the merge?

The merge is not the completion of Ethereum 2.0, but rather the beginning. It will be followed by other upgrades designed to bring Ethereum into its final form: the Surge, the Verge, the Purge, and the Splurge.

The Surge will implement sharding: it will connect the other application blockchains to the beacon chain. He should help Ethereum to scale very far.

The Verge will use Verkle Trees. These are a further development of the Merkle trees or hash trees, which allow smaller proofs and can reduce or completely eliminate the load of the state. This state is a fundamental limitation for full nodes on Ethereum , so the Verge would be a pretty big deal.

The purge will simplify the Ethereum Virtual Machine (EVM), i.e. the operational environment of smart contracts.

Finally, the splurge is intended to integrate various and important further changes that complete the Ethereum roadmap. However, this event is likely to be in the fairly distant future.

 

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