The Merge—an upgrade to change Ethereum’s transaction verification mechanism—was successfully completed yesterday. As a result, the crypto market space is flooded with news on the second largest crypto by market cap.
But all of the news coverage, the Twitter threads, and Medium blogs, come with a lot of jargon. Not to worry, though. All you have to do to get your basics straight is read this article.
Ethereum: A brief introduction
Ethereum is the second largest crypto by market cap after Bitcoin today. At the time of writing, ETH price is around the $1,400 mark.
The Ethereum network is what took the crypto ecosystem beyond transaction-based uses by creating a Web 3.0 services ecosystem. The network was instrumental to blockchain technology being able to compete with traditional systems on multiple levels.
It all started in 2013, when Vitalik Buterin, the network’s most well-known co-founder, released Ethereum’s whitepaper at the age of 19. The following year, he received over $18 million in funding. The Ethereum blockchain went live on 30 July 2015.
During Ethereum’s first stage of operations, the network could only host smart contracts and one kind of consensus mechanism.
Smart contracts, consensus mechanisms…what’s all that?
It’s a lot of jargon, yes, but this explainer should get you up to speed.
What are smart contracts?
Smart contracts are called “smart” for a reason. They rely on the intelligence of computers to provide financial services without the help of any intermediary person or institution. This type of contract is backed by a code and is stored on a blockchain.
Traditionally, before a contract is signed, an intermediary would do the job of checking whether the parties to the contract are in agreement and have fulfilled any preconditions necessary for the execution of the contract. But smart contracts are programmed to be self-executing. So they can automatically execute an order once they find two agreeable parties.
The two parties are anonymous, and once they enter such a contract, the terms cannot be altered.
Ethereum hosts contracts of this type.
What are consensus mechanisms?
For transactions to occur on an ongoing basis on a blockchain, there has to be some way for users to agree on whether each transaction is valid or not. Blockchains developers wanted to find people who would agree to verify transactions on a rotational basis. They also had to figure out how the rotation would occur without any bias.
That’s where consensus mechanisms come in. Consensus mechanisms are computer algorithms that help blockchains decide who gets to verify each transaction. They are called that because they help the community arrive at a consensus on an ongoing basis.
Ethereum is currently governed by the Proof-of-Work (PoW) consensus mechanism. However, in a few days, the blockchain will shift to a new consensus mechanism, Proof-of-Stake (PoS). (More on these types in the next section.)
From PoW to PoS: The Merge
The journey from PoW to PoS has been in the making for a long time now. (The idea first popped up in 2016!) But why was there a need to change the transaction verification mechanism, and what does the change mean? To find the answer to these questions, it may help to begin breaking down the key terms involved.
Proof of Work (PoW)
The differences between PoW and PoS are best simplified with an example. Let’s imagine you’re hiring a stylist online offering you fashion and grooming advice for a fee. How do you decide whether to pick them or someone else?
You might choose based on their appearance. Or you could look at photographs of happy customers on their profile page. In either case, it means you wish to see proof of their work to make sure their advice is worth your money. (After all, your money is hard-earned.)
Simply put, that’s how PoW operates. Those who can prove their work and experience stand a chance to verify transactions on a blockchain. In the case of blockchain technology, the “work” involves lending computing power to the network. Those who do this work are called miners. They are compensated for their contribution with block rewards. To know more about mining, read this.
Proof of Stake (PoS)
Let’s go back to the stylist selection example. Some people from the fashion industry may not have a lot of work experience to show, and they may not look like fashionistas themselves, but they may be invested in the industry in other ways. They may run a huge fashion chain, for example. Such people may have enough skin in the game even without proof of work, so it’s understandable if you think it’s okay to trust their advice. That’s how PoS works, too.
With PoS, unlike PoW, the user’s computing power does not determine who gets to seal the fate of the next block. Their ETH holdings do. Anyone who has staked a minimum of 32 ETH on the Beacon Chain gains the right to verify transaction blocks. This eliminates the energy-intensive mining process. Ethereum adoption of PoS brings its energy consumption down by 99.95%.
Learn more about staking here.
So, what’s the Merge, again?
On 15 September 2022, Ethereum switched from PoW to PoS through an upgrade called the Merge.
The Merge isn’t Ethereum’s first upgrade. The network has had many upgrades over the years. The last of them brought in the Beacon Chain, which implemented PoS on Ethereum and made the Merge possible.
But what does the transition to PoS do for Ethereum? Well, for now, it does not involve any expansion of network capacity. But it is a huge step toward Ethereum turning eco-friendly.
The Merge is the first among many other steps to follow, like the Surge, Verge, Purge, and Splurge.
Read this to clear out any Merge-related doubts you may have.
What does the Merge mean for investors?
Now that the Merge has occurred, you are probably wondering what your next investment move should be. Will ETH prices shoot up or plummet after this event? Should you buy or sell? We aren’t going to tell you what to do on this blog, but we do know that ETH is expected to see some volatility now. So, here are some resources to help you think your decisions through:
- Ethereum upgrades and corresponding price actions: Everything investors need to know
- How the Merge will affect ETH token supply
- Why the Ethereum Merge could start a bull run for ETH and the broader market
We’ll keep updating this list for you, but in the meantime, stay safe and keep that research going.