What is The Ethereum Merge?

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Contributor, Benzinga
April 13, 2022

Ethereum, along with Bitcoin, has built the foundation of most of the cryptocurrency space. As a mild consequence of this status, however, Ethereum has some slightly dated technological and tokenomic attributes that newer players like Solana and Cosmos have improved upon over time. As a result, Ethereum’s developers have been hard at work on a long-planned raft of hugely consequential changes to the Ethereum Network. Initially called Ethereum 2.0, these upgrades focused on scalability, security and sustainability and are now referred to as “The Ethereum Upgrades.” The most consequential of these upgrades is the process of merging Ethereum’s ongoing transactions to an upgraded test chain — the Beacon Chain — that has been running in parallel with the current main chain since December 2020.

Ethereum’s History

Ethereum was founded in 2015 by Vitalik Buterin, Joe Lubin and a few other developers following Buterin’s 2014 whitepaper, which envisioned a decentralized application platform and a system of smart contracts and protocols that greatly expanded on the utility that Bitcoin had demonstrated until then. In this sense, Ethereum’s whitepaper predicted many of the applications of blockchain that are used today in the context of decentralized finance (DeFi) and Web3.

One crucial event in Ethereum’s early history was the decentralized autonomous organization (DAO) hack, in which a group of network participants exploited smart contract vulnerabilities to gain majority control of the Ethereum Network — known as a 51% attack — stealing over $50 million worth of Ether, which had been set aside for a project known as the Yes.

The past 18 months have also been important in a similar sense, with the meteoric rise of DeFi and non-fungible tokens (NFTs), both in the crypto space and in the eyes of the general public. This attention has been important in terms of stress testing the Ethereum Network’s capacity to handle varied use cases and large fluctuations of traffic, and the concurrent emergence of Layer 2 solutions to cheaply (in a transaction cost sense) handle the scale demanded by these applications is a substantial motivator for Ethereum’s upgrades.

Ethereum Blockchain vs. Other Blockchains

Over the past seven years, some of Ethereum’s attributes have become issues, insofar as the quantity of transactions has ballooned massively, drastically increasing costs to use and operate the Ethereum Network for a variety of reasons. Among these reasons are bottlenecks coming from a network’s bandwidth or the total number transactions per second (TPS), the time it takes for transactions to process, the costs associated with making these transactions — both the magnitude and variance of the transaction fees, known as gas fees — and the environmental impact of the electrical consumption associated with each block in the network. 

These aspects of Ethereum measure fairly poorly compared to newer blockchains like Terra and Solana, which boast much higher transaction throughputs and cheaper costs.

Why is Ethereum Upgrading to Proof of Stake?

Ethereum and Bitcoin both use a proof-of-work consensus mechanism, which uses more energy per block, translating to environmental impacts through the dirty grids that mine most of these tokens. Furthermore, through mining’s tendency to favor dedicated mining chips, tons of e-waste is also attributable to proof-of-work blockchains. Nano acts as a counterexample that proves that proof-of-work consensus doesn’t inherently mean that a chain uses lots of energy, and cleaner grids solve for most environmental concerns.

Proof of work as a consensus mechanism makes it relatively easier for a malicious party to take control of the network by controlling 51% of the network’s mining computational power, whereas proof of stake increases the number of validator nodes in the network to the point where a hacker would need billions of dollars in ETH in order to gain a comparable level of control. The attack would almost instantly devalue the ETH used to gain control, which is why such an attack is so unlikely to happen.

Sharding is another key reason for the transition to proof of stake, and refers to native side chains and Layer 2-esque solutions to reduce network congestion and thus drop node requirements and gas prices by a substantial amount. In this sense, most of the cost reductions slated for Ethereum’s upgrades are only going to take full effect in 2023, when sharding is enabled for Ethereum.

What Actually is Ethereum 2.0?

Ethereum 2.0 was originally the banner under which all Ethereum’s upgrades were housed, but the term has been recently phased out to avoid confusion — or the perception that Ether tokens are changing — with the current Ether tokens, which will be fully usable under Ethereum’s upgrades. The Ethereum Merge and the introduction of sharding collectively comprises the set of changes that was originally referred to as Ethereum 2.0

Where to buy Ethereum

To buy Ether, consumers need to exchange fiat currency to purchase cryptocurrencies, much like how one might purchase foreign currency before traveling to another country. These trades are most often facilitated by companies called centralized exchanges (CEXs), some of which include eToro, Gemini and Coinbase Global Inc. (NASDAQ: COIN). By virtue of its immense popularity, Ether can be bought and sold at any CEX and has exchange pairs with any cryptocurrency or fiat currency.

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How to Store Ethereum Safely

Individuals typically use tools called cryptocurrency wallets to securely store their Ether and assets. These wallets are associated with a unique Ethereum address which Ether transactions are sent to and from. Some examples of always connected hot wallets for the Ethereum network include MetaMask and Rainbow, both of which offer browser extensions for major browsers. More crypto-native browsers like Opera and Brave also offer native software wallets as well.

Cold wallets are hardware wallets that are connected to the internet only when they are powered on, essentially trading convenience for maximum security while still performing the same core function. Ledger makes thumb-drive-sized cold wallets that offer a high degree of compatibility and security.

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Aadharsh Pannirselvam

About Aadharsh Pannirselvam

Aadharsh Pannirselvam is a student at the University of Chicago studying Economics and Data Science while building with Blockchain Chicago and the Chicago DAO. Aadharsh works on creating easily digestible web3 and DeFi content at Benzinga while learning off of the bleeding edges of blockchains and digital assets and exploring a career in the space. He holds positions in Ethereum, Bitcoin, and various other DeFi protocols and ecosystems. Aadharsh was previously affiliated with Flipside Crypto and is currently affiliated with Galaxy Digital. Aadharsh’s opinions are his own and not financial advice. The best way to get in touch with Aadharsh is via Twitter, @aadharsh2010 or via LinkedIn.