Ethereum 2.0
Ethereum 2.0

The Merge: What You Need To Know About Ethereum 2.0

The NFT realm is runned mostly on the Ethereum blockchain: it is the most common blockchain used on OpenSea, and a layer 1 network that is used for several scaling solutions (such as Polygon). However, Ethereum has a few flaws in its initial design that prevents it from reaching its true potential. In light of the upcoming “Merge”, it is worth understanding what The Merge is all about, and what exactly it aims to solve.

What Is Wrong With Ethereum?

In order to understand The Merge, we need to first understand how Ethereum works. Basically, the Ethereum blockchain exists on thousands of computers that are called “Nodes”, that are connected to each other via the blockchain. The size of the blockchain is determined by how many nodes are connected to it. In any given time, these nodes are validating the blockchain’s transactions, and in return, the nodes receive ETH tokens as a reward for their contribution (Which is often referred to as mining). 

One of Ethereum’s biggest drawbacks is its high volume of computing activity, which translates into high gas fees: Gas fees are commission that users pay when they make a transaction on the Ethereum blockchain. Gas fees help to pay the nodes, and regulate the ecosystem’s high electricity consumption and demand for computing activity.

Ethereum 2.0 graphic
Ethereum 2.0 graphic

Gas fees can be very costly: In some NFT transactions, it can be higher than the Token itself. However, these high gas fees implies a major problem: In order to validate transactions on Ethereum and to keep all of the nodes synced, there is a need for what is known as a consensus mechanism. The consensus mechanism allows all of the nodes to “Agree” on the allocations of tokens that are scattered throughout the network. In order to do that, the nodes have to process complicated calculations, in what is called a “Proof of work” (POS) mechanism, that requires a lot of computing power and a lot of electricity. In fact, The Ethereum blockchain demand for electricity is over 90 terawatt-hours annually. That is twice the entire electricity demand for Hong Hong. Furthermore, Ethereum is creating a carbon footprint (CO2 emissions) of 26.45 Mt CO2; that is comparable to the entire country of Mongolia. And get this: Each Ethereum transaction is like 11,427 hours of watching Youtube. That is a lot! 

Even regardless of the high emissions of CO2 and the air pollution, the current system just can’t support the number of transactions: The current system can only validate a total of 50 transactions per second. For comparesement, modern credit card systems can support tens of thousands of deals per second. Furthermore, the current system has more drawbacks and problems, such as the need for strong and expensive graphic processors, and other problems that we won’t get into right now. Bottom line? a solution is needed.

Proof of stake (POS)

All of the problems detailed above led the Ethereum community to search for a solution, something that will make Ethereum great again. That solution is usually referred to as Ethereum 2.0, which means a transition from a proof of work (POW), to a proof of stake (POS) consensus mechanism: In a POW, nodes verify the network by making electricity-gorging calculations that “mines” new blocks and add them to the blockchain. 

However, in a POS mechanism, validating nodes don’t need to perform calculations. Instead, they just stake some of their own tokens, and users validate transactions when they choose to. Validators are rewarded by the network in proportion to their stake. In this mechanism, adding incorrect information leads to fines (Slashing). One advantage of POS is safety: When a lot of nodes stake their tokens, it requires a great deal of tokens to attack the blockchain, which makes such an attack basically impossible. However, the greatest upside is power saving: When Ethereum will use POS, it will consume 99% less electricity.

The Merge

Ethereum 2.0 is often referred to as “The merge”, since it is a gradual process that allows the network to function while the updated network is under construction. For instance, one element worth mentioning is Sharding: As of now, each Ethereum blockchain requires 4TB of memory in a node. Sharding will enable it to be split 64 ways, so each node will have to store just 1/64 of the block. These will enable to decentralize the system even more. 

Another element is the Beacon Chain: A consensus layer that operates simultaneously to the current Ethereum ledger, which acts as a sort of Audit mechanism to the current network. The Merge is actually the merge of the old network with the consensus layer known as The Beacon chain.

The Merge is expected by some time near the end of 2022. It is worth noting that it was postponed many times in the past, and some are skeptical that it will ever happen. However, over 30 billion dollars are currently staked in the new simultaneous consensus layer by validators, so it is kind of hard to go back now. As we see it, the future is coming.

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