Here’s what you need to know
Ethereum’s journey since launching in 2015 has been a tremendously successful, albeit tumultuous one. The premier smart contract blockchain has enjoyed exponential adoption and a thriving developer community giving rise to the nascent sectors of DeFi and NFTs.
Despite its widespread popularity, the chain remains plagued by congestion and high energy expenditure due to its Proof-of-Work (PoW) architecture. Understanding the need for Ethereum to scale faster while maintaining its security, developers have worked tirelessly to develop a framework for transitioning to Proof-of-Stake (PoS). Years of work are finally coming to fruition with the Merge slated for Q3.
While Ethereum mainnet still operates on PoW, its PoS counterpart, Beacon Chain, has been in development since late 2020. Beacon Chain will form the consensus layer of Ethereum 2.0’s architecture, allowing the network’s smart contract functionality to scale rapidly with the help of validator nodes. The Merge denotes the integration of these two technologies. As the Ethereum Foundation explains, Beacon can be likened to a “docking station” powering Ethereum’s voyage toward mass adoption.
The Merge has already been successfully executed on both the Ropsten Testnet and, more recently, the Kiln Testnet, the final testnet deployment prior to the mainnet merge, dubbed “Shanghai”. The integration of PoS consensus into ETH’s mainnet architecture could see an estimated energy expenditure reduction of ~99.95% — firmly addressing the concerns of critics of the current energy-intensive PoW consensus.
Impact of the Merge
Ethereum will see some immediate changes post-merge, in addition to the reduction in energy consumption. Block production time, which currently varies but generally takes 13 seconds to process, will be fixed at 12 seconds under PoS, representing a ~1 second reduction in latency on the network. As blocks will be considered finalised after consensus is achieved among 2/3 of validators, an attacker would have to effectively burn a third of total staked ETH to create a conflicting block.
To put that into perspective, there is currently >12,5m ETH staked in preparation for ETH 2.0, with a USD equivalent of ~$25B at the time of writing. Network attackers would thus need to burn >$8B worth of ETH to mount a challenge to the network’s integrity — making it a prohibitively expensive and unworthwhile endeavour.
These changes aside, it’s important to note that the merge to Beacon will not, in and of itself, immediately increase scalability. Rather, the integration of Ethereum’s execution layer into Beacon’s PoS consensus mechanism will pave the way for scalability in the form of sharding.
On a basic level, sharding allows for a secure distribution of data storage, making rollups cheaper to execute in the form of Layer-2 scaling solutions. Rollups allow for transaction bundling, meaning that transactions on Ethereum can be executed far more affordably and rapidly than is possible at present.
One can think of sharding as a team effort. Instead of all parties competing to mine a block, sharding allows transactions to be processed in parallel, thus increasing throughput (how many units can be processed at once) by breaking down the work into smaller, easier to process chunks.
While the Sharding upgrade was slated to ship along with the Merge, the wealth of independent Layer-2 solutions that have been launched over the past year, including Optimism, Arbitrum,and Metis, has reduced the urgency of this deployment.
Users wishing to immediately benefit from L2 scaling solutions now have a number of options to choose from, with the sector’s TVL (total value locked) currently sitting at $3,96B.
The industry’s leading Layer-2 projects (L2Beat)
So, What’s Next?
The merge and sharding represent upgrades aimed at solving the most significant challenge to networks in crypto — the blockchain trilemma.
While whether it succeeds remains to be seen, Vitalik, Ethereum’s co-founder, asserts that the complete realisation of ETH 2.0 could provide a viable solution to this complex problem.
As mentioned above, sharding allows for the processing of far more transactions — thus providing scalability. Further, sharding can be run entirely on consumer laptops, allowing for decentralisation. Finally, this decentralisation via sharding makes a blockchain more secure as potential attackers would need to attack the entire network to make an impact, rather than exploiting a small part of the system.
If we consider Ethereum in its current form, the urgency of these issues becomes clearer. During the height of 2021’s bullrun, transaction fees on the network sometimes ran upwards of $400 for a simple token swap or NFT purchase. It goes without saying that such exorbitant fees only serve to hamper further adoption, pricing out the vast majority of retail investors not yet in the market. These fees are the result of massive network congestion due to the low throughput of ETH at present — roughly 13 Transactions Per Second (TPS) on its current PoW architecture.
The eventual introduction of sharding is likely to dramatically increase throughput and lead to more inclusive transaction fees. Given that we’ve barely scraped the surface of mass adoption, these innovations are vital if the industry hopes to onboard the remainder of our eight billion-strong population.
Security is of course also a paramount concern in the industry. With hacks draining over $500m from the space in 2022 alone, bolstering network security through further decentralisation is vital when billions of dollars are on the line.
Innovation in crypto moves at a pace far more rapid than anything we’ve encountered before. Negotiating the growing pains of an emerging technology aimed towards mass adoption is a fascinating, and incredibly resource-intensive undertaking. The beauty of blockchain means that most of these innovations are driven by a decentralised community of builders with the common goal of getting crypto to a place where it’s ready to integrate into the broader world.
There’s a long way to go yet, but it’s encouraging to note that the ethos driving infrastructure innovation remains steeped in providing increased accessibility to a new financial paradigm.
How lucky we are to bear witness to a collaborative effort of this magnitude. It’s a much-needed reminder that speculation and technology operate on two different levels. Regardless of price action, builders keep building — relentlessly.