Bookmark this article to prepare for the upcoming Ethereum Merge — you'll find all that you need to know.
Important Context to Understand ‘The Merge’
In order to fully understand what “The Merge” is, let’s cover important key concepts.
Notice all of those leading 0's? Miners must do immense work to find these multiple-leading-0 outputs.
To review the PoW mining algorithm:
1. Gather a bunch of unconfirmed transactions.
2. Build a “candidate” block with them.
4. Did the hash output produce enough leading 0's? (aka: was it below a desired network-enabled target difficulty?)
5. If yes, you won! You found a valid proof-of-work. Submit that block to the network and get rewarded. Go back to Step 1 and repeat.
6. If not, repeat step 4.
Ethereum’s PoW system works in exactly the same way. If you want to add blocks to the chain and get rewarded for doing so, you must invest in hardware to perform the PoW algorithm trillions of times.
So that’s how the proof-of-work model works. Miners expend a lot of energy and time in order to compete to find a valid proof-of-work, a process that serves to secure the network and achieve consensus.
There Are Many Levels to Consensus
The process described above is just an algorithm that is run by the Ethereum client mining software. Game theory forces us to consider factors external to just the software. Blockchain networks, as strong drivers for social and economic activity, transcend across to real-life systems. For example, a PoW miner must use capital to:
1. Purchase hardware equipment;
2. Have access to plentiful cheap electricity;
3. Have access to strong WiFi;
4. Set up space and infrastructure to house machines, heat exhaust, dust.
These are all risks that a person must take on in order to become a “miner” in a PoW system. All of these items are required for you to have everything necessary to submit valid proofs of work and keep the network in question secure. In proof-of-work, miners prove they have capital at risk by expending energy.
Given the above, a PoW network’s consensus is backed by the thousands of hardware machines and trillions of kilowatts of electricity invested by the miners around the world.
Proof-of-Stake = Another Consensus Mechanism
Proof-of-work is just one out of many consensus mechanisms that exist to coordinate decentralized networks. It’s the de facto consensus mechanism, popularized by Bitcoin — and copied by Ethereum.
But Ethereum was always designed for its use of proof-of work-consensus to be temporary.
Before we talk about The Merge, let’s review proof-of-stake, or PoS.
Proof-of-stake is a consensus mechanism that, like PoW, is used to give a blockchain network the things that consensus mechanisms should provide, mainly:
1. Network security (no fraud, no double-spending, no 51% attacks);
2. A way for nodes to agree what chain is the “true” chain.
Tezos is a network in production that uses PoS successfully; you must stake (aka: lock up) 6,000 $XTZ (the Tezos network native token) to become a “baker,” Tezos’s term for a “validator” and “miner.” Risking capital to support a network, game-theory-wise, properly incentivizes actors to be honest arbiters of the network, otherwise their investments would not be profitable.
Ethereum + Proof-of-Stake
Ethereum was designed to use proof-of-work only temporarily: the creators always planned to switch to proof-of-stake. Given proof-of-work’s indisputable success as a consensus model for Bitcoin, Ethereum was able to begin working with a PoW mechanism, while the complex design of a proof-of-stake Ethereum could be fully architected with a plan to implement it when the time was right and the system was fully researched, trouble-shooted and ready.
To become an Ethereum validator, you must stake 32 $ETH (the Ethereum network native token) and run the Ethereum client on a high-Internet uptime machine (even a laptop!). By doing this, you signal to the network that you will verify and create blocks honestly. Why? Because it is in your own best self-interest to do so. If you are dishonest, you will lose out on validator rewards and even potentially start to lose your stake — even the value of the token itself can fall, meaning you ultimately end up attacking yourself.
Ethereum PoS vs Ethereum PoW Concepts to Know
- A block in PoW is added to the chain by whoever successfully solves the target difficulty hashing puzzle. A block in PoS is added to the chain by selecting a random validator node to propose a block. A second set of validators is then randomly chosen to verify that validator’s proposed block.
- Ethereum PoW has “miners” responsible for block verification + addition. Ethereum PoS has “validators” responsible for block verification + addition. Miners earn rewards for finding a valid target hash solution, validators earn rewards by constructing a block when chosen at random to do so.
- To add blocks, Ethereum PoS does not require high energy consumption, while Ethereum PoW requires extreme energy usage in order to perform hash computations rapidly. Estimates place the PoS energy requirement to be ~99.95% less than PoW.
- The capital at stake in PoW is a person’s time, hardware and electricity. The capital at stake in PoS is a person’s time + their 32 ETH. Given the game theory design, honest actors stand to gain more than dishonest ones.
- The rate of PoW blocks is determined by the network difficulty, usually fine-tuned to aim for a specific time — which it can go over or under. A valid target hash can take a variable amount of time to find. The rate of PoS blocks is a fixed tempo. Time in PoS Ethereum is divided into slots (12 seconds) and epochs (32 slots). There are various mechanics that function based on this fixed tempo, for example: every slot, a committee of validators is randomly selected and charged with voting on whether the block proposed by another random validator is valid.
Ethereum + PoS Terms & Concepts to Know
- Validator: as a validator, you’ll be responsible for storing data, processing transactions and adding new blocks to the blockchain — doing this will require 32 $ETH stake + active hardware + software client. Validators are expected to maintain sufficient hardware and internet connectivity in order to gain rewards via block validation/proposal.
- Slashing: malicious behavior from a validator can result in that validator’s stake getting “slashed” or subtracted from, in ever-increasing amounts (remember that you can get slashed even for non-malicious behaviors such as your node going offline!).
- Slot: 12 seconds.
- Epoch: 32 slots.
- Mainnet: Ethereum’s current “true” chain running on PoW consensus. As opposed to a test network like Göerli, Ether is worth real money on this network.
- Ethereum client: software package run by Ethereum nodes that consists of two layers: execution and consensus. The node running the client could either be a full node or a mining node.
- Execution layer: layer of Ethereum client responsible for the execution of transactions and state management. This is where the EVM runs operation codes and programming logic. Execution clients include: Geth, Erigon and Nethermind.
- Consensus layer: layer of Ethereum client responsible for consensus. This is where the rules on what makes a block or transaction valid live. Consensus clients for the Beacon Chain include Lighthouse, Prysm and Teku.
- The Beacon Chain: Separate proof-of-stake blockchain created on Dec. 1, 2020. It exists completely parallel to Ethereum’s Mainnet and has been in production since it was created, used for testing. Once ready, it will become the new consensus engine on which future Ethereum transactions get executed.
Ok, So What Is The Merge?
Now that we’ve covered a lot of important terms and context above, understanding what the heck “The Merge” is should be easier.
“The Merge” is the final step in Ethereum’s broader plan to completely move off of PoW consensus and adopt PoS, or proof-of-stake.
Ethereum’s transition to proof-of-stake was originally divided into two major parts (excluding hard forks like Berlin and London, which occurred as general upgrades to pre-Merge Ethereum):
When The Merge occurs, Ethereum’s current PoW-powered consensus layer will be switched out for proof-of-stake consensus. Ethereum’s state and transaction history will remain exactly the same. If you are currently a liquidity provider on Uniswap, you will still be one on the proof-of-stake Ethereum system; the only difference is that the system on which you are on an LP will be secured by proof-of-stake consensus instead of proof-of-work.
The Merge will effectively change the way Ethereum clients currently bundle execution and consensus layers together, separating them out into their own separate clients. This means a PoS Ethereum full node can run a client with: Geth (execution) + Lighthouse (consensus) — or any variation of the execution/consensus clients possible. And it will do all of this in real-time.
Ok, The Merge Is the Final Step in the Ethereum Upgrade to Proof-of-Stake, But What Actually Happens?
So there you have it. After reading this article, you should be familiar with all of the important terms and concepts related to blockchain consensus systems, particularly for proof-of-work and proof-of-stake. When someone asks you what the heck The Merge is, the natural one-answer should be: “The final step in the process of Ethereum transitioning from PoW to PoS security model.”
Is this change risky? Sure! Proof-of-work is a battle-tested security model that has given Bitcoin almost-perfect uptime for over almost two decades. Proof-of-stake, on the other hand, is a fairly new and more complex security model. It remains to be seen whether the model will do well to secure the hundreds of billions of dollars on the Ethereum network.
Once Ethereum reaches its proof-of-stake milestone, there are many more upgrades down the line that are intended to help Ethereum increase scaling and further decentralization. These next milestones include:
What do you think? Will Ethereum’s “upgrade” to a new security model serve it well? Should they have just stayed with PoW consensus, given that is a seemingly reliable security model? Will this make Ethereum adoption mainstream or hurt it in the long run?
A special thank you to CryptoPunk 6068 for lending his research expertise to write this article.