Wondering what the Ethereum ‘merge’ means for you? Here’s a complete breakdown

The merge between Ethereum and Beacon Chain is a software upgrade from proof-of-work to proof-of-stake for validating transactions.

FPJ Web DeskUpdated: Thursday, September 15, 2022, 05:59 PM IST
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During a trip to the US last month, Sitharaman raised doubts about the size of the cryptocurrency market worldwide | Image by Miloslav Hamřík from Pixabay

Crypto mining has been an essential cog in the blockchain machinery, more than a decade after virtual currency Bitcoin was first created. It refers to a process of minting new crypto coins and verifying transactions through the proof-of-work mechanism that makes cryptocurrencies secure. But at the same time mining relies on sophisticated hardware and a network of computers which solve complex mathematical equations and consume a lot of energy.

The much talked about ‘merge’ between Ethereum and Beacon Chain, which is actually a software update, will bring down energy consumed for validating crypto transactions by 99%. It will also reduce costs and time involved in the process by shifting from the proof-of-work to proof-of-stake methodology for verification. But this will effectively end crypto mining for Ethereum while increasing efficiency.

How does mining work?

Cryptocurrencies are created on ‘blockchains’, which is a virtual ledger that records transactions in the form of blocks arranged in a sequence, so that an asset isn’t spent twice. Since the blockchain is accessible to the public, users can reject an altered version, and this is what keeps it secure. Proof-of-work requires a computer to solve time-consuming mathematical equations before adding another block. It’s a key aspect of crypto mining which also uses graphics processing units of gaming computers to solve computations.

The big switch

Beacon Chain, the firm which Ethereum is now merging with, uses an alternative to proof-of-work called proof-of-stake. Here crypto owners are randomly selected to validate transactions, based on the number of assets they possess. There are no puzzles involved, and validators only need to stake tokens as collateral for validating transactions. If the operation is successful, they get rewarded based on their stakes, and in case of an error in the transaction they are penalised. This guarantees that validators will perform their task thoroughly and also secures the system against external attacks.

By doing away with the enormous amount of hardware, the merge will first cut out e-waste as well as costs involved in proof-of-work powered crypto mining. Crypto mining also consumes energy more than entire countries do, and by using 99% less energy through the proof-of-stake mechanism, Ethereum will cut down power consumption equivalent to the amount used by Chile. The merger will reduce the global energy consumption by 0.2% which is a significant impact by a single firm.

In terms of speed, the merger will make validation of transactions marginally quicker from 14 seconds to 12 seconds.

Plainly speaking, the software update will replace crypto miners with stakers in the Ethereum ecosystem, and will remove control of a few mining syndicates. But it may also mean that staking syndicates will take their place, since a community-run validator collective Lido already controls 30% of Ethereum’s proof-of-stake chain.

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