On September 15th, the long-awaited Ethereum merge finally happened, as the Ethereum blockchain shifted from the legacy Proof-of-Work (PoW) model to a more sustainable Proof-of-Stake (PoS one).
Our speaker Brian Pasfield, CTO of Fringe Finance, shared his thoughts on how the upgrade will influence the crypto space.
The merge isn’t just a milestone for the Ethereum community but the entire crypto space. However, there are several implications of the Merge, both positive and negative. To get a better idea of the impact of the upgrade, one has to comprehend its technical repercussions.
Firstly, although the main Ethereum network will now operate under PoS, we also have a new fork called ETHPoW or ETHW. But more importantly, the update itself is not over yet. The Merge was just the first step on the blockchain’s road map: developers are yet to achieve several more milestones before Ethereum becomes the most sustainable network.
So, what’s next? How will the new update impact the crypto community, and how will the new ETHW operate within its niche?
Consequences for miners: Why was the ETHPoW fork created?
To understand why the hard-forked ETHPoW was created following the merge, let’s first review how Ethereum’s mining and consensus mechanism has changed.
Every blockchain uses a consensus mechanism to validate transactions and records. A network member gets chosen as a validator for each block of transactions. In a proof-of-work model, network members compete to become validators, as they have to solve a computational puzzle or problem. The one to solve the puzzle first gets a chance to validate the blocks and earns cryptocurrencies as a reward. The more powerful the computer network system a miner has, the more likely it is that they will solve the proof-of-work puzzle first.
On the other hand, the proof-of-stake (PoS) mechanism significantly reduces the amount of computational work required to verify blocks and transactions. In this model, members of the network can become validators by staking their coins as collateral. Validators are randomly selected from a pool of stakers to confirm transactions and validate the block information. In Ethereum, validators are required to deposit at least 32 ETH. So, they have to maintain integrity and accuracy when varifying transactions, otherwise, risk having their staked assets lost.
A substantial part of the community — mostly ETH miners — were against the PoS upgrade, as this model would evidently drive miners out of work. High-profile crypto miners such as Chandler Guo and others campaigned for a forked network of the PoW system.
As a result, ETHPoW was born, which will allow miners to hold onto their profits. The native token of this forked network is ETHW, which will be airdropped to pre-Merge ETH holders on supported exchanges.
The pros and cons of Ethereum’s PoS
Undoubtedly, the core benefit of the Proof-of-Stake mechanism is its efficiency. As PoS is not a hardware-dependent model, it requires 99.9% less energy than PoW. So, going forward Ethereum’s carbon footprint will be little to none, which is likely to bring more new users to the ecosystem. There are also more technical benefits, along with some unconsidered risks.
Sharding becomes possible
The PoS model will create more scope for Ethereum to increase its efficiency through sharding. In a blockchain, sharding splits large data blocks into smaller pieces (shards) for faster validation, allowing the network to handle more transactions at any given time. ‘The Surge,’ Ethereum’s next milestone, will see the network split into several shards to drive scalability. It could potentially increase the number of participants in the network by allowing devices like phones to become nodes. Sharding will also allow transactions to be significantly faster, as validations will happen in almost real-time.
The circulation of new coins will decline
Going forward, the Ethereum Mainnet won’t require any mining activity because of the PoS mechanism. Therefore, the circulation rate of new ETH tokens will decline because mining rewards are substantially larger than staking rewards. In the long term, this could potentially favor ETH prices during a bull marke. tAnalysts estimate that new ETH token production will decrease by 90% because of the Merge.
Whales might retain the ultimate control of Ethereum
Regarding cons, the PoS model creates significant risks for Ethereum’s decentralized model. According to the IMF, the PoS consensus mechanism could ultimately create an excessive concentration of decision-making powers on crypto exchanges and wallet services providers. In the long-term, this could increase market integrity risks, and make Ethereum more centralized below the surface.
There’s also the potential risks of users pooling funds together to recieve validation rewards, which also compromises the ethos of PoS.
What’s next for PoS Ethereum?
As discussed, the merge is just the beginning of Ethereum’s long-term vision of developing the most sustainable blockchain network. As mentioned above, ‘The Surge’ upgrade will implement sharding. Following this, the third planned milestone is ‘The Verge,’ which will allow more users to become validators without requiring them to store a lot of data: the network’s monumental push toward ‘true decentralization.’
Next comes ‘The Purge,’ which will see the network remove its historical data and technical debt. And the final milestone will be ‘The Spulge’, which refers to the fine-tuning of its preceded steps.
In conclusion, Ethereum is poised to bring revolutionary changes to the DeFi and crypto space in the coming years. Only time will tell how sustainable and effective these changes might turn out to be.