In an attempt to become faster and more energy-efficient, the world's second most important blockchain changed its consensus mechanism from Proof of Work to Proof of Stake on 15 September.
What does this mean? Previously, the Ethereum network ran on a blockchain that used Proof of Work (PoW) as its consensus mechanism (Ethereum Mainnet). To validate and generate the blocks in the blockchain, PoW requires nodes (miners) to solve a complex task using mining hardware and computing power to run the network. The fastest node receives a reward.
With the Merge, the old PoW blockchain has now been merged with the new beacon chain. The new beacon chain no longer uses the consensus mechanism PoW and instead relies on Proof of Stake (PoS).
Proof of Stake involves the use of validators instead of miners. In this consensus mechanism, node operators must deposit 32 Ether (ETH) as collateral (via a smart contract - staking) to become network validators and receive rewards. One node is then chosen at random as recipient of the rewards.
Those who neither have 32 Ether, nor want to run a validator node yet still want to use their Ether, can do so by joining a staking pool. A staking pool combines the stakes of multiple people to put up the required 32 ETH for an Ethereum validator node. The block rewards of such node are then shared with the staking pool in proportion to the ETH deposited per individual account.
What does the Merge bring to the table?
With the switch to the PoS mechanism, Ethereum promises a number of advantages: for example, the new method is significantly more energy-efficient than the previously used proof of work. The high-performance – and correspondingly power-hungry – hardware required for the mining process is now no longer needed. Therefore, Ethereum developers can more or less predict that the power requirement will drop by a whopping 99.95 %.
In addition, transactions are also expected to get faster, because Proof of Stake means that significantly fewer validations are performed on the blockchain at the same time. This should also be accompanied by lower transaction fees; these are (still) unreasonably high for Ethereum compared to other cryptocurrencies.
In any case, the price of ETH has nevertheless dropped after the successful merge and should therefore also be well observed. In addition, the merger of the new beacon chain with the old mainnet has major implications for an industry worth billions – for investors, startups, mining companies, staking providers and even tax consultants.
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