The Merge — Ethereum’s pivot from proof of work to proof of stake is imminent but — despite common belief — the event will not solve the network’s scalability challenges.
This pivot, scheduled to happen this month, is Ethereum’s biggest change to date. When finalized, Ethereum will have moved further away from Bitcoin’s original design into a new era of blockchain technology — one more in line with many newer blockchains that are cropping up.
But despite The Merge being a big change, it won’t affect Ethereum’s core performance. There are common misconceptions that The Merge will boost speed or lower fees — only neither are set to happen. Instead, the bigger changes are to do with its consensus mechanism and its tokenomics. Here’s a look at what The Merge will and won’t do.
What will The Merge do?
The Merge will move Ethereum from proof of work to a proof of stake consensus mechanism. This transaction will happen due to a coming together of two layers, hence the term “merge.” The Merge will combine the current execution layer (which uses proof of work) with a new consensus layer called the Beacon Chain.
When this happens, the Ethereum blockchain will continue as normal, but it will be running on proof of stake instead.
Ethereum will go through a few changes as a result of The Merge. One of these changes will be to the security model of the network. By moving to proof of stake, Ethereum will no longer be secured by miners with powerful computers solving complex computations. Instead, participants will stake ether (ETH) tokens with validators to secure the network. The economic value of the staked ETH will now act as security for the chain.
Validators, and not miners, will be responsible for ordering transactions on Ethereum after The Merge. These entities will be the ones to determine the order of slots (the new term for blocks after the event) once The Merge happens.
With miners out of the picture, Ethereum’s carbon footprint is expected to reduce. Validators won’t need to run powerful computers that consume a lot of energy. As such, Ethereum’s energy usage is projected to go down by over 99%.
The Merge will also affect Ethereum’s issuance of new ETH. The event will reduce the issuance of new ETH by around 90%. The network will also continue to burn tokens in every transaction. If network fees are high enough, this means it could burn more tokens in fees each year than it issues — resulting in a deflationary network.
Why won’t The Merge increase scalability?
The Merge won’t affect scalability in any meaningful way because it is outside of the scope of the upgrade. The Merge does not expand the capacity of the Ethereum blockchain. As such, it will not introduce any changes to the speed of the network or the cost of transactions on the base layer. It is only changing the consensus protocol that governs the network.
Scalability has proven to be a difficult problem for blockchain networks to solve. This is due to something called the blockchain paradox or blockchain trilemma. The paradox has three sides — scalability, decentralization, and security. This trilemma has a simple argument; it is not possible to optimize for all three sides at the same time. Optimizing for any one or two will be at the cost of the others.
Older blockchains like Bitcoin, Litecoin, and even Ethereum, work by having most of the participants on the network running full nodes. These full nodes verify every transaction on the network and store the complete data history of the chain. They tend to have high security and decentralization but are not usually scalable. Bitcoin can only process about five transactions per second. Ethereum’s capacity is between 13 to 20 transactions per second.
Newer blockchains like Avalanche, Solana, Fantom, and Binance Smart Chain do not use this method. They instead rely on a limited number of nodes that are responsible for processing transactions. Users of these networks must trust that these nodes are working properly. Such chains have high transaction speeds at low cost, for example, Fantom can process 25,000 transactions per second. So, they are scalable, but they are not as decentralized. Apart from not being so decentralized, their networks can become bloated and much more expensive, and difficult to run. They can also lead to spam, something that has taken the Solana blockchain offline a few times.
Ethereum is going down a different path to solve its scalability challenges. Rather than one big, bloated base layer doing everything, Ethereum developers want to achieve scalability through a system of multiple layers — and potentially also by splitting up its blockchain into multiple parts. This first part of this strategy is already underway but it’s still relatively early days and we can expect a lot more progress on both fronts after The Merge.
By making the network more scalable, this will increase the number of transactions it can process per second and reduce fees for using the network.
When will Ethereum be more scalable?
There are two main ways Ethereum is aiming to be more scalable. It’s expanding vertically through a system of multiple layers (examples include Arbitrum, Optimism, and zkSync) and it might also expand horizontally through a technique known as sharding.
These layers use rollups which is a type of scaling technology. Rollups allow these layers to process hundreds of transactions into one single batch transaction that is then submitted to the main Ethereum chain for final execution. Layer 2 networks using rollups can process up to 4,000 transactions per second at a fraction of the cost compared to putting them all on the Ethereum mainnet.
The Merge will be followed by another upgrade called The Surge. This upgrade will introduce “sharding” and will help to increase Ethereum’s scalability by splitting the network into smaller chains called “shards.” Sharding is expected to improve Ethereum’s scalability by a factor of 100,000 and will likely happen in 2023.
Three other upgrades will come after the Surge — The Verge, The Purge, and The Splurge. These upgrades will help to optimize data storage on Ethereum by reducing the memory space requirements for validators. Data optimization will help to reduce instances of network congestion on Ethereum.
© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
