The Merge and Why It Matters – BRINK – Conversations and Insights on Global Business

In the last three weeks, one of the biggest events in the crypto space took place. Ethereum, the second largest blockchain after Bitcoin, has switched its operating model from Proof of Work to Proof of Stake.

One of the biggest benefits of this will be a reduction in energy consumption from the blockchain, estimated to be equivalent to the entire annual energy consumption of Switzerland.

BRINK spoke to Margaux Nijerk, Ethereum protocol reporter at CoinDesk, who explained what is happening.

NIJKERK: Since its inception, the Ethereum blockchain has wanted to shift its consensus mechanism from a proof-of-work model to a proof-of-stake model. “The Merge” as it is called basically means that these two models, the Proof-of-Work model and the Proof-of-Stake model, are merged and continue under a Proof-of-Stake model . That’s why it was also called a merge.

This has never been done before in the history of blockchain and it took years of engineering, research, creativity and manpower to figure out how to move a blockchain from one blockchain model to the next without shutting down everything in the ecosystem as there are so many Applications exist and an economy built on the Ethereum blockchain.

One of the analogies I like best that describes this whole situation is to imagine driving a car on the freeway that is filled with gas. And halfway through your journey, your car will automatically switch from petrol to an electric system without having to turn off the car.

EDGE: What is the economy built on Ethereum?

NIJKERK: Ethereum is really a grassroots project that not only allows you to practice decentralized finance through Ether, its native token, but also contains many decentralized applications. Hundreds of organizations and applications are powered by Ethereum. It is estimated to be a $60 billion industry built on the Ethereum blockchain. And so, suddenly changing this base blockchain to a new model really poses a huge risk if not done right. That’s why it took them so many years to test how to switch without shutting down this ecosystem.

There is some debate as to whether the presence of validators makes proof-of-stake systems less secure compared to proof-of-work. But the cutback mechanisms behind it, like the fines, are pretty serious.

This switch will reduce Ethereum’s energy consumption by 99.95%. The proof-of-work energy consumption of Bitcoin, for example, corresponds to that of Switzerland. So it’s a lot of energy saved for Ethereum, but besides energy consumption, the developers also believe that moving to a proof-of-stake model will make the network more secure.

The difference between Proof of Work and Proof of Stake

EDGE: Can you explain exactly what is meant by Proof of Work and Proof of Stake?

NIJKERK: Proof of Work basically puts the crypto miners in charge of adding blocks to the blockchain. Simply put, when a transaction comes in and they want to add it to the blockchain, miners compete to solve a difficult cryptographic math problem. Whoever gets the answer to that reaps the reward (for the Bitcoin Proof-of-Work blockchain, the reward is in Bitcoin), and then that block is added to the blockchain.

In order to be able to solve these cryptographic problems, you need very intensive computer hardware and you have to invest in huge computers, and because so much computing power is used to solve this cryptographic problem, this energy problem arises.

However, Proof of Stake is performed by validators. To participate, stake 32 Ether (ETH), which is currently around $48,000. When a transaction comes in, a validator is randomly chosen to validate blocks. The more Ether (ETH) you have staked, the higher the chance that you will be selected to add that block to the blockchain, but there is no cryptographic problem to solve, so it doesn’t require much energy. And before it is added to the blockchain, other validators must sign off on it.

EDGE: Isn’t there a risk that someone will pay their 32 ether to join and then make a corrupt or dishonest transaction?

NIJKERK: There are rules that penalize examiners who misbehave. And it’s very easy to find it on the blockchain if they choose not to include a transaction or not add blocks to the blockchain. If a validator is not acting honestly or maliciously, they are said to be truncated, which basically means they are financially penalized.

If you participate in the validation process now, lock at least 32 ETH, you will lose part of it if the validator does not act honestly. Because validation is fully visible on a blockchain, one can see if a validator is proposing two blocks for the same slot or signing different attestations for the same target. If he is caught, he will be punished. This is to ensure the security of the network so that blocks are added properly without jeopardizing the integrity of the network.

There is some debate as to whether the presence of validators makes proof-of-stake systems less secure compared to proof-of-work. But the cutback mechanisms behind it, like the fines, are pretty serious.

EDGE: Do you think the merger will be successful?

NIJKERK: There was always a non-zero chance that something could go wrong, but I’m cautiously optimistic because they really tested this thing through and through. The merger took place on September 15th and went incredibly well. There seemed to be very minor issues, and the developers seemed impressed with how well it performed. This is thanks to the number of testnets and shadow forks the developers worked on to ensure the merge went as smoothly as possible. Now Ethereum operates entirely under a proof-of-stake consensus mechanism.