Ethereum: The Merge

The Merge is one of the biggest upgrades of Ethereum. There has been speculation for years about a possible upgrade of the Ethereum blockchain. In 2021, a few minor upgrades to the Ethereum blockchain occurred. The Merge  upgrade will be done step by step to prevent errors.

The Merge should ensure that the scalability of Ethereum improves. Ethereum users have been struggling with high transaction costs and long processing times for years. 

Ethereum 2.0

Proof of Work

Like the bitcoin blockchain, the Ethereum blockchain uses Proof of Work (PoW) as its consensus mechanism. There is a lot of criticism of this way of verifying transactions. This is because it uses a lot of electricity. This would be bad for the climate according to critics. In itself they are also right, although the real story is always more nuanced.

In addition, the PoW can promote inequality. Miners who verify transactions on the blockchain need advanced equipment to verify transactions on the blockchain. That takes a lot of computing power. An ordinary Macbook is not suitable for this. This means that users who have a lot of capital can buy better computers and therefore can always verify transactions where they also get a reward.

Also, the PoW has become slow due to the amount of transactions the blockchain has to process. The blockchain was not made to handle many transactions in the beginning. This led to network congestion and higher transaction costs. As a result, users started to pay a lot of transaction fees to execute a transaction. 

The Merge

Ethereum 2.0 (the Merge) should change the Ethereum blockchain. The previous solutions should be solved by this upgrade. The biggest change is the switch from the PoW to the Proof of Stake (PoS). This no longer uses computational power and electricity, but a group of validators who must stake Ethereum to qualify as a validator. These validators are then allowed to verify the transaction on the blockchain which gives them a reward for it. We are actually switching from electricity to shares.

The complete upgrade is done in steps, through hard forks. Every node in the network must update their software with every hard fork, in order to implement new functionalities step by step.

Beacon Chain
At the end of 2020, the Beacon Chain was launched by Ethereum. That was the very first step towards the PoS consensus mechanism. The Beacon Chain is Ethereum's new blockchain and it uses the PoS. The network of this blockchain consists of a large number of validators who can stake their Ethereum to the blockchain protocol. 

The Merge, a deepdive...

The Merge is a fusion of Ethereum's traditional blockchain and the Beacon Chain. As you can imagine, this has to go incredibly well. One small mistake could trigger a catastrophe.

At the point where Ethereum Mainnet has converged with the Beacon Chain, Ethereum uses Proof of Stake. The ability to run smart contracts and the full history of the blockchain are brought by the Ethereum Mainnet to the Beacon Chain. This transition should create little to no disruption for users.

The Merge on Kiln
On Ethereum's Kiln testnet, The Merge was successfully executed. This was an important step towards Ethereum 2.0 because this transition showed that there were no errors in the transition that could disrupt the transition process. Since this transition was successful, it was possible to start getting ready to implement The Merge on the Mainnet.

What is Kiln? Kiln is the testnet that Ethereum uses for testing new updates. By thoroughly testing new updates on a separate net than the mainnet, errors can be detected and fixed without affecting the Ethereum network in its whole. After the testing is successful, the update is installed on the mainnet.

When will The Merge with the Mainnet take place?
The actual implementation and transition was expected in the second quarter of 2022. On March 15, the Ethereum Foundation announced that The Merge had been successfully completed on Kiln - the last merge testnet before the upgrade will be deployed on Ethereum's public testnets.

The first stage of Ethereum's two-stage merge, codenamed Bellatrix, happened on 6 September 2022. Now that all stages are complete, the merge itself has also been finalised.

Post clean-up fork
If The Merge has been executed on the mainnet, it will not yet mean that all functions are supported. For example, it is not yet possible to transfer staking income from Ethereum to another wallet. This function will have to be made possible after the Merge.

For most functions a hard fork will have to be made. That is, a split off of the blockchain that will take place. A hard fork does allow you to transfer staking income to another wallet address. Until then, your staking income is stuck in the smart contract on Ethereum 2.0. The reason why this income is locked is to ensure the security of the upgrade. It is possible that staking income may be removed from the smart contract while the upgrade is taking place. This could disrupt the upgrade and Ethereum could be lost.

So users who have staked their Ethereum (for example, through LIDO) cannot get their Ethereum out if LIDO. They can only do so if The Merge has been successful and there has been a hard fork. So please pay attention to this as well if you are going to stake your Ethreum via LIDO. You can't get it out (yet)! If you stake Ethereum via LIDO, you will receive Steth. Steth stands for staked Ethereum. This Steth is the same as Ethereum in terms of price. If you still want to get your Ethereum cashed out of LIDO, you can exchange your Steth to the 'real' Ethereum via a Decentralized Exchange. Your Ethereum isn't lost :)

Post Merger steps

Sharding

After The Merge has successfully taken place, sharding is added to the blockchain. Sharding should make the blockchain faster. With sharding, more "highways" are built so that transactions no longer have to travel along one road but can be distributed. This allows more transactions to be processed per minute.