ETH Merge thoughts

ETH MERGE

The Ethereum platform is the foundation of WEB3 and many DeFi applications. It ranks highest amongst competing platforms in terms of economic activity, user growth, and developer engagement. With the significant number of users on the platform, understanding the upcoming “Merge” is vital to operating on its infrastructure in the near future. Especially with the current degree of speculation on the Merge, it is important to educate yourself about what the Merge actually entails and how it can affect your wallet. This article will delve into what is occurring in the Merge, the changes it will bring to the Ethereum platform, and how it will affect Ethereum users.

Proof of Work (PoW) vs Proof of Stake (PoS)

At its core, the Merge is Ethereum’s shift from a Proof of Work (PoW) to a Proof of Stake (PoS) system for its consensus mechanism. A consensus mechanism is the tool used in blockchain networks to validate transactions. PoW and PoS are two different types of consensus mechanisms and exploring how these systems work is vital to understanding the upcoming changes to Ethereum.

PoW is the current system Ethereum uses to validate transactions on its platform. PoW requires miners who confirm blocks on the blockchain through the computation of complex cryptography problems. The security of the block is measured by the total hash-power, computation, and energy needed to validate the block. Miners are incentivized to solve these problems by receiving rewards in the form of cryptocurrency for the completion of a block. However, PoW relies on large amounts of energy and high-end hardware to perform. As a result, mining is not only environmentally destructive, but also centralized in a small number of mining pools who control the validation process.

PoS is the new validation system that Ethereum will adopt platform wide once the Merge occurs. In the PoS system, Ethereum users called “validators” are selected to stake their own tokens into a smart contract. These staked amounts act as collateral, which can be destroyed if other users or “attesters” vote that the transaction is fraudulent. For Ethereum specifically, anyone with at least 32 ETH can qualify as a validator. To summarize, participants in a PoS model stake their own collateral in validating blocks to secure transactions in the network.

What will happen during the Merge?

To transition from PoW to PoS, Ethereum’s Merge will combine its existing Ethereum Mainnet client with the Beacon Chain PoS Consensus client. Once these two systems are merged, all Ethereum nodes created will have both of these clients and their respective features.

The new functionality of Ethereum nodes can be described in layers. The first is the execution layer, which is the current Ethereum Mainnet client or ETH1. This layer is responsible for storage, management, state sync, VM execution, and transaction processing. The second is the consensus layer, which is the Beacon PoS client or ETH2. This layer will facilitate the transition from a PoW system to a PoS system.

How will PoS on Ethereum work?

Every twelve seconds, the Beacon Chain or consensus layer will randomly select a group of validators that is 1/32 of all stakers on the platform. One validator in that group will be designated as a “block proposer” while others are labeled as “attesters”. The block proposer will propose a new block to be added to the chain, while the attesters in the group will vote on the block’s validity. However, if the attesters find that the proposed block is fraudulent or dishonest, the block proposer is punished. This process of attesters voting that a block proposer is misbehaving is called “slashing”.

Validators are awarded if their new block is attested and they act honestly in the blocks they propose. Their award is determined by the transaction fees and rewards generated by the network; however, this does not include gas fees determined by the EIP-1559 model. Importantly, this reward is shared equally across the pool of stakers, regardless if the staker is chosen in that initial group of the block proposer and attesters.

Slashing penalties will be given to those who break certain rules. For example, if a block proposer proposed a block with a false transaction or manipulated data history, a large portion of the validator’s staked ETH is slashed. That validator is also banned from participating in the network in the future. Penalties are also given when validators commit smaller offenses like going offline, but the penalties are much less severe for these infractions.

Why is the Merge happening?

The transition from PoW to PoS will bring multiple benefits to the current Ethereum platform. Some of the main reasons include network security, energy efficiency, and scalability.

Network Security

In its current PoW system, Ethereum validation is controlled by a few participants due to the energy needs and expensive hardware required to compute these cryptographic problems. This defeats the purpose of a decentralized transaction system. In the new PoS system, anyone with at least 32 ETH can participate as a validator. There is no longer an energy or hardware requirement to validate newly added blocks. The new PoS Ethereum will require at least 16,382 validators to function, which is far more than the current validators in the PoW system.

Energy Saving

Crypto-related applications have been maligned by media outlets for accelerating climate change due to its immense energy requirements. Since the computation of complex cryptographical problems is no longer needed in a PoS model, Ethereum does not require an immense amount of energy to operate. It is estimated that transition to PoS will result in a 99.95% reduction in energy used in block validation operations.

Scalability

Ethereum’s transition to PoS is its first step to improve its scalability. In particular, the new PoS system is the start of Ethereum’s advancements in sharding, a technique to split the transaction load across sub-chains in the network. Incorporating sharding would spread transactions across 64 new chains as opposed to a single blockchain, decreasing congestion in the network and increasing the throughput rate of transactions. It is estimated that the increase to throughput will allow nearly a hundred thousand transactions per second once sharding is implemented.

What will be the same after the Merge?

While the Merge will introduce changes to how blocks are validated, most surface users will not recognize many changes on the platform. Especially in regards to gas prices, the current model will not change with Ethereum still utilizing the EIP-1559 pricing model. However, while fees will not be changed, differences in block times and transaction rates can affect gas pricing in the future. Additionally, the Merge will not directly affect transaction throughput rate until sharding is fully implemented.

Other speculation on the Merge revolves around its misleading terminology. In particular, the term “Ethereum 2.0” is often used when talking about the Merge, giving the false impression that a new token or asset is being developed. This claim is false, as “Ethereum 2.0” is just a term to describe the consensus layer as specified earlier.

What will be different after the Merge?

Block Finality Time

One of the key differences introduced by the Merge is the increased time it takes for blocks to be validated. The current Beacon Chain PoS system requires approximately fifteen minutes to validate a block. In contrast, PoW requires only five minutes to fully validate a transaction. While block finality may take longer, this is due to the higher security provided by the PoS system. Blocks are viewed and validated by more eyes, resulting in a more secure chain and greater prevention of fraudulent activities like double-spend attacks.

Separation of Block Building and Block Proposing

Block building is the process of storing a group of transactions onto a single block and adding those transactions to the blockchain. Block building is a complicated process that has been optimized for profitability by miners in the current PoW system. However, the PoS model will result in many new participants in the validation system that lack the skill miners have in block building. The introduction of the PoS system creates new roles in the Ethereum economic ecosystem, as block proposers will seek experts to build blocks for them. The new ecosystem will have a profound impact on how users interact with each other in the PoS infrastructure.

Block Reward Reduction

The new PoS system will result in a 90% reduction in block validation rewards compared to the current PoW model. This is due to the PoS system not requiring immense energy and computer hardware costs to complete. Current PoW rewards average ~13,000 ETH per day while PoS rewards average ~1,600 ETH per day. The Ethereum Foundation has stated that once the Merge occurs, the 1,600 ETH per day will be the standard for block validation rewards.

When will the Merge happen?

The Merge has had a turbulent delay history, but is now projected by Ethereum developer Tim Beiko to be implemented by September, 19, 2022. Other testnets have already merged Beacon Chain functionality for testing.

Key Risk: Replay Attacks

A key concern about the Ethereum platform post-Merge is whether a vestigial PoW chain will still be created after the system shifts to PoS. The creation of this chain would be known as a “hard fork” and would allow miners to still utilize PoW features. However, unless miners are able to coordinate before the Merge to run this vestigial chain on a new chain ID, “replay attacks” might be possible. A replay attack would occur if a transaction made on the PoW side of the fork affects your assets on the other side of the fork in the PoS chain.

For example, if User A were to send 50 ETH to User B on the PoW chain, then User B can repeat that same transaction on the PoS chain. User B would then be able to send him or herself an additional 50 ETH from the PoS chain to their wallet.

Replay attacks can be completely avoided if Ethereum users ignore any transactions that may occur on a vestigial PoW fork. Interacting with this fork gives anyone the chance to transact ETH from the PoS fork at zero cost to themselves. If a user still wants to interact with the PoW fork, other ways to avoid replay attacks include:

  1. Make transactions fail due to invalid preconditions
  2. Make transactions fail due to low gas

However, while there are ways to limit replay attacks, the attack is too speculative to concretely avoid. This is why users should avoid interaction with any PoW forks that may be available after the Merge. This is further supported by many Stablecoins, including Tether, only having value on the upcoming PoS chain. Tether CEO, Paolo Ardoino, has already shut down claims that Tether will still be involved on any PoW chain on the platform.

Conclusion:

The Merge completely revises the means in which Ethereum’s internal infrastructure operates and how users validate transactions on the platform. It is extremely important for all Ethereum users to understand these incoming changes and dispel speculation about the upcoming event. By understanding both how and why these changes are being implemented, Ethereum users can prepare themselves for the rapidly changing ecosystem of the platform at the center of WEB3.

Needless to say, I’m excited for the next few weeks.

Thanks for your time — Juanbug.

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