Ethereum Merge

If you follow Crypto news, you’ve probably heard about the Ethereum Merge over the last week. When I first started writing this newsletter, I covered the scale challenges with Ethereum and discussed the high cost in fees and lower speed of the network’s Proof of Work (PoW) process. Faster, cheaper blockchains like Solana and Flow operate on Proof of Stake (PoS) validation. PoW requires a computer to solve a complex mathematical problem before confirming onchain activities. These calculations hog computer capacity, consumer a lot of energy, and are expensive to operate. PoS is accomplished by proving that a wallet owns a piece of the token in order to become a validator, which requires way less power and cost.

After years of operating as a PoW chain, Ethereum will be transitioning to PoS around September 15, 2022. This date is approximate because in typical blockchain overcomplicated fashion, it will occur when the chain hits a certain block counter number, specifically 58750000000000000000000. This changeover has been on the Ethereum roadmap for over 5 years, and the network passed a critical test called the Goerli public testnet merge last week. This was the big remaining hurdle to making the conversion live on mainnet. It is reported that “the Merge will reduce Ethereum’s energy consumption by ~99.95%.” A big win for sure.

Holders of $ETH may find their custodians or trading firms putting a short term pause on activity around the merge. This might mean temporary restrictions on withdrawals or trading. Coinbase has already warned customers of this. Holders of $ETH don’t need to do anything. The activity happens all with the validators behind the scenes.

$ETH has been on a tear since bottoming at $1,366 on July 26th. The token hit a recent high of $2,000 on August 14th as the Goerli test was completed. Ethereum has given back some of these gains as risk assets have been hit in the last week.

Unfortunately, the Merge is not going to bring all the benefits of PoS chains like Solana and Flow to Ethereum. The Ethereum Foundation released this document to dispel myths around the Merge. In it, they state that the Merge will not reduce gas fees or speed up the network in a meaningful way. These benefits are expected to come in the future when Ethereum implements sharding, a process of splitting a database to spread the computational load. The move to PoS needed to be completed before Ethereum could implement sharding to increase speeds and bring down the costs. People generally think sharding will come some time in 2023, but Ethereum has been notorious for missing dates in its roadmap.

I’m going to keep today’s post short as this might have been a bit technical for some readers. As the roadmap continues for Ethereum, we’ll cover more on this in the future. Please follow me on Twitter for more frequent updates.

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