The Merge- Ethereum Might Shift to Proof-of-Stake Mechanism Sooner Than We Think

What is "The Merge"?

Ethereum functions similarly to Bitcoin because a decentralized network of computers competing to solve mathematical puzzles is responsible for mining transactions. In exchange for solving the puzzle, the reward is new ETH coins. However, the process by which computers determine which transactions should be added to a block, known as proof of work, is extremely energy-intensive. As a result, Ethereum will likely switch to a consensus algorithm that consumes significantly less energy, allowing the network to be 99 percent more energy efficient.

The term given to Ethereum’s new protocol is proof of stake. In proof of stake, transactions are validated by addresses that have staked — or pledged to a smart contract — a significant quantity of ETH. Those who staked more ETH receive a larger portion of the reward. Since the first blockchain launch in 2015, the Ethereum community has been working to transition to proof-of-stake. The Merge is one of a series of upgrades that will make Ethereum faster and less expensive to use. Ethereum's downside is its long transaction times and high transaction fees. For example, during times of heavy congestion, simple $1 token exchanges on Uniswap can incur transaction fees of more than $50.

The Merge is not the solution to the problem of high gas fees. However, it will pave the way for improvements that could ultimately reduce it. Before the beginning of 2022, the designation given to these upgrades was Ethereum 2.0. This designation stopped in early 2022.

Hasn't Ethereum Shifted to the Proof-of-Stake?

You must be aware that Ethereum has a proof-of-stake blockchain on which you can stake any amount of ETH. In December of 2020, the chain dubbed "Beacon Chain" was introduced. Since its launch, it has been a success. This particular chain has 330,000 validators and has wagered approximately 10.6 million ETH. However, the Beacon Chain has been neutered. It functions concurrently with the Ethereum blockchain, and even though developers are working on an updated version of Ethereum, it is impossible to modify it beyond the ETH stake.

The Merge will transform the mainnet version of Ethereum into Beacon Chain. After The Merge, there will be the elimination of the proof-of-work component of Ethereum, and mining will cease permanently. In the wake of The Merge, you will eventually be able to execute smart contracts on the Ethereum mainnet using proof-of-stake rather than proof of work. Furthermore, you will be able to withdraw the ETH you have invested in Ethereum 2.0. However, the Ethereum Foundation anticipates that the post-merge "cleanup" upgrade will occur "very soon" after The Merge.

When Will The Merge Take Place?

The Ethereum mainnet blockchain will merge with Beacon Chain a few months after in June 2022. Unfortunately, there has been a postponement of these upgrades numerous times with a possibility of another postponement.

Do You Have to Take Any Action?

Yes, most probably. The Merge makes no changes to Ethereum's history. You can view all of the information about the Ethereum blockchain using block explorers such as Etherscan. If everything goes as planned, you won't have to do anything; it's just a back-end change. However, if you are an Ethereum miner, you will lose your job and will have to find a new mining location.

If you're considering staking Ethereum to be a part of the Beacon Chain (or delegating Ethereum to a third party if you don't have the 32 ETH required to run an Ethereum validator), it will be a relief for you to know that you can withdraw your ETH immediately following The Merge. However, staked ETH can be "withdrawn" from sites like Lido, which distribute tokens representing the staked Ethereum. Something important to note is that approximately 90% of the new Ethereum will be removed when The Merge occurs. Therefore, if many people invest in Ethereum at this time, it may result in less profit being made.

What Will Happen After The Merge?

Following The Merge, future network upgrades will incorporate "shard chains" to increase network speed and capacity. With these, the network will gain 64 new blockchains. Because these shard chains must be staked, the Merge is the first step. The Ethereum Foundation recently stated that shard chains are no longer a requirement because layer 2 scaling solutions such as Optimism and Arbitrum are now obsolete. Layer-2 scaling solutions allow ETH and ERC-20 tokens to be temporarily transferred to another blockchain that performs the computing work for less money and at a lower cost.

Shards may be able to work with layer-2 technology in the future. According to the Ethereum Foundation, members of the Ethereum community will require "multiple rounds of shard chains," which can provide "endless scaling."

Should You Change Your Investment Strategy?

There is no reason to act while things are still in progress. It may take some time to get everything in order, and additional factors such as expanding regulation may impact Ethereum and other cryptocurrencies during this time. Investing in Ethereum or any type of blockchain technology is investing in something in its infancy. You will need a considerable amount of time to predict how the technology will evolve. I do not believe there is anything Ethereum holders must do at this time.

The possibility of an upgrade and the escalating number of blockchain transactions indicate the future of this technology. With this in place, it is never too late to learn. This may give you an advantage or help you decide on investing in crypto. However, financial advisors caution against investing more than 5 percent of your cryptocurrency portfolio for any cryptocurrency investment. Regardless of how tempting it may be to ride the cryptocurrency wave, you should prioritize paying off debt and bolstering your emergency fund rather than investing in cryptocurrency. In addition, experts advise against investing more than you can afford to lose, as crypto is a volatile investment class.

If you are still willing to take risks under these conditions, Ethereum may be a suitable option. Experts have ranked Ethereum alongside Bitcoin as one of the most secure crypto investments, even before the Merge may bring prices closer to the high record it reached in late 2021.

What Does the Future Hold for Ethereum?

This Ethereum update will likely reduce the supply of new ETH, while the amount of ETH available for staking may increase interest in the Ethereum blockchain. The decline in supply is favorable for the majority of Ethereum investors. In the future, supply is likely to decrease, not increase. This will serve as a tremendous boost for Ethereum's investment potential as a store of value and hedge against inflation.

Conclusion

Investors in DeFi are eager for the finalization of the merger. The current report indicates that at least $31 billion worth of ETH has been deposited into the brand-new Ethereum Consensus Model staking mechanism, which will validate new transactions when the light turns green. This is ample evidence to support Ethereum's blockchain as it is maintaining its position as the world's leading smart contract blockchain and becoming the next cryptocurrency market leader. Nonetheless, Ethereum's developers have a great deal of work to complete before they can be released.