In the early hours of Thursday morning (UTC), Ethereum hit a long-awaited milestone as mainnet merged with the Beacon Chain, completing the network’s transition from proof-of-work to proof-of-stake.
The Ethereum Foundation has described the Merge as "the most significant upgrade in the history of Ethereum", and it does have huge implications for the future of the world’s first and largest smart contract platform.
However, equally important is what changes the Merge does not bring – and what development goals still lie ahead.
What Happened At The Merge?
The Ethereum network used a proof-of-work consensus mechanism right from its launch in 2015 up to the point of the Merge. This means that, like Bitcoin, the Ethereum blockchain was maintained by thousands of computers around the world, purpose-designed to undertake the trillions of calculations required to ensure security and prevent fraudulent transactions taking place.
In 2015, PoW mining was the only tried-and-tested consensus mechanism. A few blockchains used proof of stake (PoS), but it did not then have the track record of PoW. Over time, the shortcomings of PoW became evident, including its enormous energy usage and a degree of centralisation that arose through the use of large mining pools. Meanwhile, research into PoS showed that it was at least as secure as PoW, and in fact it became the preferred solution for new blockchains.
For years, the limitations of the Ethereum network had been evident, including its throughput of just 15 transactions per second (tps) and its huge carbon footprint. A far-reaching set of improvements – collectively known as Ethereum Upgrades – was researched and planned. One of the key elements of these upgrades was a switch from PoW to PoS.
Note: Ethereum Upgrades was formerly known as Ethereum 2.0. The Ethereum Foundation stopped using this term because it implied there were two versions of Ethereum – and also gave scammers opportunities to exploit confused users.
In December 2020 the Beacon Chain was launched. This was a separate PoS chain that would eventually serve as the new consensus layer for the upgraded Ethereum, managing not just one chain but dozens of ‘shards’, or sub-chains, to increase the network’s total capacity. For almost the first two years of its existence, the functionality of the Beacon Chain was limited. Unlike the PoW Ethereum mainnet, it could not process transactions or execute smart contracts.
The Merge saw the Beacon Chain take over the job of managing consensus for Ethereum mainnet. From that point on, PoW miners would be redundant. The energy use of the network – around 80 TWh or roughly equal to that of Chile – plummeted by 99.95%. It has been estimated that switching to PoS reduced global energy consumption by 0.2%.
The Merge is the most important update to have happened in Ethereum’s eight-year history, but one of its key roles was to pave the way for more significant upgrades that will happen in the coming months and years.
What Did Not Happen?
At the Merge, Ethereum transitioned to proof of stake consensus. As well as having a far lower carbon footprint, PoS is arguably more secure than PoW. Because expensive mining hardware is no longer required and anyone can stake their ETH, the network is more decentralised.
The move to PoS also lays the groundwork for improved scalability in the form of sharding. However, this will not be implemented until late 2023 or 2024. In itself, the Merge does not have any effect on Ethereum’s capacity.
This means there will be no immediate reduction in gas fees, which can be as high as $10 for a simple ETH transfer at times of peak network use, and hundreds of dollars for a complex smart contract interaction. Ordinary users will still have to put up with lengthy delays before their transactions are confirmed when the network is at its busiest.
In short, nothing will really change for the end user at this point. Layer 2 networks like Polygon, Arbitrum and Optimism will still be necessary – and according to Ethereum co-founder Vitalik Buterin, they will likely always be necessary, even once sharding has been implemented.
What Are The Next Development Goals?
Many blockchain platforms support a higher transaction volume than Ethereum, but they typically make trade-offs to achieve this – usually settling for a degree of centralisation in one form or another, which makes them more vulnerable to attacks.
The ultimate aim of Ethereum Upgrades is to increase the capacity of the network to tens of thousands of transactions per second, without compromising security or decentralisation.
Sharding is the key to achieving this and the priority for the next major phase of development. There is still a large amount of work to be done on sharding, and it’s not clear whether shards would be used to execute transactions, or simply to store data (which is simpler and easier).
The intention is that the Beacon Chain will eventually coordinate transactions between 64 different shards, which would increase the capacity of the network from 15 tps to around 1,000 tps. However, this is not nearly enough to compete with the TradFi industry; an often-quoted statistic is that Visa can handle 24,000 tps, and routinely processes 2,000 tps.
L2 solutions are therefore critical, and are also an integral part of the plan to scale Ethereum. Vitalik Buterin has discussed the importance of these in a blog post titled A rollup-centric Ethereum roadmap. Rollups and other L2s have the ability to increase Ethereum’s capacity to around 3,000 tps. L2s and sharding together, along with other optimisations to the network, could see Ethereum process an incredible 100,000 tps, meaning that sharding alone would likely be a step backwards that would throttle the network.
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The successful Merge provides a strong foundation for future improvements, helping Ethereum to maintain its position as the most popular and important smart contract platform.