Witness history! Ethereum's "smooth" merger writes a new chapter in POS

After years of waiting, the expectations were worth it. At around 02:44 PM on September 15, 2022 (Beijing time), Ethereum The Merge was officially activated. A few minutes later, the first epoch was completed, marking the completion of the Ethereum blockchain's transition from Proof of Work (PoW) to Proof of Stake (PoS), and the new era of PoS has officially begun.

Ethereum co-founder Vitalik Buterin tweeted his congratulations: “This is an important moment for the Ethereum ecosystem, and everyone who helped with the merger should be very proud!”

In the “Merge Watch Party” YouTube live broadcast hosted by the Ethereum Foundation , accompanied by the “POS Activated” picture released by the development team, more than 40,000 crypto people witnessed this history online.

Why is the merger so important? On the one hand, crypto people have been waiting too long. The vision of Ethereum migrating to PoS was first proposed in 2014. The upgrade was originally scheduled for 2016, but it was repeatedly delayed. There are even many critics who bet that the merger will never happen.

On the other hand, the combination of Ethereum and smart contracts marks another major development in the crypto market after the birth of Bitcoin in 2009. Without Ethereum, there would be no DeFi , NFT, DAO or decentralized metaverse vision that flourished later. The merger represents the switching of the underlying consensus engine of the blockchain while Ethereum continues to operate and support DeFi, NFT and application economies worth more than $100 billion.

"Silky" transition

Speaking of the merger, Ethereum co-founder Joseph Lubin once told Bloomberg that the process should be very smooth, saying: "It's as smooth as your iPhone or laptop automatically upgrading its operating system overnight while you sleep."

This was indeed the case, and there were no technical obstacles during the merger.

EtherNodes data shows that before the merge, 88% of the execution layer clients were ready for the PoS merge. After the total terminal difficulty of 587500000000000000000000 was triggered, according to the Ethereum Foundation's conference call, about 4% of the validators withdrew from the network after The Merge was activated, but this proportion was not enough to affect the network and was lower than some estimates before The Merge. About 15 minutes later, the first epoch was completed and Ethereum officially completed the transition to proof of stake.

According to Dune Analytic data, as of press time, there are nearly 430,000 validators on the Ethereum beacon chain , with staked ETH accounting for 11.36% of the total supply, and Lido's market share is 30.31%.

Did “buy rumors, sell news” happen?

Data from Bitpush Terminal shows that after The Merge was activated, the price of Ethereum did not fluctuate dramatically, basically remaining around $1,600, and then experienced a short surge from $1,600 to $1,655. About 7 hours later, ETH suddenly plummeted to $1,489, the largest single-day drop since August 26. In contrast, Bitcoin's 24-hour drop was only 2%.

Riyad Carey, a research analyst at crypto data company Kaiko , said in his analysis that the sudden plunge looks like a "buy the rumor, sell the news" reaction.

In fact, there are traces of this market reaction.

A report from data analysis platform Nansen said that before the Ethereum merger, the amount of ETH flowing into cryptocurrency exchanges surged, with crypto lending platform Nexo transferring 450,000 ETH ($720 million) to Binance , while another identified multi-signature wallet transferred 288,442 ETH ($461 million) to Bitfinex . Nansen's data showed that the cumulative value of ETH flowing into exchanges reached $1.2 billion, the largest in 6 months.

A large number of tokens flowing into exchanges may indicate that buyers want to sell, increasing the selling pressure in the market and directly dragging down the token price.

“ETH markets still have a lot of leverage, so volatility should be expected and will likely be welcomed by traders,” Carey predicted in his report. “We are also observing decreased market depth and increased spreads, so this could impact larger price moves.”

99.988% reduction in energy usage

Global regulators have long criticized cryptocurrencies for their energy consumption, and the amount of energy consumed by PoW has come under scrutiny from lawmakers and policymakers around the world. The biggest change to the PoS mechanism is that miners are eliminated, and validators are responsible for protecting the network.

According to an estimate by Digiconomist , before the transition to PoS, a single Ethereum transaction used 200.05 kilowatt-hours (kWh) of electricity, which is equivalent to 6.7 days of electricity consumption of an average American household.

The merger cuts Ethereum’s energy usage by 99.988% and CO2 emissions by 99.992%, a reduction that means the network now emits less CO2 than hundreds of American households do over the course of a full year of electricity use, according to a new report from the Crypto Carbon Ratings Institute (CCRI).

“We are pleased to commission this report from CCRI, which confirms that the impact of Ethereum’s incorporation could be the largest decarbonization effort of any industry in history,” ConsenSys founder Joseph Lubin said in the statement.

Issues to be resolved

While the merger largely solves Ethereum’s sustainability issues, it faces other challenges, which have been exacerbated by the massive growth in users over the past two years.

• Scalability. Ethereum’s processing efficiency (the number of transactions it can process per second) is limited by its design, and currently, Ethereum can process about 15 transactions per second. This greatly limits its use in application building, real-time data processing, and other advanced use cases.
  

• Cost. The biggest misconception about the merger is that it will reduce gas fees. “This is a change in the consensus mechanism, not an increase in network capacity, which will reduce gas fees,” explained Steven Walbroehl , co -founder and CTO of Halborn. In times of high demand, gas fees will soar, sometimes even exceeding the actual value of the transaction itself. If the transaction fails, the user still has to pay the fee, which will hinder the adoption of new users.

• Interoperability. Ethereum does not easily or directly interoperate with other blockchains, which means that transferring assets to other chains relies on externally designed mechanisms (such as Layer-2 chains or cross-chain bridges) to provide solutions.

As a result, the merger does not address some of the core barriers to mainstream adoption of cryptocurrencies. The Ethereum development team said they will continue to work on developments such as "sharding" - which allows nodes to reduce data costs by storing only a subset of data through shards, which may improve these issues, but when it will be implemented is still a long wait.

For Vitalik, the merger is just the beginning. “Let’s go build all the other parts of this ecosystem and make Ethereum what we want it to be,” he said in a live broadcast on Thursday.