Ethereum merger: a "big test" for the decentralized world

The gears of history are slowly turning, and an event that will lay the foundation for the future development of the blockchain industry is taking place.

On September 15, 2022, Ethereum, which was established eight years ago, will complete the merger. 420,000 people participated in the verification, more than 7,000 active nodes around the world collaborated together, and tens of thousands of blockchain teams made choices... This system upgrade attracted the attention of almost all encryption and blockchain practitioners, and even attracted the attention of major mainstream financial regulatory agencies, semiconductor giants, and domestic and foreign Internet giants.

The reason is simple. As the world's largest decentralized Internet platform and the most innovative blockchain and Web3 ecosystem, Ethereum claims that this is the most complex system upgrade since its establishment, which is of great significance. Ethereum founder Vitalik Buterin said that he has been preparing for this for 6 years.

The merger of Ethereum means a complete upgrade of this super-large decentralized system with a market value of US$200 billion. According to OKLink data, Ethereum currently has more than 3,000 developers and millions of users. Its ecosystem runs more than 400 Defi (decentralized finance) projects, 130,000 NFT contracts and more than 7,500 active nodes, and they will witness and participate in this upgrade together.

In the past two years, Ethereum has been running two parallel networks at the bottom layer, one is the original PoW (proof of work) blockchain, and the other is the PoS (proof of stake) blockchain that has only been running for the past two years. There are corresponding interest groups behind each of them. The purpose of the Ethereum merger is to completely replace the former with the latter without stopping the system.

Behind this upgrade, not only will it prove to everyone whether Ethereum has the ability to improve itself and whether it is still the safest and healthiest decentralized Internet platform, but people will also witness a capital reshuffle and redistribution of benefits on a scale of hundreds of billions.

As a member standing on the PoW side, Nvidia was unfortunately hit hard in this incident. According to a report by Guosheng Securities, in the fourth quarter of 2021, 45% of Nvidia's revenue came from gaming and mining customers, amounting to US$3.4 billion. And Nvidia's old rival AMD (Advanced Microelectronics Corporation) in the first quarter of 2022, 54% of its revenue came from computing and graphics products including mining graphics cards, amounting to US$4.8 billion. Guosheng analyzed that although Nvidia and AMD did not split their mining businesses, making it impossible for people to know the specific revenue of the mining businesses of these two semiconductor companies, they can still get a glimpse of the impact of the Ethereum merger on the revenue of these two companies.

Things change unpredictably. Not long ago, Nvidia CEO Jensen Huang said: "Our GPU supports the world's largest distributed supercomputing, which is why it is so popular in the field of cryptocurrency." But now, as a believer in cryptocurrency, Huang Renxun has been abandoned by the crypto giants.

Nvidia is just a shadow of this incident. The Ethereum merger directly shakes the interests of hundreds of thousands of cryptocurrency miners; a mining market worth hundreds of billions of dollars that has been built up over a decade. A CEO of a crypto mining company said: "The Ethereum merger will force PoW miners to look for other small PoW blockchains, which will lead to overcrowding of these blockchains, increased mining difficulty, and reduced profitability."

So, why did Ethereum go to so much trouble to merge and even offend the entire mining community?

“In 2014, Ethereum’s white paper said it would switch from PoW to PoS. Everyone initially thought it would be possible in 2018 or 2019, but the research on PoS was not yet complete at the time. Unexpectedly, it has been delayed again and again until now,” said a practitioner.

Choosing PoS or PoW is not only a battle of interests, but also a battle of beliefs.

PoW (Proof of Work) was once the basis for the operation of Bitcoin, Ethereum, and all blockchains (public chains). The reason why Ethereum could operate normally in the past was that miners or mining pools acted as nodes and provided computing power for the entire system through mining.

However, Ethereum founder Vitalik Buterin believes that mining consumes too much energy and requires the issuance of hundreds of thousands of Bitcoins or Ethereum coins every year. He believes that this is not a good mechanism. On the contrary, the PoS mechanism can save 99.95% of electricity consumption and make it more difficult for the main network to be attacked by 51% of the computing power.

In addition, another key benefit of PoS is that it unites a wider group of people, deeply binding hundreds of thousands or even millions of people to participate in blockchain verification. Users no longer need to purchase hardware such as graphics cards and mining machines as before. They only need to pledge ETH at the software layer to participate in Ethereum mining. "You only need an Internet-connected laptop to participate in mining, which will greatly increase the number of pledgers or miners, thereby achieving greater decentralization. " said an encryption industry analyst. According to OKLink data, the total number of ETH 2.0 pledged addresses has exceeded 430,000, and the number of validators has exceeded 420,000, almost twice the number of the same period last year.

It is foreseeable that after the Ethereum merger, the number of people and addresses staking Ethereum will increase significantly again. In the past, miners were a group of profit-seeking people who had little to do with the Ethereum ecosystem. However, after PoW switched to PoS, coin holders (stakers) became miners, and more participants will be closely tied to Ethereum.

The transition from PoW to PoS is actually a competition among the Ethereum ecosystem for the right to record books in the distributed ledger. It chooses to eliminate the previous accounting method (PoW) and interest groups (institutions and individuals who use mining machines to mine) and embrace the new accounting method (PoS) and interest groups (people who hold coins and pledge Ethereum coins).

For nodes, PoW is more like rolling dice, while PoS is more like buying a lottery ticket. In PoS, block transactions are verified by validators who have pledged multiple tokens. The more tokens an individual has associated with a blockchain, the higher the chance that they will be randomly selected as a network validator. Compared to PoW, PoS also prefers ordinary people, as long as they have an Internet connection, they can become a node without having to buy expensive mining machines.

This mechanism has been widely recognized and agreed upon by people. "Except for BTC, other Crypto ecosystems will turn to POS." A practitioner judged.

A trend is becoming increasingly obvious, with more and more mainstream blockchains choosing PoS, such as Solana, Polygon, etc.

However, many miners believe that PoS is not necessarily a good choice. As the party whose interests are damaged, miners believe that the merger of Ethereum actually violates the spirit of blockchain.

"Mining machines build a bridge between the physical world and the virtual world. If such a large facility is subject to regulation and review, it will bring many problems to decentralization, which goes against people's original vision of complete decentralization." said a practitioner working in a crypto mining company. For a long time, the crypto industry was a group that was not regulated by governments. They believed in decentralization, so they had a strong aversion to government regulation.

Moreover, Shenyu, a supporter of PoW, believes that the current PoW blockchain can achieve anonymity of block-producing nodes, but PoS has certain difficulties due to the mortgage of on-chain assets.

Some industry insiders believe that PoS has more uncertainty than before in terms of government regulation and anti-censorship, which has become a common concern among practitioners: If the SEC regards Ethereum as a security, how will it face regulatory scrutiny? This is not far away. Recently, the chairman of the US SEC has stated that both cryptocurrency issuers and exchanges are obliged to register with the SEC. PoW believes that Ethereum should not be put in a situation where it may be subject to government regulation, and Ethereum may violate blockchain fundamentalism. The conflict between these two views cannot be reconciled and has become a confrontation between two ideologies.

Nvidia, Bitmain, Justin Sun and others are on the side of PoW; Vitalik Buterin, the Ethereum Foundation, USDC and USDT and the Defi markets they lead, Yuga Labs and Opensea and the NFT markets they lead are on the side of PoS (Proof of Stake).

Supporters of the merger believe that the historical role of miners has been fulfilled and they should be eliminated because they consume too much energy. Judging from the current situation, most of those who support the Ethereum merger are those who pursue technological and product innovation. They believe that the future world should be built by newer mechanisms and more new participants.

It is worth mentioning that the Ethereum merger has also attracted much attention in China, including blockchain startups, financial institutions, Internet companies, etc. For example, in order to attract more Ethereum miners, Conflux plans to replace its PoW algorithm with Ethash.

Although cryptocurrencies are explicitly prohibited in China, the country attaches great importance to the technology of Ethereum applications that do not involve tokens, such as smart contracts. Smart contracts are an automatically executed protocol that can greatly improve the efficiency of financial institutions in certain areas. On Ethereum, developers use "smart contracts" to build a large network of financial institutions, such as exchanges and lending institutions. A paper from the IMF (International Monetary Fund) pointed out that the marginal cost of financial activities through Defi applications is one-third of that of banks in developed countries and one-fifth of that of banks in developing countries. Domestic regulators, financial institutions, and Internet companies are also trying to apply this technology.

Ethereum, to some extent, is already a successful social experiment, and is becoming an object for domestic entrepreneurs to imitate, learn from, and transform to suit domestic soil. This is now the world's largest decentralized Internet platform, which has successfully led and dominated the Defi and NFT waves, and spread the concept of Web3 around the world. The source of 700 domestic NFT platforms comes from it. In the future, it will also implement five major upgrades (merger, take-off, border, clearing, and carnival). It has already entered and is integrating into the mainstream financial market and Internet platform.

The merger, the first comprehensive upgrade of the Ethereum system, will be a key step in introducing the "decentralized concept" into the mainstream world.