Proof of Work will soon be history for Ethereum, the network is on the home stretch to merge – the conversion of the consensus procedure to proof of stake. The long-awaited upgrade is expected to take place on September 15. We will clarify the five most important questions for you in advance.
1. Does the Ethereum Merge affect the power consumption of Ethereum?
Proof of work consumes a lot of electricity, this is an open secret. The ”proof of work” in mining takes the form of computing power – whoever contributes more increases the chances of winning, processing a block and thus being able to collect the income.
A highly competitive competition: With the price increases on the crypto market, mining has become more and more lucrative, and the network computing power – known as hashrate – on blockchains such as Bitcoin and Ethereum has increased dramatically over the past few years. According to Digiconomist, both networks together currently consume as much electricity as Australia.
With the merge, mining on Ethereum also ends. Instead of miners, validators will secure the network with ether deposits in the future. This results in a significant improvement in energy efficiency, with consumption reduced by an estimated 99.95 percent.
2. Does scalability increase?
This is no secret either: Ethereum has a scaling problem. With a throughput of about 15 transactions per second, the performance of Ethereum is far below the requirements as the largest smart contract platform. The deficit always comes to light when the transaction requests skyrocket and with them the transaction costs.
The bad news: the change of consensus itself does not change this at first. The good news: The merge paves the way for subsequent scaling solutions.
After the upgrade, the focus in Ethereum development is on the integration of so-called layer 2 solutions – sidechains, which outsource the processing of transactions and transfer them bundled to Ethereum. In the future, the network will be able to process thousands of transactions instead of 15. Complete solutions are expected for next year.
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3. How do investors benefit from Ethereum 2.0?
The most obvious side effect from the merge: staking – the opportunity to earn returns on blocked ethers. Even with small amounts, you can indirectly earn money on network security.
The entry hurdle for validators is high for Ethereum: 32 ethers – currently about 60,000 US dollars. However, small investors can pool capital via staking pools and thus participate in staking with less funds.
Residents lock their tokens and receive an annual percentage return (APY) for the provision, which is calculated according to the number of tokens used. On average, the profits are lower than with a “full-fledged” validator node. But the costs are also much lower. Proof of Stake thus also enables retail investors to participate financially in the protection of the blockchain.
4. Is the Ethereum network becoming more decentralized now?
A clear yes: since validators with higher stakes also have higher chances of winning, Proof of Stake tends to favor wealthy network participants. On the one hand, the degree of decentralization decreases as a result. On the other hand, Proof of Stake also favors network participation at more favorable conditions than, for example, Proof of Work.
Participation in Proof of Work is associated with high costs: acquisition, operation and maintenance of mining rigs. Over the years, private miners have been forced out of the business, which has been monopolized by a few major players. In addition, large miners with a higher hashrate also have a competitive advantage in the proof of work. The plutocracy effect thus balances out in both methods.
With the proof of stake, however, there are no further costs – apart from the stake itself. Access is more inclusive, the protection is spread over more shoulders than before. This in turn increases the degree of decentralization through proof of stake.
5. Will Ethereum 2.0 become a “world computer” with Proof of Stake?
Sustainability, scalability, financial inclusion, decentralization: with the change of consensus, Ethereum is well on its way to making the vision of the “world computer” a reality. Behind this is the idea of a global smart contract platform that can be used by everyone. Be it for decentralized applications (dApps), NFTs, DeFi transactions or transfers.
The integration of scaling solutions is a crucial piece of the puzzle, only with consistently low fees and higher throughput can Ethereum fulfill its promise from the world computer. Even if there are still many small construction sites in the network, Ethereum is moving a lot closer to the declared goal of the world computer with the merge.
In the current issue of the BTC-ECHO magazine you will find all the important background information on the Ethereum Merge as a cover story.