Ethereum's upcoming merge upgrade! What are the benefits of transitioning to PoS? What problems still need to be resolved?

With the final non-public Ethereum testnet Kiln merging on 3/15, the Ethereum mainnet merge is approaching. In light of this, Google software engineer Shivsak shared his thoughts on the merge on Twitter, explaining what this upgrade will mean for Ethereum.

A 🧵 about the $ETH 2.0 Merge: the upcoming upgrade for @ethereum

What it "the merge", why is it important, and what does it mean for the future of Ethereum?

[1/x] 👇

— shivsak (@shivsakhuja) March 25, 2022

Transition of Consensus Mechanism

The current consensus mechanism of Ethereum is the same as Bitcoin, both using PoW Proof-of-Work. Under this mechanism, miners must bear significant costs to win mining rewards by purchasing high-performance hardware equipment and paying for electricity expenses. This not only creates barriers to entry but also makes it more difficult to increase decentralization.

In the future, Ethereum's consensus mechanism will gradually shift to PoS Proof-of-Stake. In addition to solving the hardware and electricity issues mentioned above, validators only need to stake their ETH to verify transactions and earn transaction fees.

In this new PoS mechanism, validators no longer need to solve complex problems through calculations, as validators are randomly selected. The more ETH staked, the higher the chance of being selected.

Ethereum Upgrade Three Phases

Ethereum's upgrade from the current stage to the consensus layer, the original Ethereum 2.0, is divided into the following three phases:

1. Beacon Chain: This is a chain independent of the mainnet, currently operated using PoS consensus mechanism. It was launched in December 2020, primarily laying the foundation for the transition from PoW to PoS.

2. The Merge: The current Ethereum mainnet will merge with the Beacon Chain, fully adopting the PoS consensus mechanism. This merge is expected to take place in 2022 Q2.

3. Sharding: This is the solution to Ethereum's scalability issue. Currently, Ethereum can only process about 15 transactions per second. After sharding, Ethereum's transaction processing capacity will reach thousands per second by dividing the blockchain into many "shards," independent chains to increase scalability.

This will reduce the entry barriers for Ethereum validators, as validators only need to store and operate data for a subset of the blockchain, not the entire blockchain. It will also increase the possibility of running Ethereum nodes on laptops or phones and enhance decentralization. This technology is expected to be implemented in 2023.

Note: Sharding is a form of database partitioning, also known as horizontal partitioning, which involves splitting a large database into smaller, manageable parts to improve performance and reduce response time.

Benefits of the Merge

As mentioned above, the merge will make Ethereum more efficient and energy-saving, and there will be changes in the issuance volume and inflation rate. According to data from ultrasound.money, after the merge, the annual ETH issuance will decrease from 5.4 million to 500,000, and the total supply growth rate will decrease from an annual increase of 3.5% to -0.6%.

After the merge, ETH may not necessarily experience deflation, but at least the inflation rate will be much lower. In addition, staking rewards will increase from around 5% to 7-12%. Validators will no longer need to sell ETH to pay for electricity.

Gas Fee and Congestion Issues Still Pending Resolution

In 2021, Ethereum generated $11.6 trillion in transaction volume, driven significantly by developments in NFTs, the metaverse, DeFi, and other areas, leading to increased Ethereum usage and transaction demand, resulting in transaction congestion and high Gas Fees. However, even after the merge, this issue remains unresolved. To enjoy lower Gas Fees, one must wait for the implementation of sharding technology in 2023. Note: L2 Layer 2 solutions are also a focus of scalability.