The ‘Ethereum (ETH) Merge’ Primer Series: PART II

By Rodrigo Zepeda, CEO, Storm-7 Consulting

A brief history of Ethereum developments

It is helpful to briefly understand historical developments pertaining to Ethereum, in order to frame the developments ushered in by The Merge. On 1 April 2014, the Ethereum Yellow Paper was published which set out a technical definition of the Ethereum protocol (Ethereum 2022). On 22 July 2014 Ether (ETH) was first officially launched for sale to the public (Ethereum 2022). On 30 July 2015 ‘Frontier’ provided the first live basic implementation of the Ethereum project (Ethereum 2022). This was followed by the Frontier thawing on 7 September 2015 (ETH=$1.24), which: (1) lifted the Frontier thawing fork (5,000 gas limit per block lifted)); (2) set the default gas price to 51 Gigawei (GWEI), and (3) introduced the difficulty bomb to ensure a future hard fork to proof-of-stake (PoS) (Ethereum 2022).

On 14 March 2016, the ‘Homestead’ fork was implemented (ETH=$12.50), which included a number of protocol changes and a networking change that provided the Ethereum platform with further network upgrade capabilities (Ethereum 2022). On 20 July 2016, the ‘DAO’ (Decentralised Autonomous Organization) fork was introduced (ETH=$12.54), which represented a decision to fork voted on by the Ethereum community in response to ‘The DAO Attack’ which occurred in 2016 (Ethereum 2022; Siegel 2022). On 18 October 2016 the ‘Tangerine Whistle’ fork (ETH=$12.50) represented a first response to the denial of service (DoS) attacks that occurred on the network in September 2016 and October 2016 (Ethereum 2022).

On 22 November 2016, the ‘Spurious Dragon’ fork (ETH=$9.84) represented a second response to the DoS attacks that had previously occurred on the network (Ethereum 2022). On 16 October 2017, the ‘Byzantium’ fork (ETH=$334.23): (1) implemented the reduction of block mining awards (5 ETH to 3 ETH); (2) added certain functionalities (ability to make non-state-changing calls to other contracts, cryptography methods to facilitate layer 2 scaling (L2S)); and (3) delayed the planned difficulty bomb (Ethereum 2022).

On 28 February 2019, the ‘Constantinople’ fork (ETH=$136.29): (1) sought to ensure that the blockchain did not freeze before the implementation of PoS; (2) optimised the gas price of certain actions in the Ethereum Virtual Machine (EVM); and (3) added the ability of the platform to interact with addresses that were yet to be created (Ethereum 2022). On 8 December 2019 the ‘Istanbul’ fork (ETH=$151.06) sought to: (1) allow contracts to facilitate more creative functions; (2) allow Ethereum and Zcash to interoperate; (3) improve DoS attack resilience; (4) improve the performance of L2S scaling solutions; and (5) optimise the gas cost of certain EVM actions (Ethereum 2022).

On 2 January 2020, the Muir Glacier fork (ETH=$127.18) introduced a further delay to the difficulty bomb (by 4 million blocks ~ 611 days), as increases in block difficulty owing to proof-of-work (PoW) threatened to degrade Ethereum usability (waiting times, transaction times, decentralised application (Dapp) times would all increase) (Ethereum 2022). If not for the Muir Glacier fork, transaction costs on the Ethereum network would have skyrocketed as block settlement times were predicted to hit between 20-30 seconds per block (fewer blocks would have been minted per day) (Foxley 2020; Ethereum 2022).

On 14 October 2020, the staking deposit contract was introduced to the Ethereum network which facilitated staking (ETH=$379.04) (Ethereum 2022). On 1 December 2020, the ‘Beacon Chain’ genesis (ETH=$586.23) occurred which meant that PoS was first introduced to the Ethereum ecosystem (Ethereum 2022). On 15 April 2021 the ‘Berlin’ upgrade was implemented (ETH=$2,454) in order to optimise gas costs for certain EVM actions and to increase support for a range of transaction types (Ethereum 2022). From 2020 to 2021 we can identify a clear rise in the value of ETH. At the same time, we can also identify that this period features a great deal more network changes.

On 5 August 2021, the ‘London’ upgrade (ETH=$2,621) sought to: (1) reform the transaction fee market, by introducing Ethereum Improvement Proposal (EIP) ‘1559’ (Beck and Asher 2021); (2) enact changes regarding the handling of gas refunds; and (3) set out the Ice Age schedule (Ethereum 2022). On 27 October 2021, the ‘Altair’ upgrade (ETH=$4,024) was introduced to the Ethereum network which provided a scheduled upgrade for the Beacon Chain (Ethereum 2022). On 9 December 2021, the ‘Arrow Glacier’ upgrade (ETH=$4,111) was introduced to further push back the difficulty bomb timeline (Ethereum 2022).

On 30 June 2022, the ‘Gray Glacier’ upgrade (ETH=$1,069) was introduced to push back the difficulty bomb timeline again (Ethereum 2022; Newar 2022). These developments demonstrate the huge amount of work and upgrades that have taken place on the Ethereum network throughout its comparatively short lifespan. In addition, they also show how the Ethereum platform has consistently sought to introduce operational improvements. However, because of the somewhat haphazard nature of such upgrades and improvements, they have at the same time introduced volatility in the market price of its native cryptocurrency, Ether.

Nevertheless, it is important to understand that throughout 2020 and 2021, ETH made significant and consistent gains in value, and rose from $127.18 in January 2020 to $4,111 in December 2021. So, whilst its value has fallen considerably owing to the Cryptocurrency Crash in 2022, it has arguably not always shown the same consistently wild swings in volatility as has been demonstrated by Bitcoin (BTC) over this period.

Ethereum: The Merge

The Merge has been scheduled to take place in September 2022. The Merge represents the merging of the Ethereum PoW main network (mainnet) (main public Ethereum blockchain) with its existing PoS (Beacon Chain) consensus mechanism (Fox 2022).  At its core, The Merge will facilitate a transition away from the old PoW mining model to the new PoS mining model. The overall transition from the ‘Execution Layer’ (Ethereum 1.0) to the ‘Consensus Layer (Ethereum 2.0) is multi-phased, meaning that it is scheduled to occur over a series of different upgrades. The envisaged three main upgrades relate to:

(1) the Beacon Chain;

(2) The Merge; and

(3) ‘Shard Chains’.

The Beacon Chain phase has now transpired, and so The Merge is the next main upgrade to the Ethereum platform. It represents one of the most significant and technologically complex parts of this multi-phased transition, with the full upgrade to the Consensus Layer expected to occur sometime in 2023 (Yaffe-Bellany 2022). As noted above, the Beacon Chain introduced the PoS blockchain mining model to the Ethereum ecosystem. This meant that from that time onwards, there were two consensus mechanisms operating in tandem within the Ethereum ecosystem, namely the traditional PoW mechanism (on the main chain), and the PoS mechanism (on the Beacon Chain).

The Merge will transition the Ethereum network from a PoW mechanism to a PoS mechanism, by merging the existing Ethereum mainnet with the Beacon Chain mechanism. This will enable full staking on the Ethereum network. Overall, The Merge is intended to improve the overall efficiency, scalability, and speed of the Ethereum network, which will ultimately result in a higher processing capacity, faster processing times, and reduced processing fees (Millman, Graves, Kelly 2022).

The Merge: Sustainability

In fact, the final shift from a PoW framework to a PoS framework is expected to cut Ethereum’s overall energy use by 99.95% (Yaffe-Bellany 2022). To put this into perspective in terms of sustainability, it has been estimated that the Ethereum network’s annualised consumption of power is approximately 112.9 Terrawatt-hours (TWh), which is about the same as the annual consumption of the Netherlands (population of 17.4 million) (Alchemy 2022). By comparison, Bitcoin (94.8 TWh per year) has been estimated to have an annual consumption of energy just over that of the Philippines (population of 109.6 million and electricity consumption of 90.9 TWh per year) (Smith 2022; University of Cambridge).

It is believed that Bitcoin PoW mining generates somewhere between 22 and 22.9 million metric tonnes of CO2 every year (Volpicelli 2022). It is believed that such a level of annual CO2 emission will likely be eliminated to a large degree under the Ethereum PoS mining model. So, following on from The Merge the Ethereum platform should be massively more climate friendly owing to reduced carbon emissions. As such, it has been proposed that the reduced environmental footprint inherent in a move to the Consensus Layer may reduce the ‘reputational price’ of the Ethereum network, as well as the products and services built on it (Volpicelli 2022).

Indeed, one example of the new type of green products to be launched post-Merge, is a collection of sustainable non-fungible tokens (NFTs) called ‘Regenesis’ offered on the Ethereum platform by ConsenSys (Jagdev 2022; Tonelli 2022).  The core themes to be highlighted by the new sustainable NFT collection are ‘Sustainability’, ‘Security’, and ‘Scalability’ (Godfrey 2022). What is really interesting about this NFT collection is that it is free - collectors are free to mint as many NFTs as they like (view the launch online).

The Merge: Security

In theory, the transition to PoS following on from The Merge should increase decentralisation within the blockchain and improve security. It was believed that validators in the network would increase sixfold from the current 2,700 to at least 16,384 validators (Alchemy 2022). However, the latest figures show that there are more than 400,000 validators that currently exist on the Beacon Chain (Marcobello 2022). Under the Ethereum 2.0 PoS model, validators will be responsible for processing transactions and ensuring security on the Ethereum network.

Anyone can become a validator so long as they stake a minimum of 32 ETH (approximately $50,656 or £44,003), and set up three pieces of software, namely an execution client, a consensus client, and a validator (Marcobello 2022). However, a range of new intermediaries will also be providing access to 'fractional' validation services, i.e., market participants can benefit from ETH validation rewards by investing in only a fraction of the minimum stake. Ethereum already features a balanced distribution of developers, enthusiasts, investors, stakeholders, and users, across its ecosystem (Liu 2022). This increase in the number of validators in the Ethereum network therefore further adds to the underlying security of the network.

In order to attempt an attack on the network, an attacker would now have to control at least 51% of the blockchain’s staked tokens, and at least 51% of the network’s nodes (Liu 2022). Under the PoW Ethereum 1.0 model, an attack would require control of 51% of the network’s mining power, however, under the PoS staking model, the attack requirement of 51% of the staked ETH would amount to around $15 billion (Alchemy 2022). Other estimates put the amount of staked ETH needed at around $25 billion (Volpicelli 2022). In addition, if an attack is attempted the Ethereum protocol could result in the destruction of a certain percentage of the validators’ staked ETH (slashing) (Alchemy 2022).

Slashing occurs where validators allow false or incorrect information to go through, and the protocol then punishes such validators by slashing their staked ETH (Kladko 2020). So, to launch a successful attack, an attacker would have to: (1) control 51% of the blockchain’s staked tokens (valued at $15-$25 billion); (2) control 51% of the network’s nodes; and (3) risk losing the entire $15-25 billion in staked tokens during a single attack (if the attack goes wrong and the stakes of the controlled validators are completely slashed). So, in theory, security of the blockchain following on from The Merge should increase compared to that which currently exists under the Ethereum 1.0 PoW model.

The Merge: Scalability

In addition, The Merge is intended to facilitate a significant improvement in the existing network’s scalability. The overall utility of Ethereum’s network is limited by the speed of the network, and this utility level has been dampened by millions and millions of Ethereum users, combined with the increased launch of new Ethereum applications (Alchemy 2022). Scalability is also limited under the PoW model, as this type of consensus mechanism requires each computer on the network (node) to hold the entire network’s data (Alchemy 2022).

This approach completely changes under the PoS model following on from The Merge, as running nodes will no longer require such extensive energy and hardware investments (Alchemy 2022). The Execution Layer (Ethereum 1.0) network previously supported around 30 transactions per second (TPS) which caused delays and congestion, whereas the final transition to the Consensus Layer (Ethereum 2.0) is intended to scale the network up to 100,000 TPS (Millman, Graves, Kelly 2022). Clearly, this change in scalability is huge, and in theory it should improve the overall efficiency of the network, and it should also potentially lower Ethereum transaction fees, i.e., gas fees.

However, many people seem to have confused the envisaged operational timelines for these changes. The Merge itself, will not incorporate this final transition to the Consensus Layer, but will instead facilitate the critical network changes that are necessary to enable the final phases to occur sometime in 2023. Therefore, The Merge will not immediately bring about reduced transaction fees on the Ethereum blockchain. Instead, this is likely to occur with the third phase of Ethereum ‘Sharding’ and the introduction of ‘Shard Chains’, which will be covered in the next blog (Part III).

To be continued.