2022 has been a difficult year for cryptocurrencies and other digital assets. Markets were generally sluggish, followed by the collapse of Terralna, job cuts at nearly every major exchange, the collapse of his crypto hedge fund Three Arrows Capital and lending platform Celsius Network, and the collapse of FTX. On the positive side, the leading blockchain Ethereum has moved to a proof-of-state consensus mechanism, officially reducing blockchain energy consumption by up to 99.95%.
What is merging?
Technically, the merge was to combine the original layers of Ethereum into a new layer called the BeaconChain. This merger introduced a new proof-of-stake consensus mechanism to the blockchain, rendering the original proof-of-work consensus mechanism worthless.
© Stiftung Ethereum; https://ethereum.org/en/upgrades/merge/
What is Proof of Stake?
A blockchain is a decentralized database and requires a consensus mechanism for determining entries. Proof of Stake (PoS) and Proof of Work (PoW) are two mechanisms used in various blockchains. Until the merge, PoW was used by the most important blockchains, Bitcoin and Ethereum. PoW requires participants (“miners”) to solve arithmetic riddles by performing billions of arithmetic operations. These operations require enormous and ever-increasing amounts of computing power. Bitcoin, for example, is estimated to use 0.16% of global energy production and emit his 0.10% of global carbon emissions as of Q3 2022. Despite improvements, energy consumption is increasing.
PoS, on the other hand, is a mechanism based on the idea that the blockchain member who owns the most tokens has an interest in maintaining the network. The decisive factor is therefore the user’s stake, i.e. the percentage of the total amount of tokens they own. The higher the stake, the more likely this user will be chosen to mine the next block. Broadly speaking, when compared to Proof of Work, the Proof of Stake mechanism resembles a corporation. Those who own more shares in a company usually receive more voting rights and can make decisions. PoS does not use energy to protect the network.
For Ethereum, the move to PoS means that the energy consumption of the blockchain has been reduced to around 0-0026 TWh/year. For example, it is estimated that the energy YouTube used to stream his “Gangam Style” video in 2019 was more than 175 times the energy Ethereum uses annually. The following chart from the Ethereum website shows the estimated annual energy consumption of various industries in his TWh/year (taken June 2022. Ethereum is on the far right of the chart titled ‘ETH PoS’). ).
© Stiftung Ethereum; https://ethereum.org/en/energy-consumption/
How does PoS work?
Participants (node operators) must deposit 32 Ether (ETH) as collateral (via a smart contract – this is called “staking”) in order to become a network validator and receive rewards. I have. One node is then randomly selected as the reward recipient. Through staking pools, Ether holders can pool their Ether to participate in the PoS consensus process. The reward is then split among the pool participants. Many cryptocurrency exchanges (such as client Bitpanda) offer staking solutions.
…and then what happened?
The merge was a global event. Completed successfully on September 15, 2022. In addition to the impact on energy consumption, PoS is expected to speed up transactions as well, as significantly fewer validations need to be performed on the blockchain at the same time. This should also reduce transaction fees. It remains to be seen whether this paper will be supported.
Despite the technical success of the merge, the blockchain cryptocurrency Ether (ETH), like almost all other cryptocurrencies and other digital assets, is still under pressure. At the time of writing (November 10, 2022), it is trading at around €1,000 per ETH, down from around €3,300 at the beginning of the year. It remains to be seen when this crypto winter will turn into a crypto spring and whether the merger will be commercially successful for the network and its users.