The Merge

- What is the Ethereum merge and how does it impact you? In September 2022, Ethereum one of the biggest blockchains, cryptocurrencies, and the platform on which the thing people refer to as Web3 is being built, underwent a major technological shift. The underlying consensus model of the blockchain was shifted from proof of work, to proof of stake. Now, for most people, that's just words. So let me explain what's going on here. Starting with how a blockchain works. The blocks on a blockchain are immutable containers, sort of like safes, where we can put our transactions. So when new transactions are added, they're put into a block. The block is locked and added to the chain. And now if anyone goes back and tries to alter the entries in this locked block, an alarm goes off and we know that something's gone wrong. That's how the blockchain becomes immutable. So how is this different from how we do traditional banking and finance? The blockchain is decentralized and trustless. What does that mean? Consider how a regular bank works. You go to the bank and give them your money, then they hold your money, and then you can make transactions with that money. The bank becomes the single source of truth about how much money you have and where that money is traveling and they have a single ledger where all that is happening, what's called your bank account. Cryptocurrency Blockchains are completely different. Here, in place of having a bank, a third party who is a central source of truth, everyone has a copy of the ledger and anytime a transaction is made, we go and compare each other's ledgers to make sure they all agree and then make the transactions. But this opens the door for a very tricky problem known as a double spend problem. Say for example, I owe you two coins and I also owe Sam two coins, but I only have two coins. Normally I would only be able to pay one of you with my two coins. But in a decentralized system, there's a way for me, to try at least, to scam one of you. You see, if I go to you and say, I have two coins, and I want to pay you, you can cross reference my ledger on your own and see, yes, you have two coins and then I can pay you that. But then I can take advantage of the delay in the system to hurry over to Sam and say, "Hey, check your ledger and mine. And you see, I still have two coins. Okay, I'm giving them to you too." Thus I can spend the same two coins twice, the double spend problem. This is a problem unique to decentralization, and it's also one of the reasons why decentralization is so hard. If you have many different sources of truth, how do you ensure they're all in agreement on what is true and what is not? The solution created by Bitcoin and then propagated through all crypto projects, was to introduce a consensus mechanism. Basically incentivize users of the network to validate only proper transactions on the blockchain and add them into blocks by paying them in coin. So, the cryptocurrencies you hear about on all of these blockchains are the payments made to the validators of the transactions that sit in the blocks on the blockchain. You are paid to maintain the blockchain, and now we're finally getting to the merge and this transition from proof of work to proof of stake. You've probably heard stories of how Bitcoin mining uses as much energy as a small country. This is because Bitcoin uses the proof of work model and up until the merge, Ethereum also used the proof of work model. Proof of work makes it expensive to add new blocks to the blockchain and ideas, because it's so expensive in the form of burning electricity to do this, only the people who have valid blocks to add will add blocks to the blockchain because that's the only way they'll get their money back in the form of crypto. The actual validation mechanism is as trivial as it is ingenious. All the validators go and guess at a number. And whoever guesses the right number gets to add a block to the chain and gets paid in crypto. Now, of course, it's a bit more complicated than that, but that's really all you need to know. Computers are guessing at a random number, and the more computer power you have to guess at a random number, the higher the likelihood of you guessing the right number, which is why we get these massive stacks of server base that just guess that number and use a lot of energy to win Bitcoin. To try to solve this problem, a new consensus model was introduced called proof of stake. Here, instead of guessing at a random number, the people who want to validate blocks on the chain and earn cryptocurrency can stake. literally put their crypto in escrow on the blockchain and say, "I'm going to put my money here and prove that I am a trustworthy character." And then as long as I validate valid blocks I can keep the money on the blockchain. But if I approve invalid blocks or scam transactions, or something like that, I lose my stake. Literally, you prove that you have a stake in the game. So that is the merge, the transition from the very wasteful proof of work model to the much less wasteful, but quite exclusionary proof of stake model. At present, the stake for partaking in validation on Ethereum to forge new blocks, rather than mine them on Bitcoin is 32 east, which is somewhere around $40,000 US dollars, right now, as I record this. The promise of the merge is that the energy footprint of Ethereum will be reduced by up to 99% from the proof of work model. Considering all the attention the environmental footprint of crypto has gotten, that's a big deal, but it doesn't solve all the other underlying problems with crypto. This is very much a technological change from proof of work to proof of stake. Nothing more, nothing less.