It was in May, in a packed hall at the Permissionless Conference in Palm Beach, Florida, when Preston Van Loon made his personal prediction about what may prove to be the biggest event in crypto since its inception.
In his capacity as Prysmatic Lab’s protocol developer for Ethereum, the second-largest blockchain in the crypto ecosystem, Van Loon had been asked when the network would finally shift from using a ‘proof of work’ consensus mechanism, which asks users to solve a cryptographic puzzle to validate new blocks, to ‘proof of stake,’ which assigns the same privilege to individuals selected randomly from a group in possession of tokens in the chain.
“I’m ready, let’s do it,” he said, prompting cheers from the audience. “As far as we know, August? It just makes sense.”
Referred to as ‘The Merge,’ this process would see Ethereum’s energy consumption drop from 112 terawatts of electricity per year – roughly equivalent to the energy needs of the Netherlands – to just a couple of megawatts, a drop of 99.95%.
For crypto at large, this would be seismic. While Ethereum trails Bitcoin as the sector’s second most valuable blockchain, it remains a foundation layer for a cornucopia of products and services in the space. If the core development team could pull off The Merge, swathes of DeFi, NFTs and Layer 2 solutions would see their associated carbon emissions plunge to single figures within weeks.
That was the idea, in any case. While Ethereum’s core development team had been working on The Merge since 2018, the project had succumbed to multiple delays and false starts. The main reason, explains developer Ben Edgington, is the fact that the community couldn’t agree on how to proceed.
“From the earliest days, the plan has been for Ethereum to move to proof of stake,” explains Edgington, product lead for Ethereum 2.0 client Teku. “That plan has evolved over the years, and various attempts, dead ends, blind alleys, pivots, changes – whatever you like to call it – have come around.”
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There was the first plan in 2017, explains the developer, which advanced far enough for a prototype to be built before the community concluded that the solution they were working on wasn’t decentralised enough. Then, the following year, came a new, three-phase plan which would focus on increasing the capacity of Ethereum first through sharding (more on that later) before finally switching the blockchain to a proof-of-stake model.
That, too, was abandoned when pressure on the community grew to squash the blockchain’s emissions first and concentrate on increasing capacity later. “The whole public narrative around proof of work just became a lot more challenging,” says Edgington. Stories emerged of miners consuming amounts of electricity equivalent to the usage of small countries, warping local power markets and handily increasing carbon emissions for little reason other than enriching themselves.
Developers like Edgington, however, are confident that The Merge will finally happen this year. The Beacon Chain – the parallel blockchain designed to demonstrate that PoS can work for Ethereum – has been operating smoothly since the end of 2020, while several tests of other side-chains have only resulted in minor glitches being uncovered and patched.
Certain factors, though, still suggest the hoped-for August deadline for switching to PoS is overly optimistic. Not least of these is the fact that the detonation of the so-called Difficulty Bomb, a mechanism inside Ethereum for making PoW impossibly difficult, has been delayed until October. Even if developers manage to pull it off later rather than sooner, significant questions remain about what exactly the impact of The Merge will have on Ethereum’s stakeholders – and crypto at large.
What is the Ethereum Merge?
Concerns about carbon emissions were far from the mind of Vitalik Buterin when he conceived Ethereum in 2013. In a world still reeling from the global financial crisis of five years before, the Russian-born programmer sought to build on the progress made by Bitcoin in forging a system of exchange outside the control of the big banks.
What made Ethereum different, however, was its programmability. Through the use of smart contracts, Buterin envisioned Ethereum as akin to a decentralised global computer, capable of automating whole swathes of digital life – all beyond the control of governments and private corporations.
Where Ethereum wasn’t different from Bitcoin, however, was the method by which it validated transactions on its network. True decentralisation required a consensus mechanism for transactions that implemented a degree of randomness, to preclude the possibility of any one individual validating new blocks.
That came in the form of proof of work, wherein so-called miners are rewarded for validating transactions on the network with Ether by solving a cryptographic puzzle. While highly secure, over time the increasing difficulty of these puzzles meant so-called ‘miners’ were expending huge amounts of electricity to have a chance of solving them.
Proof of work vs proof of stake
Proof of stake offered an alternative. First conceived in 2012, this approach achieves consensus through individuals and organisations ‘staking’ a certain amount of Ether issued by the blockchain, before one of the group is rewarded for correctly betting which block is the next one to come up for verification (conversely, trying to pass off a transaction as valid when it isn’t, sees them lose their stake.)
Crucially, this mechanism requires only a modicum of computing power. Easy to implement at the very start of a cryptocurrency’s existence, PoS would eventually underpin the creation of numerous altcoins and platforms, including Cardano, Solana and Avalanche.
“From the earliest days, the plan has been for Ethereum to move to proof of stake,” says Edgington. That it wasn’t founded as such was largely down to the seeming advantages of PoW at the time – and a seeming lack of awareness of how energy-hungry it would eventually become.
Doing so after the fact has been fraught with difficulty, explains Dr Leonardo Bautista Gomez, an expert in supercomputing and the founder of Miga Labs. “Nobody in the world, in the history of humanity, has done what we are trying to do,” says Bautista. “We’re trying to change the wheel of a car while the car is still moving.”
Preserving randomness in the validation process has been a particularly hard problem, explains the developer, along with aggregating signatures. Other challenges involve securing the increasingly complex code written to perform The Merge from attack.
A tremendous amount of work has gone into mitigating these types of risks, says Edgington, while maintaining the spirit of decentralisation that has run through Ethereum from the very beginning. “What we’re doing as protocol devs is trying to favour the decentralised [approach], always trying to make the advantage of the centralised operator as low as possible,” he says. “And then, people can choose.”
Those organising principles have been mirrored in the community managing The Merge itself, which has only been lightly coordinated in its work by the Ethereum Foundation. “Getting agreement on things is a laborious process,” Edgington admits. Nevertheless, he argues a more efficient approach to managing The Merge would inevitably have resulted in a much weaker system for Ethereum. “It would not have been nearly as strong, or had the community buy-in, as what we are delivering now.”
After the Ethereum Merge
Will that ethos carry over to the post-Merge Ethereum? Some have their doubts. PoS systems are often criticised for letting powerful organisations amass significant shares in a blockchain’s operation. Buterin himself has expressed misgivings about Lido Finance’s role in this respect, as Ethereum’s biggest provider of staking services. Even so, he said, “I also think it’s important not to overly catastrophise the issue” of centralisation.
Lido isn’t the only point of concern. Another is Infura, an API used by most developers to access key information about the blockchain. Its power over users was demonstrated in March, when the platform inadvertently blocked users in Venezuela from using Metamask wallets in a bid to comply with US sanctions law.
“Isn’t this all decentralisation theatre?”, asks author and crypto sceptic David Gerard. “Having 20 validators doesn’t matter if 100% of transactions are on Infura, or even 90% are on Infura.”
Bautista vehemently objects. “I think that’s just bullshit,” he says. While most developers are using Infura to monitor Ethereum, argues Bautista, there are alternatives on offer. What’s more, “if Infura goes down today, the blockchain is still moving.”
For all his scepticism about crypto in general, though, Gerard believes that the Ethereum community is deadly serious about pulling off The Merge. “They are sincere about this move,” he says. “They think they’re doing a real thing. And that’s good.”
He can also understand the caution of the Ethereum development community in implementing any change before the system is truly ready. “There’s any number of blockchains that have gone proof of stake, but fundamentally no one really cares about them,” says Gerard. “Bitcoin and Ethereum are the big ones – they’re the ones where the money is. So, you have to actually get it right, and you probably have to get it right the first time.”
Edgington, for one, is optimistic that The Merge will happen at some point later this year. The engineering, he points out, is complete, and all the clients for Ethereum 2.0 have now implemented all the mechanics and the code necessary to flip the switch. As such, says Edgington, “We could merge tomorrow. You can quote me on that. We could push the button and go.”
What remains, explains the developer, is due diligence. “We are testing, testing, testing,” says Edgington, always looking for nasty glitches that could up-end the whole project. So far, there haven’t been that many, which makes a launch by Devcon in October eminently realistic, according to the developer. “I think teams will be really motivated to get the Merge done by then, because we don’t want to meet all our peers not having done [it],” says Edgington. “I’d rather go in and everyone buys us a beer.”
The Ethereum miners probably won’t. According to Bloomberg, approximately a million will see one of their main sources of passive income disappear within weeks. Ironically, however, a crash in the price of GPUs has seen more miners flock to Ethereum in what some suspect is a last hurrah before The Merge takes place later this year. Whether they’ll stop mining altogether after that happens is unclear. “They can always hop to other altcoins any time they like,” says Gerard.
A successful switch to PoS may also put greater political pressure on Bitcoin to make a similar change, adds the author. But Bitcoin enthusiasts, including Bitcoin analyst at Quantum Economics Jason Deane, are sceptical on this point.
Fresh from a crypto convention in Avon (“It was a crazy, crazy one,” he says, a shade blearily), Deane hasn’t known many of his fellow Bitcoinists pay much attention to The Merge. Many, like him, feel that PoW is integral to Bitcoin’s identity and that the argument that it’s predominantly powered by fossil fuels is essentially unproven. As such, the idea of adopting PoS is faintly ridiculous. “I can honestly say, I’ve never had that conversation, except in a kind of comical way,” he says.
Then there’s the impact The Merge is anticipated to have on Ethereum itself. For his part, Edgington hopes that developers who had previously left the blockchain to work on others like Solana, Terra and Osmosis will return to the fold. What the move to PoS won’t do, however, is ease network congestion. A centralised payment platform like Visa, for example, is capable of performing more than 65,000 transaction messages per second. Ethereum, by contrast, only manages between 13-15.
This will be solved, Bautista explains, in the next phase of development. By ‘sharding’ Ethereum into multiple blockchains running simultaneously at much greater computational speeds (the Beacon Chain, he adds, will remain as Ethereum’s “heartbeat,”) the network will finally be able to compete against the likes of Visa and deliver on its initial promise of becoming a truly decentralised global computer.
While this sounds simple, the process of building a parallelised network of blockchains in this way is fiendishly complicated – and in its nascent stages. Getting it right will be a massive undertaking, explains Gerard. “It’s a possibly impossible problem,” he says, one where the solution can be approximated but at a high cost of uncertainty as to whether the resulting network is vulnerable to glitches and breaches. “And, if you’re doing cryptography involving millions of virtual dollars, that’s really a problem.”
In the meantime, work on The Merge continues apace. Saying that the development of Ethereum 2.0 is taking place in difficult conditions is somewhat of an understatement, as the crypto sector enters into one of the most prolonged slumps in its history and an increasingly hostile regulatory environment.
“I don’t know what’s taking them so long,” says Gerard. “They’re never going to get the perfect system. I’d like them to just get the hell on with it.”
