What the Ethereum Merge Is and Why It Matters

MORGANTOWN, WV - 31 DECEMBER 2017: Ethereum or ether coin lying on top of similar golden coins to illustrate cybercurrencies.
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On Sept. 15, 2022, Ethereum co-founder Vitalik Buterin tweeted “Happy merge all.” He congratulated the team who helped make the Merge happen, and called the event “a big moment for the Ethereum ecosystem.”

Read: 5 Things You Must Do When Your Savings Reach $50,000

But what is the Ethereum Merge and why is it so important not just to crypto investors but to the environment?

In short, the Merge is the second step in upgrading the Ethereum blockchain — it transitioned Ethereum entirely from proof-of-work protocol to proof-of-stake protocol. Once all stages of Ethereum upgrades are complete, Ethereum will be more sustainable, more scalable, more accessible and more secure.

What Is the Ethereum Blockchain and How Does It Work?

To understand the Ethereum Merge, you’ll first need to understand the basics of the Ethereum blockchain, which is where the world’s largest alt-coin based on market capitalization is traded. ETH is second only to Bitcoin in market cap and in value relative to the U.S. dollar right now.

But the Ethereum blockchain is actually used more frequently than Bitcoin. People frequently use the blockchain to develop, store and trade NFTs, including the hugely popular CryptoPunks series. Unlike Bitcoin, Ethereum is an open-source operating system and computing platform capable of also supporting decentralized apps and smart contracts.

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However, there are some drawbacks to the Ethereum blockchain. Most notably, operating the blockchain uses a ton of power. The developers sought to solve this problem, while making the blockchain more secure and more scalable, through a series of upgrades. When the upgrades are complete, ETH2 will be born.

The steps, or phases, of the project are as follows:

  1. Launch of the Beacon Chain
  2. The Ethereum Merge
  3. Ethereum Sharding

The Beacon Chain

Prior to the Beacon Chain upgrade, Ethereum used a proof-of-work (PoW) consensus to determine ownership of mined coins and maintain security of the blockchain, which requires extensive computing power that requires energy to solve complex mathematical problems. Coins are released to the miners who solve them.

The Beacon Chain upgrade introduced proof-of-stake (PoS) mining to the Ethereum blockchain, which secures the blockchain by verifying or validating transactions for far less energy. People can still earn coins by validating transactions. The lower energy use compared to mining helps keep Ethereum decentralized by giving more people the opportunity to stake coins.

For two years, the Ethereum Mainnet and the Beacon Chain operated simultaneously, meaning that both PoS and PoW were used. Of course, this still used a lot of power. But it had to be done to show that proof-of-stake could work effectively and efficiently.

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Plus, technology also had to be put in place to allow a merge between the two chains to occur, which is where the Bellatrix update came in.

What Is the Bellatrix Upgrade?

The Bellatrix update prepared the Beacon Chain for its merge with the mainnet. Fortune called the Bellatrix upgrade the first step of the merge. It took place on Sept. 6, 2022. From there, things progressed quickly toward The Merge.

The Ethereum Merge

In September 2022, the next step toward ETH2 took place, called The Merge. In a YouTube live stream following the Merge, Buterin called it “the difference between early stage Ethereum and the Ethereum we’ve always wanted.”

The Merge describes the transition from the old PoW blockchain to the new PoS Beacon Chain. Programmers instructed the Beacon Chain to accept transactions from the Ethereum PoW chain and bundle them into blocks, and then the PoS mechanism was used to integrate them into the new blockchain. All mining, block propagation and consensus logic switched to PoS on the new chain.

Following the Bellatrix update, Ethereum developers completed another update, called the Paris upgrade. At this point, the Ethereum mainnet began to shift transactions to the Beacon Chain in the first steps of the Merge. Once the terminal total difficulty of the chain hit 58750000000000000000000, the next block would be produced on the Beacon Chain using proof-of-stake.

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“The Merge transition is considered complete once the Beacon Chain finalizes this block,” the Ethereum Protocol Support Team wrote in a blog post dated Aug. 24, 2022.

On Sept. 15, this occurred, and Ethereum began operating entirely through proof-of-stake logic.

How the Ethereum Merge Helped Solve the Issue of Energy Consumption

Prior to the Merge, mining Ethereum used 23 million megawatt hours per year, based on a report from the Crypto Carbon Ratings Institute.

Immediately following the Merge, this dropped by roughly 99.95%. Now, Ethereum’s energy needs total just 2,600 megawatt hours per year. Additionally, CO2 emissions dropped from more than 11 million tons to less than 870 tons. That’s less than the combined carbon footprint of 100 average American homes.

Proof-of-stake is simply that much more efficient.

However, it’s important to note that even though Ethereum now uses less energy, that energy consumption hasn’t vanished, but has shifted. Some miners who invested money in power-hungry computers to mine Ethereum simply shifted their operations to mining other crypto. Other miners, including the world’s largest, Ethermine, did close shop. But it’s likely their equipment will find a home and purpose somewhere.

ETHPoW

Just prior to The Merge, Chinese miner Chandler Guo created a hard fork of the blockchain, deemed ETHPoW, which still uses the PoW consensus mechanism for those who prefer to mine their cryptocurrency. Miners can earn ETHW for their work. It is not the same as ethereum, but Guo says it will someday rise to the same value as ETH.

Ethereum Sharding: The Final Phase

The ETH2 upgrade isn’t quite done yet — there is still one more upgrade to go. Now that the Ethereum blockchain is more sustainable, its founders and development team will head into the final phase of introducing Ethereum 2.0: Sharding.

Sharding is the process of splitting a database horizontally and will improve the blockchain’s scalability and capacity. It should reduce network congestion and improve transactions per second by splitting the burden of handling the data. By using sharding, Ethereum will remain decentralized but have increased processing power and security without increasing the size of the database.

In the future, advances in technology could enable shards to manage smart contracts, handle transactions and execute code. But first it has to be implemented, which is currently on-track to happen in 2023.

Staking ETH2: New Opportunities

Previously, it was difficult and expensive to mine Ethereum due to the power and computing requirements. However, staking is much easier. It can even be done through crypto trading networks like Coinbase.

Some cryptocurrency exchanges have minimum requirements to stake your ETH. Coinbase does not. If you live in a region that permits staking, which includes the U.S. — other than New York and Hawaii — you can validate transactions on the new PoS blockchain and earn ethereum as rewards.

If you prefer not to stake ETH through a large, centralized exchange, you can also stake on your own. This is called “solo home staking” and requires 32 ETH to get started. You can also consider other methods, such as staking as a service, where you outsource the staking for a fee, or pooled staking, where you invest in liquidity tokens that represent your share of ETH.

Final Take

If you hold investments in ETH, the Merge will not directly affect your profits or the money you hold. There are now opportunities to stake ETH and earn more coins. From an investor standpoint, if you held ETH before The Merge, the coins in your wallet have the same value as prior to Sept. 15, 2022.

Meanwhile, miners have the option to continue mining on the EthereumPoW blockchain and earn ETHW.

FAQ

  • Will ETH2 replace ETH?
    • In a sense, ETH2 replaced ETH immediately following the Merge. But if you hold ETH investments, they did not lose their value. Plus, investors have an opportunity to earn more ETH2 through staking.
    • ETH is still used to refer to ethereum coins, while ETH2 is used for ethereum coins used for staking.
  • What happens to ETH after ETH2?
    • Ethereum (ETH) has become ETH2, although it's still identified on crypto exchanges and other platforms as ETH. It is simply the next, better iteration of ETH.

Information is accurate as of Oct. 14, 2022.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

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About the Author

Dawn Allcot is a full-time freelance writer and content marketing specialist who geeks out about finance, e-commerce, technology, and real estate. Her lengthy list of publishing credits include Bankrate, Lending Tree, and Chase Bank. She is the founder and owner of GeekTravelGuide.net, a travel, technology, and entertainment website. She lives on Long Island, New York, with a veritable menagerie that includes 2 cats, a rambunctious kitten, and three lizards of varying sizes and personalities – plus her two kids and husband. Find her on Twitter, @DawnAllcot.
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