Ethereum 2.0 Merge: Understanding Proof-Of-Stake and why should I care

It’s no more news that the Ethereum 2.0 update, often referred to as “the merge", is right around the corner.

The much anticipated Ethereum Ethereum (ETH) merge is simply a transition of Ethereum from a Proof-Of-Work blockchain to a Proof-Of-Stake blockchain, thus removing the leverage of miners in the Ethereum network.

Moving further, let’s take note of the following outlines below;

• Overview of the Ethereum Blockchain
• Mining
• The Consensus mechanism
• Proof-Of-Work (PoW)
• Proof-Of-Stake (PoS)
• Why Is the Ethereum Merge So Important?
• Summary

Overview of the Ethereum Blockchain

Before we delve right in into the merge, let’s start from the basics and grass root by understanding what the Ethereum blockchain is all about.

Blockchain is the interconnection of computers that are linked in a peer-to-peer network; this network forms a digitally distributed, decentralized ledger that can be accessed publicly across the blockchain network. The term decentralization implies that no single authority or government agencies can control the blockchain network.

Ethereum (ETH) is simply a piece of technology for building apps and organizations, holding assets, transacting and communicating without being controlled by a central authority. Ethereum itself is built on top of the blockchain network referred to as the Ethereum blockchain.

You might be interested to learn more about those resources and organizations. Different assets that are constructed on top of the Ethereum blockchain network include NFTS, Tokens, DEFI protocols, etc.

Without a centralized authority, like a bank or financial institution, to verify and process transactions, there must be a mechanism to decentralized transaction validation on blockchain networks like Ethereum. Currently, Ethereum uses a system known as Proof of Work, along with other well-known cryptocurrencies like Bitcoin (PoW). The proof-of-work consensus algorithm is used by the blockchains of both bitcoin and ethereum.

Mining

Mining is the process by which new cryptocurrencies are entered into circulation. It is also the way the network confirms new transactions in the blockchain network and publicly distributes those transactions to the public ledger.

Since cryptocurrencies are digital assets, there is a chance that one coin will be duplicated or falsified. By making network hacking expensive and resource-intensive, mining addresses this issue.

Due to the high demand of hardware requirements needed to accomplish such enormous and complex mathematical computations and transactions on the blockchain network, mining is a very time-consuming, highly sophisticated technique of creating new currency.

KEYS TO NOTE

• Miners are entitled to earn some cryptocurrency without having to put buy it.
• Miners receive bitcoin as a reward for completing "blocks" of verified transactions, which are added to the blockchain, these rewards are due to the complex computations solved by the highly sophisticated mining hardware.

The Consensus mechanism

Why is the consensus mechanism important? The consensus mechanism is crucial in any blockchain network. The consensus is a contract of agreement on which a given decision is archived.

It sets up the network's transaction process and controls how transactions are verified, how much energy is consumed, network fees, transaction speeds, and other aspects of the currency and network as a whole.

Imagine paying for goods or services online. Your bank card or other payment method is debited, and this payment system acts as a middleman where you can send money to your seller. This middleman also charges transaction fees and provides both you and your seller with a receipt of the transaction. On the blockchain network, however, this middleman barrier is eliminated because transactions are conducted peer-to-peer.

Remember we made mention of the blockchain being highly decentralized, well every perks comes with its cons and pros, as its quit hard to reach the full consent of the entire users of a given blockchain network.

Imaging taking a food order in a restaurant with a group of friends to get a single meal, how many group of friends do you think will most likely reach a consensus? Probably some might want to eat something else, some might be on a diet and not hungry. Well in order to curtail this conflict among group of friends, we employ a consensus mechanism.

Hence, the consensus mechanism is an algorithm that controls how any blockchain network work.

There are various types of consensus which includes;

• Proof-Of-Work
• Proof-Of-stake
• Delegated Proof-of-stake
• Proof-Of-importance
• Proof-Of-Capacity
• Proof-Of-Burn

But for the sake of simplicity, we will deep dive into two, which are the proof-of-work and proof-of-stake

Proof-Of-Work (PoW)

The creator of bitcoin Satoshi Nakamoto as well as Ethereum both implemented the proof-of-work consensus mechanism to achieve full decentralization.

The "work" itself is mining. PoS adjusts the difficulty to the work miners do, so the more work done, the longer the chain and more advanced the blocks, making it more complex and impossible to duplicate. It is the act of adding legitimate pieces of blocks to the Ethereum blockchain.

For a transaction to be carried out successfully, miners have to go through a complex computation of trial and error to find the nonce for a block. Only the given block with a valid once can be added into the chain, here is an example of once code: 0xd4ff632b6fb3d24c

Recall that on PoS, miners work in a decentralized way, hence in most rare cases two valid blocks can get mined at the same time. This will in turn create a temporary fork, making it longer for transactions to be validated.

Proof-Of-Stake (PoS)

In general, proof of stake obviously offers wider range of benefits to scalability and maintenance, Proof-of-stake (PoS) is the consensus mechanism that Ethereum will use after The Merge.

As a result, this will officially usher in the end of Ethereum's PoW system. As a result, the Ethereum network will no longer require the usage of miners. Validating valid transactions over the Ethereum blockchain network is the duty of validators in the proof-of-stake (PoS) model.

These validators differ from miners in that they stake ether (ETH), the cryptocurrency used for the Ethereum network, into a smart contract. This validator, which is chosen at random, is in charge of producing a new block and disseminating it to other network nodes.

Why Is the Ethereum Merge So Important?

A major criticism of proof-of-work is the amount of energy output required to keep the network safe. Ethereum on Proof-of-Work will become deflationary; an average user can take part in the validation process with just the network’s native token (ether).

The network is expected to be more decentralized and sustainable as it's a more efficient means of processing due to reduction of energy consumption and cost effective, though power can still be centralized around large token holders (whales).

The merge will improve quicker transaction times and validations

Summary

We got to know about the Ethereum merge as well as various Why’s and How’s about the Ethereum merge, as miners leave the Ethereum network, it might lead to a significant drop in the mining industry. As a HODLer of ether (ETH), you have no need to worry about the merge as your ETH holdings are pretty safe.

The merge has no impact on network capacity, hence it won't lower gas prices because gas prices are a result of network demand, and network demand is inversely correlated with network capacity.

Ethereum’s move to Proof of Stake looks to be of significant benefits to users at large.