The cryptocurrency Ethereum, the second-biggest name in cryptocurrency and the most popular by number of trades, is due to undergo its biggest upgrade ever next month. Known as “the Merge,” it will change up how Ethereum runs its operation behind-the-scenes. Specifically, it is shifting away from using something called a proof-of-work algorithm to verify transactions between users to the more environmentally friendly proof-of-stake algorithm. This transition, which has been promised by Ethereum for years, has faced many delays in its rollout.
“It’s a highly anticipated moment in crypto,” explains Christian Catalini, the founder of the MIT Cryptoeconomics Lab. “We don’t see major shifts and changes to the governance and incentives model of a large cryptocurrency that often.”
Here’s what’s going to happen.
The problem with proof-of-work
Bitcoin and Ethereum currently use a so-called proof-of-work algorithm to add new blocks to their blockchains. Whenever a new block is due to be added, computers (or “miners”) around the world compete to be the first to solve an incredibly hard math problem. The first miner to do so is paid with some of the cryptocurrency—which is how new tokens get added to the economy. (For a more detailed explanation, check out our guide to the basics of cryptocurrencies.)
The problem with this is that it is incredibly wasteful. Bitcoin has roughly 1 million miners while Ethereum has around 120,000. For every one miner that solves the math equation, tens of thousands more are just wasting electricity. It’s one of the reasons why cryptocurrencies use so much electricity to process relatively tiny numbers of transactions compared to a payment company like Visa.
The Merge and proof-of-stake
Proof-of-stake is a different method for validating blockchains. Instead of a race, in proof-of-stake systems, “validators” deposit or “stake” a number of coins to enter a lottery to be the one to add each block. The coins are held as insurance against bad actors. If a validator misbehaves and approves a fraudulent transaction, for example, their stake can be confiscated. In payment for running the network, validators earn a return on their staked coins from transaction fees.
Because only one computer does the work, and it doesn’t involve incredibly complex math, and a device as small as a Raspberry Pi can be a validator, cryptocurrencies with proof-of-stake algorithms require dramatically less electricity to run, according to experts in the industry. After the Merge, for example, Ethereum estimates that its energy use should fall by around 99.95 percent.
What does the Merge mean?
Since November 2020, the Beacon Chain (which uses proof-of-stake) has been running in parallel with the Ethereum blockchain. The organizations responsible for Ethereum’s development introduced the Beacon Chain as a pilot test of sorts for proof-of-stake within the larger Ethereum ecosystem. Because the Beacon Chain existed separ