DOMANI Concept Explainer - The Ethereum Merge Explainer
(DOMANI is an oracle-less Digital Asset Management platform that enables users to create, mint and manage ETF-style tokenized funds. The views expressed in the article below should not be taken as investment advice. Always do your own research.)
After months of delays and broken promises, the Ethereum Merge is expected to happen between September 13th-15th 2022. But, what does the Merge mean for the network? In short, the Ethereum Merge refers to the combining of the already existing PoW consensus layer with the new PoS consensus layer, the Beacon Chain. The idea is to change the way the Ethereum chain will be secured and validated, going from a PoW consensus mechanism, similar to Bitcoin, to a PoS consensus mechanism, similar to Avalanche and Algorand. Firstly, let’s take a look at how these two systems differ from one another.
PoW requires members, referred to as miners, of a network to expend effort solving an arbitrary mathematical puzzle, which secures the network and validates transactions on the blockchain. In exchange for validating transactions and securing the network, miners receive tokens as compensation for the energy spent completing the tasks. However, only the first person to complete the arbitrary puzzle is rewarded. The biggest criticism behind PoW consensus mechanisms is that they consume a significant amount of energy. It was recently reported that Bitcoin consumed more energy than the entire population of Argentina, a country with 45 million residents. Clearly, the way Bitcoin is secured is not energy efficient, raising environmental concerns for the future adoption of blockchain. Moreover, the PoW consensus mechanism creates more difficult puzzles as more miners join the network. In turn, this means that miners have to spend more capital on purchasing the latest hardware, which will solve the puzzle the fastest. This makes validating the network more expensive as it scales and is also considerably slower than PoS chains. Ironically, it also causes the computing power of the blockchain to be centralized.
These are some of the reasons why Ethereum has decided to go ahead with the Merge, as PoS does not require members to complete arbitrary mathematical puzzles, and instead allocates the right to validate transactions based on the percentage of tokens locked by each member, or staker. The more tokens the validator holds, the more likely they are to be chosen to validate transactions. In return for locking the tokens, stakers receive a reward in the network’s native token. Whilst being faster, more energy efficient and scalable than PoW, PoS is not free of criticism. Clearly, this type of consensus mechanism favors the wealthier validators, as those with more tokens are more likely to validate transactions, meaning they’re more likely to receive more rewards, which sacrifices decentralization as network dominance could be achieved by whales with huge stakes.
Now that we’ve analyzed PoW and PoS, why has the Merge taken so long to plan and execute? In order to plan for the Merge, Ethereum have been testing the Merge on their testnets, once enough successful testnet Merges took place, the core team were able to schedule the Merge of Ethereum mainnet and the Beacon Chain. These testnet Merges are lengthy processes, where errors are detected and corrected before the mainnet Merge. One of the most contencious components of the Merge is the difficulty bomb, which essentially discoruages miners to keep mining ETH by rapidly increasing the difficulty to mine a block on Ethereum, eventually making it economically infeasible to mine ETH using the PoW protocol. This difficulty bomb has been developed, as there simply is no way of turning off PoW on Ethereum. If the developer community times it just right, it will incentivize miners to abandon PoW, however they were not able to decide on a date. Hard supporters of PoS argue that the Merge should occur as soon as possible to bring forward the Merge. However, others argue that Ethereum’s developer team will be pushed too hard, increasing the likelihood of a mistake.
Why is the Merge so important?
Decreases energy consumption by 95.5%
Decreases token emissions by 90%
ETH staking yield will increase
Supporters of the merge argue that this could significantly increase the token price of Ethereum, which is exactly why it’s had so much traction on social media in the last months.
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DOMANI Protocol is an asset management protocol that facilitates portfolio tokenization, rebalancing, and a multiswap DEX to trade a multi-token position in a single transaction.
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