On 15 September 2022, we witnessed one of the biggest milestones in the history of blockchain to date. 

Ethereum, the second largest cryptocurrency after Bitcoin, has successfully completed a major upgrade, called “The Merge”, merging the Mainnet with the Beacon Chain, a blockchain created in 2020 to ensure the proper functioning of the “Proof-of-Stake” consensus mechanism in the Ethereum network.

Source: The Ethereum Foundation

With this important event, the Ethereum network moves from a “Proof-of-Work” consensus mechanism (the same one used by Bitcoin) to a “Proof-of-Stake” mechanism.

What are the implications of this?

🌿 Sustainability:

With the migration to “Proof-of-Stake”, Ethereum’s network will reduce energy consumption by approximately 99.95%, becoming one of the most eco-friendly blockchains. Unlike the Proof-of-Work mechanism, which requires high computational power to solve complex computational operations in order to validate blocks, the Proof-of-Stake mechanism allows validators to stake their ETH in order to authenticate blocks.

🔒 Security:

Since it does not rely on large computational power, the barriers to entry to become a validator on the network are significantly reduced, also helping the network gain decentralisation. Anyone can deposit their ETH into the network (with a minimum of 32) to become a validator and secure the network in exchange for a reward (“Staking“). The greater the number of validators, the more secure the network. Additionally, the incentives to perform a malicious attack against the network are exponentially reduced, as it requires control of 51% of the ETH, which in turn would be put at risk (“at stake“).

🏔 Scalability:

The speed of the network is expected to increase by approximately 10%, from the 13-14 seconds it took to complete each block until now, to 12 seconds. Additionally, in the coming months Ethereum is planning to add another improvement to the network, “Sharding”, which would allow the network to be divided into multiple parts (“Shard Chains“), exponentially improving the scalability of the network.

🪙 Monetary mass:

Under the “Proof-of-Work” mechanism, mining rewards in Ethereum amounted to approximately 13,000 ETH per day, resulting in an inflation rate of around 4% per year. With the migration to “Proof-of-Stake”, mining rewards will be replaced by “Staking” rewards, which are estimated to be around 1,600 ETH per day, i.e. a reduction of approximately 90% in the number of new ETH created each year. If we add to this the fact that with the London Upgrade (an improvement introduced last year), part of the new ETH created is burnt (withdrawn from circulation), ETH will become a deflationary asset.

Obviously, this major upgrade of the Ethereum network is also accompanied by some uncertainties. Some miners do not agree with this latest update and have already announced that they plan to launch a “Hard Fork”, a new blockchain, ETHW, that will maintain the “Proof-of-Work” consensus mechanism. For the moment, if the fact is finally confirmed, both Circle and Tether, creators of the two most important stablecoins (stable cryptocurrencies) used in the Ethereum network, have already announced that they will not support it.