In 2022, Ethereum will be undergoing an upgrade called “The Merge”. Sometimes known as Eth 2.0, it plans to improve a number of aspects of the Ethereum network. This upgrade will change how it operates, and could have wide ranging knock-on effects.
Therefore, it could be beneficial to understand Ethereum, and the changes that are happening.
What is Ethereum?
Ethereum is a decentralised network which allows for smart contracts that can support Decentralised Apps (dApps), other blockchains and NFTs. Built on blockchain technology, it’s best known for its native cryptocurrency, which is known as Ethereum, Ether, or ETH.
Launched in 2015, it is the second largest crypto by market cap after Bitcoin.
What’s the difference between Ethereum and Bitcoin?
While there are many similarities between the world’s first cryptocurrencies, there are several notable differences.
- Supply cap – Bitcoin has a maximum supply cap of 21 million, whereas Ethereum has no supply cap. However, mining (the act of creating new blocks on blockchain, which creates new ETH) is a time-consuming process, and so regulates how much can be minted.
- BTC is seen more as a store of value and is often called digital gold. On the other hand, ETH is used to power the Ethereum network.
- Ethereum can be used to create complex smart contracts.
- Bitcoin transactions take around 10/15 minutes to be confirmed, while Ethereum takes about 15 seconds. These transaction times are based on how long it takes for each new block to be added to the blockchain.
- While both are currently working on a Proof-of-Work consensus, Ethereum is soon moving over to Proof-of-Stake (more on this below).
How is Ethereum being used?
As we’ve already mentioned, the Ethereum cryptocurrency is used to power the platform that it’s based on. But the platform itself is used to for several functions:
- It is used to run Smart Contracts. These contracts are set up directly between a buyer and seller, where the terms and conditions are written into lines of code. This offers users a direct and secure way of setting up a variety of more complicated trades, without the need for third party intermediaries.
- The Ethereum blockchain hosts many other blockchains and projects, such as Uniswap, Axie Infinity, and Chainlink to name but a few.
- Most NFTs are hosted on the Ethereum blockchain, and are commonly paid for with ETH.
- When it arrives, a lot of the projects for Web 3.0 will be built on the network.
Upcoming Merge – POW to POS
Ethereum is set to upgrade this year. Although previously known as Eth 2.0, it is now official recognised as The Merge.
The Merge is a bringing together of two systems – the Mainnet (the chain currently being used), which is proof-of-work, and Beacon Chain, which is proof of stake. Once they’ve been brought together, Ethereum will work on a proof-of-stake basis thanks to Beacon Chain, but will also be able to run all the previous smart contracts, thanks to Mainnet.
Through implementing the Merge, several improvements will be made to the network:
- Increased security – while most PoS networks only require a small set of validators, Ethereum 2.0 will require a minimum of 16,384, making it even more decentralised and less at risk of manipulation.
- Energy consumption will drop by over 99.9%. As well as being more sustainable and greener, it also means that more people can validate the network, since with PoW, you need high performing computers to become a miner. With PoS, anyone holding 32 ETH will be able to become a validator, earning ETH and helping make the network secure.
- Known as “The Triple Halving” (taken as a play on words from Bitcoins halvings), Ethereum issuance will be reduced by around 90%. It’s hoped that this will make Ethereum deflationary, when included with new burn mechanisms.
- Ethereum 2.0 will eventually introduce sharding, which will greatly increase the number of transactions that can be processed – more than Visa and Mastercard combined!
Ethereum offers a decentralised and sophisticated way to conduct your digital life through its platform, with the use of its blockchain, smart contracts, and native cryptocurrency. The upcoming Merge will upgrade the network in several ways and will hopefully make the platform even more useful for those looking to decentralise their finances.
Disclaimer: Nothing within this article should be misconstrued as financial advice. The financial techniques described herein are for educational purposes only. Any financial positions you take on the market are at your own risk and own reward. If you need financial advice or further advice in general, it is recommended that you identify a relevantly qualified individual in your Jurisdiction who can advise you accordingly.