The mechanism through which blockchains add new blocks to the ledger of the chain, the consensus mechanism, is a central component of any chain and there are various mechanisms with different trade-offs that suit different purposes better.
Currently, the only major smart contract blockchain that is not using a Proof-of-Stake consensus mechanism (PoS) is Ethereum. It is widely accepted that a PoS system is more suited to scale and make a smart contract chain faster, more energy efficient, and less prone to centralization due to lower barriers to validation (low hardware requirements);all reasons why the Ethereum community decided to make the switch from Proof of Work (PoW).
The transition has been under development for several years with various steps along the way, with ‘The Merge’ being the final nail in the PoW coffin.. We will dive deeper into the specifics and try to outline the implications on the network.
So, what is ‘The Merge’?
When this endeavour started, the first step was to create a PoS consensus chain running in parallel to the PoW Ethereum network. This new chain, known as the Beacon Chain, was launched on the 1st of December 2020, with the staking deposit contract being created on the 14th of October 2020. It has been executing the PoS consensus logic since then without integrating Ethereum transaction data from what will be the Execution Layer, neither processing transactions nor handling smart contract interactions.
So The Merge refers to the moment when Ethereum’s existing PoW blockchain and the Beacon Chain join together to form one unified chain and split the responsibilities into two different layers, the consensus and the execution layer.
After the Merge, the current chain will still be responsible for executing transactions but will be dropping the PoW consensus mechanism. In contrast, the Beacon chain will assume the responsibility of reaching consensus about the execution layer transactions while producing valid blocks and, in this way making Ethereum a PoS chain. What is important to note here, is that there will be no switch or change for users on the execution layer.
The network upgrade will require the node operators (validators) to update their consensus layer (CL) and execution layer (EL) clients at the same time, while the chain will have two hard forks: the Bellatrix and the Paris fork; by this order in time.
Bellatrix is the final upgrade before The Merge, and it was activated on the Beacon Chain at epoch 144896 on the 6th of September, 2022, around 7:34 am ET and 11:34 am UTC. Ethereum nodes had to update their client software versions before the Bellatrix upgrade. This hard fork requires Beacon Chain validators to monitor the current Ethereum network to trigger the Merge event.
The Paris hard fork will make the protocol migrate from PoW to PoS upon hitting a specific Total Terminal Difficulty (TTD), triggering the Merge event at TTD 58,750,000,000,000,000,000,000, expected around 13th-15th of September 2022. Once the execution layer reaches or exceeds the TTD, the subsequent block will be produced by a Beacon Chain validator.
What does this change mean for miners?
This deep change at the protocol level will also change the dynamics between the participants. Today, miners run a software client to solve a mathematical problem that requires a lot of energy usage, and get rewarded with Ether (ETH) in order to cover the costs and get incentives to keep validating the chain. Whereas after the Merge, the validators are going to bond economic value (called staking) as an insurance that they are validating the transactions correctly. Any misbehaviour can lead to the validator getting slashed (lose part of the value staked). Per the latest stats, the Beacon Chain had over 400,000 validators and more than 13.4 million ETH (10.99% of the total supply) staked with validators.
It’s also important to notice that the possibility of withdrawing staked ETH won’t be live on the merge date for security reasons, since the network is more secure with more ETH staked. The validators will be able to remove their stake after a new update to the protocol, the Shanghai fork, which is expected to happen in early 2023.
Ethereum’s blockchain data structure is based on two elements; a pointer and a linked list. A linked list is the data structure used to store the blocks and their data. Pointers are used to link the blocks to each other by pointing toward the previous block hash. These two elements will not go through any changes ensuring any data stored on the ledger will not be lost after the transition.
Why was the TTD chosen as the trigger for the Merge?
To understand this, it is important to understand the following concepts first.
In the current Ethereum PoW chain, each block has a difficulty, representing the amount of mining power (computational work) that has gone into building a block. The TTD represents the cumulative sum of the total mining power since the genesis block, meaning it will keep increasing.
Typically, upgrades have occured at a predetermined block number. However, if the Merge was triggered by a specific block number, a potentially malicious minority hash power chain could reach that block number first and interfere with the merge transitions. That is why it was decided the PoS chain would be built on top of a block that reached the TTD value, as opposed to a block number.
Since the TTD depends on the PoW hash rate, it is difficult to predict exactly when it will be reached due to the block’s volatile hash rate. The TTD will be reached sooner if the network’s hash rate increases, while a declining hash rate would prolong the time until the Merge. However, the Ethereum core developers could coordinate a TTD override in the event of a significant decrease in hash rate levels.
Initial predictions placed the Merge date between the 16th and 20th of September.
At the time of writing the TTD was 57,988,680,864,834,678,554,746. Based on the Staking Rewards tracking link for the Merge date, it is currently between 13 and 15 September since the hash rate has been increasing since August.
Consensus after The Merge: from PoW to PoS
A reliable and robust computer system must function in the most adverse scenarios, including partial network failure. To achieve this level of antifragility, there needs to exist coordination and safeguards, such as the Byzantine Fault Tolerance (BFT) mechanism that is used on the version of PoS that Ethereum will adopt.
The BFT mechanism guarantees the capacity of the chain to reach consensus even when some nodes in the network fail to respond or validate incorrect information. To achieve it, the correctly working nodes in the network need to reach an agreement on their values and be at least two-thirds of all the nodes in the system. So as the number of nodes increases, the system becomes more secure since it gets harder to coordinate one-third of all the nodes to be corrupted.
A block conflict may occur due to network errors, latency, or malicious entities trying to sabotage the system since each validator may have different messages. Network nodes must agree to determine which blocks are correct based on the chain’s history to fix such issues. This is why a consensus mechanism is needed in distributed networks like Ethereum.
Proof of Work achieves consensus by putting capital at risk through power consumption and high cost of hardware. In contrast, Proof of Stake validators stake a certain amount of capital that can be slashed if the validator acts dishonestly or lazily.
There are currently no concrete numbers on energy consumption.
Carl Beekhuizen attempted to predict the energy usage of the Ethereum Proof of Stake in May 2021. He projected that switching to PoS will reduce total energy consumption by 99.95 percent.
You can follow his maths here, but he basically estimated the number of home validators (after eliminating the validators from exchanges and staking services from the total validators) and the average value of home-staked validators, which was 5.4 validators at the time. Afterwards, he estimated 100W per 5.5 validators based on the assumption that the typical home staker does not utilise an optimised setup. After speaking with infrastructure teams, he determined that the energy use might be 50 times less, or around 2.62 megawatts.
Carl also translated these energy consumption estimates into energy consumption per-transaction, finding out that:
- Ethereum PoS —> equivalent energy of a TV turned on for about 20 minutes.
- Ethereum PoW —> equivalent energy of a house for 2.8 days.
- Bitcoin —> equivalent energy of a house for 38 days.
The new Ethereum Consensus mechanism: Gasper
Gasper is the Beacon Chain’s consensus mechanism for determining which blocks should be accepted and which blockchain fork should be used.
It attempts to provide a practical Byzantine state machine replication by combining:
- Casper FFG (the Friendly Finality Gadget) → a finality tool.
- A PBFT-inspired algorithm that abstracts the block proposing mechanism and is only responsible for consensus, marking certain blocks as finalised.
- To prevent byzantine behaviour, a punishment mechanism is required. As a result, validators will suffer economic losses if a node violates a rule.
- LMD GHOST (Latest Message Driven Greediest Heaviest Observed SubTree) → a fork-choice rule.
- Validators must choose a canonical chain when validating a new block. As the canonical chain, LMD-GHOST selects the chain with the greatest accumulated weight of attestations (validator votes).
In proof-of-work, the timing of blocks is determined by the mining difficulty, whereas the Beacon chain has a fixed tempo divided into slots and epochs:
- A slot is a 12-second window during which a randomly selected validator is the block proposer.
- Proposing blocks involves aggregating transactions from the mempool to propose the most valuable block possible to be added to the Beacon Chain and broadcast it to the other nodes on the network.
- During each slot, at least 1 committee of at least 128 validators is selected pseudo-randomly using the RANDAO algorithm.
- 16 validators from each committee are selected to aggregate the attestations from all (at least) 128 validators, and will forward a single aggregated attestation to the block proposer.
- Attesting blocks entails voting that a specific block is valid before adding it to the chain, which entails receiving the block from the network and executing the transactions within that block to ensure their accuracy, as well as verifying the block’s signature to ensure its authenticity.
- An epoch consists of 32 slots, and is expected to take around 6.4 minutes, during which each validator is expected to attest once. After each Epoch, the validators are randomised into new committees.
If a block is created by the block proposer (in the example below, Alice is the block proposer for slot 1), other validators who were chosen at random to be part of the committee to attest that slot will receive the new block, verify its validity, and submit an attestation (vote) in favour of that block across the network.
Finality is typically reached after two epochs. Each vote has a link consisting of two epochs:
- Source → The lower epoch.
- Target → The higher epoch.
If the votes exceed ⅔ of the total staked ETH, it is called a supermajority link. When this occurs, the target becomes “justified” and the source becomes “finalised”.
A user must deposit 32 ETH into the deposit smart contract on the Ethereum 1.0 chain to become a validator on the Beacon Chain. Validators can only propose new blocks to the network and accept new blocks from network peers after activation.
Staked ETH and staking rewards remain locked on the Beacon Chain and cannot be withdrawn until the Shanghai fork. After this upgrade, withdrawals will be rate-limited for security purposes, preventing validators from withdrawing all of their staked ETH at once. As the ETH used as a tip to the validator is already on the execution layer, validators will have immediate access to the fee rewards/MEV earned during block proposals.
Block time is the amount of time required to add a new block to the chain. In the current PoW setup, the expected block time is defined as a constant at the protocol level to ensure that the rising computational power of miners does not jeopardise the network’s security.
After each block, the average block time of the network is analysed and adjusted based on the level of difficulty; if it is larger than the expected block time, the level of difficulty is decreased, and if it is less than the expected block time, the level of difficulty is increased.
At the time of writing, the average Ethereum Block Time was 13.67 seconds, falling usually within 12 to 14 seconds. The Merge will reduce the Block Time to precisely 12 seconds (the duration of a slot), unless a slot is missed because a validator is offline or does not submit a block in time.
However, when compared to Pow, block finality takes much longer under PoS. In PoS, blocks are created every 12 seconds, but finality is usually reached after two epochs. Two justified epochs are required for those epochs and the blocks within them to be considered finalised.
Stats and Analysis:
“Merge ready” nodes:
Currently, there are 83.6 percent nodes marked as “Merge ready”. To achieve this status, nodes must update their clients to the most recent version in order to be compatible with the Bellatrix upgrade.
Node operators who fail to update their nodes to the most recent client version run the risk of having their nodes syncing an incompatible chain (the pre-fork chain) using outdated rules.
ETH Staking Supply:
According to Staking Rewards , only 10.99% of the total supply of Ether is currently locked.
According to https://ethereum.org/en/staking/ there are already 14,243,585 total ETH Staked with 421,380 validators. Based on Staking Rewards, the number of validators increased by 0.02% in the last 30 days.
The lack of a fixed withdrawal date has made it challenging for users to stake ETH. LIDO, which is now the pool with the most staked ETH, accounting for more than 30%, is attempting to fix this issue by allowing users to stake ETH without losing liquidity.
Coinbase, Kraken and Binance also account for a significant portion, more than 28%, of the staked ETH. It is important to note that the recent sanctions from the American government pose a critical threat to withdrawals for staked funds on centralised exchanges.
In the crypto world, The Merge has been a highly anticipated event that has been in development for several years. Ethereum’s upgrade to PoS is a major stepping stone towards improving scalability, security and decentralisation.
However, there are still a number of key network security enhancements and threats to discuss. The lack of a fixed withdrawal date has made it difficult for users to stake ETH, with only about 10% of the total supply being staked. Add to that a minimum of 32 ETH being required to run your own node, one can see there exists a significant barrier to the decentralisation of validators. There are already discussions ongoing with regards to lowering this amount, allowing more people to operate their own nodes.
Will a successful merge accelerate the need to stake for users?