Blockchain and The Merge

What is a blockchain?

Although the term “blockchain” is now part of our modern vocabulary, there is still a lot of confusion about what a blockchain is, what it does and how it works. So let’s walk you through the overall understanding of the blockchain before we talk about the famous merge that took place a few weeks ago.

A blockchain is a technology for storing and transmitting information between multiple users, whether financial, informational, or physical, in a fully automated and secure manner. This technology offers high standards of transparency and security because it operates without a central control body.

More concretely, the blockchain allows its users – connected in a network – to share data without intermediaries and in a secure  way. With a data validation system, it is difficult or impossible to modify, hack or cheat the system which is based on a calculation algorithm called “mining”, or, by cryptographic keys.

This data validation system consists of three important concepts:

  • Blocks
  • Nodes
  • Miners

When a transaction is shared on the peer-to-peer network, it is collected by the nodes, verified by the miners, and, for efficiency reasons, the information is always collected and processed by blocks.

Each block consists of four components:

  • An arbitrary amount of data
  • A timestamp
  • The “hash” which is the unique and identifying “fingerprint” of the block
  • The “hash” of the block previously added to the blockchain in order to be able to link the new block in question.

All blocks are verified and validated by the network miners. This step consists of verifying the authenticity of transactions by :

  • Comparing them with previous transactions
  • Identifying the traceability
  • Verifying related transactions

When the blocks are validated, they are added to the other blocks to form a chain; a Blockchain.

Proof-of-work & Proof-of-stake

Proof-of-work and proof-of-stake are the two actual different types of consensus mechanisms used by blockchain networks to proceed to the validation of their transactions.

Proof-of-work (PoW) has been a part of the “Blockchain world” from its earliest days, having been built into the bitcoin blockchain when it launched in 2009.

In practice, PoW means that if new transactions are added to a given blockchain network, other nodes within the network must validate and approve them before a new block will be created and entered into the blockchain.

The idea of PoW is to avoid malicious attacks and verify each transaction by solving cryptographic equations, by trial and error, also known as Mining. This validation requires expensive computers and uses up a significant amount of energy. Those that verify the transaction are named “miners”, they choose to do it and they receive compensation in form of coins for their work. This is why PoW contains the word work. The problem with PoW is that each block has to be validated by miners, and since there are more and more blocks in the network, the amount of used energy is growing dramatically.

On the other hand, proof-of-stake (PoS) relies on validators who own coins associated with the blockchain. With PoS, the validator is chosen randomly, based on how many coins they have locked up in the blockchain network, he is “staking”. The stacked coins act as collaterals. The more a node owns coins, the more he is trustworthy since he has no interest in cheating and thus devaluing the blockchain. When a participant, or node, is chosen to validate a transaction, they receive a reward/fee based on how many coins are staked by the node. On the opposite of PoW, it doesn’t need lots of energy and any specific machine since there are no equations to solve. The idea is that you let your personal computer do the work as soon as you staked crypto on the blockchain to have the opportunity to become a validator. Of course, PoS requires multiple validators to agree that a transaction is accurate, and once enough nodes verify the transaction, the block is added to the chain! 

Ethereum Blockchain

Ethereum is a blockchain inspired by the Bitcoin blockchain, but with the intention to be an enhanced experience of the blockchain technology.

From the Ethereum official website, Ethereum is “a technology for building apps and organizations, holding assets, transacting and communicating without being controlled by a central authority. ”Nothing more, nothing less, and like all blockchain, Ethereum got its own cryptocurrency, the Ether.

It was officially launched in 2015 by Vitalik Buterin and was based on the “Proof-of-Work” methods to expand and reward its miner.

This was before the big milestone in Ethereum and the global blockchain history, that is, “The Merge”.

“The Merge”

On the 15th of September, one big event (if not the biggest) happened in the crypto world. The Ethereum blockchain was to complete the so-called “The Merge”.

The Merge was the switch of the Ethereum blockchain from a proof-of-work consensus, to a proof-of-stake consensus. The objective of this move is to reduce the energy consumption of the Ethereum blockchain by 99%. In reality, the energy needed for the Ethereum blockchain has been reduced by 99,95% with the move to the PoS. It is moving from roughly 11 million of CO2 tons to 870 tons per year.

The CCRI report (Crypto Carbon Rating Institute) compares the change as if we would have reduced the Eiffel Tower size to the size of a single Lego.

The Merge: results, effects and future?

The main objective of the Merge is the consumption of energy reduction, the improvement in scalability, security or reduction of the gas (transactions) fees were never part of the update. However, The Merge is setting hard ground for the priors to improve in the near future, for instance “Sharding”, that should come in 2023/2024 and really improve the Ethereum blockchain scalability.

However, it is interesting to notice that the standard economy has already seen some effect from The Merge. For instance, the market for graphic cards has collapsed dramatically since the announcement of The Merge. That is a reminder to the “Creative destruction” cycle theorized by Schumpeter that stated innovation solves issues and upgrades many processes, but by doing so also destroys many existing processes or brings new issues.

To conclude, it is just fair to assume that the blockchain technology is at its premises and we better buckle up for what is to come in the near future, for the best and the worst.