Written by Christopher Kocurek, Guest Writer and Advisor to Web3 Texas

Have you heard about the Ethereum Merge slated to happen soon? Whether you are a crypto native, someone who dabbles, or just trying to learn the basics, understanding the Ethereum Merge is important because it changes the shape of the blockchain technological landscape. This, in turn, changes which products are adopted by enterprise and mainstream users. The outcome of The Merge has high stakes — if it fails, ETH will be a legacy name. If it succeeds, it may be the bedrock (chainrock? bedchain? blockrock?) of innovation for decades. Here at Web3 Texas, we’re on a mission to educate on Web3 fundamentals and make this technology safe and accessible for all. We will release regular content on major industry moves. Luckily for us (the team) and you (the readers), our first post is coming out on the same month that a tectonic update is happening.

What is the Ethereum Merge

The Ethereum Network is transitioning from Proof-of-Work (PoW) to Proof-of-Stake (PoS) as the mechanism of cryptographic validation to produce blocks. Uhh… Proof-of-What?

Let me break down these fundamentals for our new Web3 adopters without turning this topic into a second-hand dissertation on what a blockchain is (note: if your mind is screaming to understand what a blockchain is right now, I suggest you read the famous Bitcoin Whitepaper). Here’s what you need to know for now.

Blockchain in 6 points!

1. A blockchain is essentially a database — or a ledger in blockchain terms.

2. Data is stored on “blocks”. For example, transaction data comprise Bitcoin blocks.

3. The blocks are connected and become a chain.

4. The database gets bigger as new blocks are added to the chain.

5. Blocks are produced through “mining”.

6. The ledger is updated and replicated through all the nodes on the network.

Pretty straightforward, when it is massively oversimplified. If you’re reading this and eager for us to dive into advanced topics based around these six points like merkle trees, 51% attacks, and cryptographic hashes, stay tuned for richer articles later!

Now, let’s dive into some details… As things happen on the blockchain, those events are recorded and the blocks are filled with data. Once the block is filled, a new block needs to be produced. This production either occurs from mining or staking. For now, we’ll talk about miners. Enter blockchain miners: these computers continually support the network by devoting GPUs to solving cryptographic hashes. When a miner solves one of these puzzles, a block is created and the miner is paid in the chain’s native token. It’s absolutely critical that blocks are always being mined, or else the network stops. Fortunately, the rewards have historically been valuable, especially when you consider that Ethereum only houses 80 kilobytes of information per block and produces about one block per 12 seconds. Compare the size of a block (80 KB) to the size of an mp3 file (4MB). That is not a lot of data. It would take 50 Ethereum blocks to store one song from iTunes.

The value of the Ethereum network is so great compared to its relative data storage capabilities that we’re going to explore the comparison by looking at how the ETH network stacks up against commercial mobile data. Imagine you’re at your local cellphone store shopping for a new plan. The salesperson offers you a free plan with 17 gigabytes of data per month. Sounds pretty great, right? Well, there’s a catch. You have to share that 17Gbs with anyone else who wants to subscribe to the free plan. So as more people decide that a free network sounds good, there is a lot more competition for the data that the network provides; which is what leads to inflated prices and network congestion.

Can the entire world really run on the ETH Network?

ETH KBs/Block: 80 KB

ETH Blocks per Minute: 5

ETH Blocks per Hour: 300

ETH Blocks per Day: 7,200

ETH Data Storage per Day: 576 MB

ETH Data Storage per Month: 17.28 GB

This is a bit of a tangent but it is critical for you to understand how crazy and early blockchain technology is. In 2021, we reached a total crypto market cap of over $1 trillion, yet the most widely adopted blockchain, Ethereum, only provides storage for 17 gigabytes (OR LESS) per month?

Circling back to the topic of this post, which is the Ethereum Merge. Thanks to our short sidebar on blockchain data limitations, I hope you have context to understand why there is such an incentive to keep producing blocks for the chain. Until this month, Ethereum has used a Proof-of-Work mining model, just like big papa Bitcoin (BTC).

Proof-of-Work

Proof-of-Work is a consensus method that allows anyone in the world to produce the blocks which form the chain and create a network. This methodology involves devoting a computer to solving a complex math problem. Whichever computer solves the math problem first produces a block and is rewarded in cryptocurrency for their efforts. It takes hardware (computers) and electricity (energy costs) for miners to validate transactions, secure the network, and keep those blocks coming.

Deep Dive: Ethereum Gas Fees

Gas is essential to the Ethereum network. It is the fuel that allows it to operate, in the same way that a car needs gasoline to run. Since each Ethereum transaction requires computational resources to execute, each transaction requires a fee. Gas refers to the fee required to conduct a transaction on Ethereum successfully. As people spend ETH Gas to conduct their business on the ETH network, the gas they spend rewards the miners who are creating the blocks that verify their transactions.

It used to be the case that mining a bitcoin was once possible with some software on a thumb drive — but those days are long gone. Now, major capital and industries are devoted to securing Proof-of-Work blockchain networks with massive mining operations. Imagine a Walmart filled with powerful computers all turned on and running 24/7 to mine BTC. That takes energy. A LOT of energy. Whether or not having a BTC Mining factory can really boil a lake, there is no doubt that it is obscenely energy intensive. Here’s a few fun* stats.

1. One bitcoin transaction is estimated to consume the same amount of energy as 50 days of your average US household. Link to source.

2. Bitcoin alone requires more energy than the nation of Argentina.. Link to source.

3. For us here in Texas, expected BTC mining operation growth is predicted to demand the equivalent of an additional Houston to our power grid. Link to source.

While I am not the most energy-conscious person, I do make an effort to shut off lights when they aren’t used, avoid wasting water, etc. Thinking back to last year, I sent two transactions on Bitcoin which used the equivalent to about 3 months of my family’s entire energy consumption.

Makes you think! Maybe blockchain isn’t so great?

DRUM ROLL!

Proof-of-Stake

A CONTENDER ENTERS! Proof-of-Stake or (PoS) is the hip new way blockchains are mining their blocks and securing the network. Lots of the new kids on the block use it (Solana (SOL), Binance (BNB), Cardano (ADA)… the list is long). Proof-of-Stake is popular because this consensus mechanism requires a lot less energy to produce a block. The Ethereum Foundation has calculated it will be 99.5% less energy intensive to mine a block.

Here come the Validators. Nice.

To apply this same reduction to our previous example (1 BTC transaction — mind you, just to SEND Bitcoin, not even to mine it — takes 50 days of my home power demand), sending that BTC transaction now is equivalent to a quarter of a day’s energy. Still seems like a lot, but my eyes aren’t popping out of my head. In fact, when you consider the energy it requires to keep a bank running, that may actually be competitive or outperform the energy cost of traditional finance systems.

Proof-of-Stake works something like this. Instead of creating a dystopian computer factory that boils lakes and produces a ridiculously small database, you get a bunch of people to lock or “stake” the blockchain’s native cryptocurrency coin into a validator node (computer). The blockchain network requires these nodes to mine blocks. The non-technical explanation here is that instead of burning energy to solve math equations, you just have to put coins into a validator node.

If you’re interested in becoming an ETH validator node, you need 32 ETH. You can also participate in fractional nodes if you have less ETH but still want to contribute. It’s pretty cool because it makes it easier for the little guy to enjoy the incentives of running the blockchain without needing to buy a bunch of computers and run up your electric bill.

An algorithm selects from a pool of validators based on the amount of funds they have locked up. The more you stake, the better your chance of winning. If your validator node is chosen and your block is accepted, you’ll be awarded in Ethereum.

Ethereum wants to be the global network. But before we can achieve global adoption, we need to solve the energy crisis around blockchain production. Ethereum competitors launched on Proof-of-Stake for just this reason! And this is why Ethereum is merging their network to the newly updated codebase that will allow blocks to be mined using Proof-of-Stake.

Problems that the Merge wont solve

Most of us probably agree that igniting our atmosphere into a fireball over internet money is probably not a sustainable strategy. That’s why ETH fans are so excited about the Merge. This represents a monumental step towards an updated fundamental component of a blockchain network. That being said, Ethereum still has major problems to face that will hold it back from global adoption. Here they are.

1. The Merge won’t lower gas fees. In the bull run of 2021, it cost me $200 to swap some ETH for SHIB on Uniswap. This user experience is awful because most people simply cannot afford to pay $200 just for a transaction. For this reason, many people including myself flocked to other Layer 1 blockchains that had affordable gas fees.

2. Transaction speed stays the same. Compared to a bank which takes multiple days to send funds from one account to another, the Ethereum network can take 10 seconds or a couple of minutes to complete your transaction. That’s still awesome, but for those of us who are spoiled by blockchains we want things to happen even faster, and ETH is particularly weak to congestion; which is a big deterrent, when other blockchain competitors boast 1–2 second finality (the finalization of a transaction on-chain).

3. Block sizes are still tiny. 80 kilobytes per block really limits what type of information you can store on-chain. This is why NFTs are not actually monkey images on the blockchain, but they are rather the equivalent of URLs branded on a coin that point to the image of a monkey on some regular storage server.

Layer-2 scaling solutions like Polygon (MATIC) attempt to solve these problems while still leveraging Ethereum as the bedchain… or was it chainbed… blockrock, right … bedrock, of the global blockchain network. I promise we will have another post about L2s soon; maybe after the merge since the importance of solutions like MATIC will grow.

Final Notes

If you have been interested in blockchain, crypto, or NFTs but have been put off by valid environmental concerns, getting onto the Ethereum network after the Merge is a great idea. Sure, it will still be expensive and relatively slow compared to competitors, but at least you aren’t detonating a fireball in a local forest each time you want to spend $5.

This post purposefully glossed over deep technicals, but if you’re a developer and want a deeper understanding of what is actually going on, check out this link about the first step of the Merge, called the Bellatrix Upgrade.

If the Merge fails, it will be a disaster for Ethereum and the entire blockchain industry. If it goes well, ETH could well oust any upstart competitors for the next decade as Web3.0 booms. In my humble opinion, it’s cool to be so close to a revolutionary historical moment and be able to see the writings of one of the mastermind orchestrators behind it all. To me, Vitalik Buterin (founder of Ethereum — did I forget to mention that?) is something like a cross-over between Nikolai Tesla, Marcus Tullius Cicero, and a hungry skeleton. We can follow the inner workings of a great technologist with deep ethical foundations and a philosophical approach to changing the world and share some funny memes at the same time.