The Merge – a revolutionary transformation of Ethereum's consensus mechanism

Introduction: when blockchain grows

Since its launch in 2015, Ethereum has become the foundation of a decentralized internet, hosting thousands of projects. However, the rapid development of the ecosystem has revealed a significant issue: the current infrastructure cannot handle the global demand for transaction processing. The network often suffers from congestion, leading to skyrocketing fees and delays in transaction confirmations.

The solution to this dilemma is not simple. Blockchains were developed with a focus on decentralization and security, but scalability often remained problematic. The Ethereum team understood this challenge and proposed a comprehensive development roadmap, the central part of which was the historic transition – The Merge.

Scalability Trilemma: Why Changes Are Inevitable

Vitalik Buterin described the fundamental problem known as the blockchain trilemma. It represents the impossibility of simultaneously achieving three criteria: scalability, security, and true decentralization.

Proof of Work, a mechanism that was used by Ethereum before The Merge, had objective limitations:

• The throughput depends on the block size and its generation time.
• Miners compete to add each block, which requires huge computational resources.
• The system is designed for mining blocks at a constant speed, which limits flexibility.

The example of Bitcoin shows that blocks are mined approximately every 10 minutes. During peak activity periods, this leads to network congestion and exponential growth in fees. Ethereum has faced a similar situation constantly.

The Merge: the unification of two worlds

The Merge is not just an update, but a fundamental transformation of Ethereum's architecture. At a technical level, the update combines two parallel chains:

• Execution Level (mainnet with all transactions and data)
• Consensus Level (Beacon Chain, launched in December 2020 based on Proof of Stake)

Until 2022, these systems operated independently. The Merge integrated them into a single ecosystem, where the Beacon Chain became the consensus mechanism for all network data.

From Mining to Validation: A New Paradigm

The coolest aspect of The Merge is the replacement of Proof of Work with Proof of Stake. Instead of competitive mining, where only owners of specialized equipment have equal opportunities, the development of the network now depends on validators.

How the new system works:

• Anyone with 32 ETH can become a validator.
• Validators are randomly assigned to verify candidate blocks.
• They receive commissions from transactions and rewards for staking for correct validation.
• The system requires orders of magnitude less energy than PoW.

This architecture makes Ethereum significantly more energy-efficient. It is estimated that electricity consumption has decreased by approximately 99.95%.

ETH Economy: Deflationary Turn

Historically, the issuance of Ethereum consisted of:

• ~13,000 ETH per day as mining rewards
• ~1,600 ETH per day as staking rewards

Together, this amounted to ~14,600 ETH daily before The Merge.

After the transition to Proof of Stake, the dynamics have changed dramatically. Mining rewards are no longer issued – only staking rewards remain. This meant a reduction in the annual issuance of ETH by approximately 90%.

With the current price of ETH at $2.98K and an annual issuance that has fallen to ~1,600 ETH per day, the logic of supply and demand suggests potential for growth. However, it should be noted that cryptocurrencies are unpredictable assets influenced by a multitude of geopolitical and macroeconomic factors.

What’s next: Sharding and the next frontiers

The Merge is not the end of Ethereum's evolution, but its second step. The following updates are in development:

Sharding is a parallel processing mechanism where data is distributed among specialized chains (shards). Each shard processes its subset of transactions, significantly increasing the overall throughput of the network.

The sharding process is intended to be multi-step:

• Version 1: Sharded chains will provide additional data for the network
• Version 2: Sharded chains will be responsible for storing and executing code.

In addition, The Surge, The Verge, The Purge, and The Splurge are being developed – updates that will continue to optimize the protocol.

Multi-layered approach to scaling

A logical question arises: why is Ethereum developing so many solutions at the same time? The answer lies in the philosophy of reliability and distributed risk.

One scaling mechanism may prove insufficient during peak loads. The presence of many complementary solutions allows the network:

• Distribute the load more efficiently
• Avoid single points of failure
• Ensuring readiness for mass acceptance

Impactus for users and assets

On network operations: The transition to PoS does not affect the functionality of users' assets. ETH remains ETH. Transactions are processed, contracts are executed, but all this occurs within the framework of a new consensus paradigm.

Token value: A 90% reduction in supply theoretically creates deflationary pressure, which should positively affect the price when demand remains constant or increases. However, markets are complex – they are often influenced by macroeconomic factors, regulatory decisions, and investor sentiment.

On the reward structure: Validators now receive transaction fees instead of specialized miners. This creates a more direct connection between network activity and the income of system participants.

Risk Warning

Investing in cryptocurrencies is associated with high volatility and market risk. Prices of digital assets can fluctuate dramatically. Past performance is not indicative of future results. Before investing funds, one should thoroughly study the market, understand the technology, and assess their own risk tolerance.

Summary

The Merge was a turning point in the development of Ethereum. It is not just a technical upgrade but a conceptual shift from energy-intensive mining to energy-efficient validation. The transition to Proof of Stake, along with planned updates for sharding and other scaling mechanisms, prepares Ethereum for an era of mass adoption, when the network will be able to handle transactions without compromising on security and decentralization.