Ethereum will soon switch from Proof-of-Work (PoW) to Proof-of-Stake (PoS). This process is known as the Merge.
With this shift, miners will no longer need to convert capital into energy and mining hardware to secure the blockchain. Rather, validators will lock in the base asset (ETH) to participate in consensus. Danny Ryan of the Ethereum Foundation has referred to this as, “proof of dedication of scarce resources to the protocol”.
The road ahead is clear, following the Ropsten testnet’s successful merge. In this post, we explore the ins and outs of Ethereum’s transition and Blockdaemon’s position as a leading validator.
Why is the Merge Happening?
Proof-of-stake delivers a ‘cheaper’ way of achieving consensus.
Consensus is how network participants agree on the state of the decentralized Ethereum chain. Traditionally, miners committed energy to produce blocks and achieve consensus. By relying on energy, each commitment to the chain carried a real economic ‘weight’. This incentivized miners to be honest, as good behavior was rewarded with block rewards, whereas energy would be wasted by acting against protocol rules.
Today, miners run clients to carry out their duties. These clients are the software that specifies how the Ethereum blockchain functions. They capture the protocol rules in code. There are many different clients currently available, with various versions of the same protocol specifications across multiple programming languages.
Below is a simple diagram of what an Ethereum client features in PoW.
The Merge will offer separate clients, decoupling execution duties from consensus. In PoW, these are one and the same. Going forward, they will no longer be bound as one.
A consensus client is needed to agree on the state of the network, while an execution client maintains Ethereum’s existing multi-billion dollar smart contract infrastructure.
To reach consensus post Merge, validators, not miners, will be called-upon to attest to the correct head of the blockchain. Each attestation adds its own cryptographic (rather than economic) ‘weight’ to the correct state of the blockchain. By relying on incentives rather than hash power, this new paradigm delivers a lighter yet equally (if not more) secure consensus mechanism.
Validators have successfully reached consensus on the Beacon Chain (Previously known as Ethereum 2.0) for almost two years. Upon merging, these operators will now need to operate both consensus and execution clients simultaneously.
The transition to PoS promises a 99.9% reduction in energy consumption. For institutional stakers, this delivers better ESG outcomes when earning yield on crypto assets. External resources will no longer be needed to earn block rewards by progressing the chain.
What Happens During The Merge Itself?
Beacon Chain validators running consensus clients (e.g. Lighthouse, Prysm, Teku, etc.) will watch Ethereum mainnet for a Total Terminal Difficulty (TDD) to be reached. This will be a block that has hit TDD, while its parent block did not.
Once this TTD threshold is hit, the following block will be produced by a validator, not a miner. As the Ethereum protocol is moving to a two-layer client architecture, two new pieces of client software are now needed to run the network successfully. Validators will run their execution clients (e.g. Geth, Nethermind, Besu, Erigon) in tandem with a consensus client.
In order to earn transaction fee rewards, validators will include tx data processed by the Ethereum Virtual Machine (EVM) of the execution client. Miners running old clients will no longer know what the head of the chain is, without running a consensus node.
When is the Merge?
As mentioned, the Merge will take place at a certain, yet undetermined, Total Terminal Difficulty (TDD). As of June 2022, this date has not yet been decided. However, a useful flowchart helps visualize the journey going forward.
You may be wondering why TTD is the metric for change? Previous network updates, such as the London hardfork, occurred at a certain block height.
TDD ensures validators only take over only the ‘heaviest’, most valuable chain, allowing them to focus solely on the canonical Ethereum network. TDD carries a real economic weight, whereas block height doesn’t. This approach was also followed during the Ropsten merge, the most recent test network to ‘test’ the transition to PoS.
Goerli and Sepolia, two other testnets, will be next to follow-suit. On these networks, client developers can test their code once again in advance of Mainnet deployment, to reduce the chances of errors once live. Such errors can be costly if not caught, with real economic value on the line. These testnets are therefore valuable proving grounds for the Merge.
According to Ethereum experts, the Merge is hopefully expected in August or September 2022, if all goes to plan.
On June 16, 2022, the Ethereum Foundation announced that the Difficulty Bomb would be pushed out by 700k blocks, around 100 days. This update, dubbed Gray Glacier, is hoped by many to be the last time such a push back occurs, once the Merge takes place.
The difficulty bomb will make mining obsolete in the long-run. Unveiled in 2015, this difficulty adjustment scheme creates an exponential increase in mining difficulty over time. This pushes block resolution time ever upwards. The stated end-game of this mechanism is to trigger an Etheruem ‘Ice Age’.
Once the Ice Age is triggered, the difficulty will be too high for any PoW block to be mined. This event has been avoided many times to-date.
What Happens to PoS Stakers After the Merge?
Stakers can now earn additional income streams. Previously, these rewards had gone to the Proof-of-Work miners. Models suggest that both of these together could about double the total revenue of a validator:
- Transaction fees: whenever a block that your validator has built is accepted into the blockchain, you will receive the transaction fees (gas paid in $ETH) by the users that have transactions in this block.
- MEV rewards: if you don’t opt out of our recommended participation in MEV, you will also likely get some “tips” in the blocks you are building from people searching and using MEV opportunities.
Blockdaemon’s Support for the Merge
Our clients will not notice any change in services during and after the Merge . Blockdaemon’s expert engineers will manage every step of the process, so you don’t have to. Locked ETH funds will remain bonded until after a follow-up network hardfork, which will take place about 6 months after the Merge.
In the meantime, we continue to earn staking yields for our customers both today, and in the post-Merge era. These yields are underpinned by our 100% slashing insurance and 99.9% uptime guarantee.
Blockdaemon actively supports the lead-up to the Merge through our leading infrastructure and generous contribution to client testing. Client testing is crucial, as various combinations of execution and consensus clients are tested in the lead-up to the release. We’ve also strategically invested in Obol Labs. Obol is a trust minimized staking protocol for public blockchain networks based on Distributed Validator Technology (DVT).
Blockdaemon connects businesses to blockchains. If you want to stake your Eth quickly, easily, and safely, reach out to us today.