Technologically, “the merge”, or Ethereum network upgrade, will shift the consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS). However, what does that mean without the jargon?
Fundamentally, the merge sets stage for a more sustainable and scalable future of Ethereum. As the world’s assets become tokenized and put on distributed ledgers, various blockchains are vying to become the technology infrastructure of this ledger system. As an early mover, Ethereum has quickly become one of the most popular choices for blockchain and web3 innovators but not without a fair share of criticism around environmental sustainability and scalability. By switching consensus mechanisms, Ethereum will wildly cut the electricity usage needed to run the chain by up to 99 percent. The full impact won’t be realized until the merge actually happens as complex systems can often behave unpredictably but if successful, Ethereum will be well positioned to address the environmental concerns that have repeatedly sparked debate around the crypto world. What about those crazy “gas” fees everyone complains about?
It’s highly unlikely that the merge will directly have a large impact on the transaction fees that come along with using Ethereum as it doesn’t fundamentally change the throughput of the blockchain, however, it can lay the groundwork for future scalability solutions to be implemented. The PoS mechanism has been used very successfully by other highly scalable blockchains which could be used as a blueprint for future enhancements. With large upgrades coming to Ethereum itself, is there still room in the market for layer two solutions?
L1 vs L2
Layer two solutions, essentially a second blockchain running on-top of the base blockchain, will continue to have a place long after the merge. As the base layer becomes more scalable, the layer two solutions will continue to become more scalable as well. The financial world as we know it is full of systems that communicate and settle with each other in batches, there’s no reason the believe the blockchain would be any different. As the world’s assets become tokenized, various layer two networks will develop focused around specific industries and applications that then settle back to the original base layer for interoperability and security.
The merge has been a long awaited event since being first introduced with a potential release in 2016. While currently anticipated in mid-September, modifying such complex systems is often unpredictable which could both delay the event as well as bring unintended behavior the ecosystem will need to adapt to.