Last week, the second-largest cryptocurrency by market value, Ethereum, reached an important milestone. Developers have completed The Merge, a much anticipated change in the way the network is governed, transactions are approved, and new blocks are formed. The Merge has been in the works for years, and while it has been a major achievement, the Ethereum community still has a lot of work to do if it is to scale the blockchain further. In fact, another major update could happen in 2023. Here's what investors should expect.
The Merge results
The Merge's main achievement was Ethereum's shift from a proof-of-work governance mechanism to a proof-of-stake mechanism.
The proof of work mechanism was the original way blockchain networks were managed and is still used by the pioneer of the blockchain Bitcoin, the largest cryptocurrency by market value. With this type of mechanism, mining rigs - at this point, usually specially designed computer arrays - attempt to solve cryptographic puzzles as quickly as possible to have the opportunity to validate transactions arriving across the network and add new blocks to the blockchain.
In return, these miners receive tokens. As token prices rise, especially among the larger cryptocurrencies, competition has intensified to solve these cryptographic puzzles, requiring miners to use tons of computing power and hardware to solve them. This makes proof-of-work protocols extremely energy intensive and therefore harmful to the environment.
In a proof-of-stake protocol, investors who own tokens can “stake” them - essentially, freeze them for a certain period so they can lend them to others. In this way, token owners enter a lottery-like system to have the ability to validate transactions and form new blocks. For their contributions, those who stake their tokens on the network will receive a certain amount of Ethereum based on a sliding scale formula.
The move to proof of stake will not only make Ethereum much more energy efficient, it will also reduce the amount of Ether assigned to validators per block, effectively slowing the growth of Ether supply and potentially contributing to its decline over time. . This could drive the price up.
What to expect in 2023
It is difficult to know when exactly the sharding will take place or if it will be completed in 2023. It will be done in two different phases and the Ethereum website lists it as an event of 2023-2024 on some pages.
Also, it appears that some aspects of the sharding implementation are still under discussion among the developers, so I expect some delays. While it can be difficult to be patient, it is important for Ethereum's sustainability and long-term success that developers get these updates right.
Investors should also take a deep breath and give the developers credit for just completing the merger. It wasn't an easy feat, and it's a testament to just how capable the developers are. This gives me confidence that the sharding will be done correctly and in the most timely manner possible.