Ethereum (ETH), a global open source blockchain platform, is an important step towards upgrading!At 14:42 Beijing time on September 15th, the Ethereum execution layer (i.e

Ethereum (ETH), a global open source blockchain platform, is an important step towards upgrading!

At 14:42 Beijing time on September 15th, the Ethereum execution layer (i.e. the previous main network) and consensus layer (i.e. beacon chain) triggered the merge mechanism at block height 15537393, which means that the Ethereum "The Merge" has been completed.

The merged Ethereum will be free from the constraints of PoW (proof of work). The main transformation is the transition of consensus mechanism from PoW mechanism to PoS (proof of equity) mechanism.

The Merge is regarded by the industry as an important symbol of Ethereum entering the 2.0 era. Senior industry experts point out that the merger will increase the value of ETH and to some extent enhance the security of the Ethereum main network. In the future, ETH may also have the triple attributes of consumable/convertible assets, capital assets, and value storage assets, becoming a trinity of "super assets".

Ethereum completes' merge '

At the beginning of its establishment, Ethereum adopted the PoW (proof-of-work) mechanism. The process of obtaining cryptocurrency through this mechanism is called "mining", that is, work is mining (rewards generated by helping bookkeeping). The working equipment is mining machines. The performance (calculation) of mining machines determines the mining revenue.

PoW requires thousands of mining hardware devices to continuously operate to support and protect the network, consuming a large amount of energy. Vitalik Buterin, the co-founder of Ethereum, has been a supporter of the consensus mechanism of proof of equity (PoS) for a long time. He believes that the consensus mechanism of proof-of-work adopted by Ethereum Network cannot meet the scalability standards, so it needs to change from the PoW mechanism to the PoS mechanism.

In order to ensure the smooth operation of the Proof of Rights (PoS) chain before its official release, Ethereum has released a separate beacon chain for testing. The Beacon Chain was launched on December 1, 2020, with the sole purpose of becoming a Proof of Rights (PoS) blockchain. This merger refers to the complete merger of this beacon chain and the early proof-of-work chain.

At 14:42 Beijing time on September 15th, the Ethereum execution layer (formerly the main network) and consensus layer (i.e. beacon chain) triggered a merge mechanism at block height 15537393, indicating that Ethereum's PoW verification will be replaced by the new PoS consensus mechanism. The Ethereum upgrade plan is divided into five parts: Merge, Surge, Verge, Purge, and Spluge.

Yu Jianing, co-chairman of the Blockchain Special Committee of the China Communications Industry Association, told the International Finance News that the PoS consensus algorithm actually means that network members who want to participate in bookkeeping can participate by pledging ETH. Each verification transaction is rewarded with a certain commission in proportion to the number of assets owned by the node. The more relevant assets the node has, the longer the holding time, The greater the chance of obtaining accounting rights. ETH holders can choose to pledge a certain amount of ETH and enjoy dividends from the system. The specific rate of return will vary with the entire system's pledge volume, and the annualized rate of return is expected to be between 2% and 20%. Therefore, after the successful merger, Stacking will become an indispensable part of the Ethereum ecosystem.

Luo Qi, a senior researcher at the European Research Institute, pointed out to the International Finance Journal that the merger of Ethereum has three main impacts: firstly, the circulation of ETH will be significantly reduced, which in turn will bring about an increase in value. Under the PoW consensus mechanism, Ethereum calculates blocks based on 13.5 seconds, resulting in a reward of approximately 2.1 ETHs per block, corresponding to a reward of approximately 4.91 million ETHs per year. After the merger and conversion to the PoS consensus mechanism, the PoW mining and block out rewards will be cancelled, and the newly added ETH will only be issued through pledge rewards. The total pledge amount on the current beacon chain is 13883221 ETH, with an annualized return of approximately 4.2%. The one-year ETH pledge reward is approximately 583100 ETH.

Overall, the merger will reduce the ETH annual inflation rate from 4.3% to 0.43%. Moreover, after the merger, the proportion of ETH destruction in each block will also increase accordingly. When the Gas cost of Ethereum (the cost paid by individuals to complete transactions on the blockchain) is greater than or equal to 7gwei (the smallest unit of Ethereum, 1gwei is equal to 0.000000001ETH) The speed at which ETH is destroyed will be greater than the issuance speed of ETH, leading to a deflationary total volume of ETH. Therefore, in the future, with the continuous increase in demand and the decrease in total volume, the value of ETH will inevitably increase Luo Qi said.

The second is to improve verification efficiency and enhance verification security. Under the PoS mechanism, the beacon chain has a registry of all approved validators, which can coordinate and parallelize the voting of validators. Therefore, the beacon chain verification mechanism innovatively establishes a committee, namely the validator set, to strengthen consensus and improve efficiency. The beacon chain random allocation committee votes on blocks to form consensus, which minimizes block size and data growth compared to single verifier validation. Moreover, the set of validators undergoes periodic transformations, making it difficult for malicious validators to quickly collude for attacks.

Thirdly, in the PoS verification mechanism, Ethereum is easier to recover from attacks. There is a built-in "reduction" mechanism in the PoS consensus proof, through which most of the attackers' pledges can be automatically destroyed. The attacker needs to purchase ETH to replace the destroyed ETH, but continuing the attack may result in the destruction again, ultimately stopping due to unbearable costs, making it easier for Ethereum to recover from the attack.

Will Ethereum become a "super asset"?

Ethereum is positioned as a world computer, and in order to achieve this goal, developers have planned an upgrade path for it since its inception, which includes four stages: Frontier, Homestead, Metropolis, and Serenity. At present, the entire network has reached the third stage, which is the ETH1.0 stage. The final stage, Senerity, is often referred to as the ETH2.0 stage in the industry.

The Merge is regarded by the industry as an important symbol of Ethereum entering the 2.0 era. Luo Qi's analysis pointed out that in the long run, the merger will increase the value of ETH and to some extent enhance the security of the Ethereum main network. Although there is no immediate impact on increasing TPS and reducing Gas fees, it will clear the obstacles for the subsequent upgrade of Ethereum at the protocol level.

For developers, Luo Qi stated that after the upgrade, the development threshold for Ethereum will be lowered, and the development environment will become more friendly. This is conducive to the prosperity of the future ecosystem and prepares for the arrival of billions of users. Moreover, the PoS mechanism is more energy-efficient compared to the PoW mechanism. Of course, the iterative elimination of the PoW mechanism also means that the mining community will withdraw from the historical stage.

Yu Jianing believes that after the merger, the Ethereum ecosystem will prosper and develop as before, giving birth to more new species such as DeFi (decentralized finance) and NFT (non homogeneous tokens) on its blockchain. On the other hand, ETH may also possess the triple attributes of consumable/convertible assets, capital assets, and value storage assets, becoming a trinity of "super assets".

Firstly, ETH has the characteristics of consumable/convertible assets. After upgrading in August 2021, a large amount of ETH was paid as a basic fee in the handling fee and "burned", which made it possess the characteristics of consumable/convertible assets, similar to oil and natural gas. Usage demand becomes a key factor, as the larger the usage demand, the lower the circulation volume, which in turn affects the value of the entire system.

Secondly, ETH has a capital asset attribute. After Ethereum officially transitions to the PoS consensus mechanism, holders can pledge ETH and continue to receive some digital asset rewards. This can be understood as holding ETH can bring some form of 'cash flow'.

Once again, ETH has the dimension of storing assets of value. After the full introduction of the proof of equity consensus mechanism, the annual supply growth rate of ETH (similar to the "inflation rate") may gradually decrease from 4%, or even become negative, indicating deflation.

In addition, many DeFi (decentralized finance) platforms support ETH as collateral locked in smart contracts to lend other digital assets or issue new digital assets as "reserves", indicating that ETH has asset derivative function. In scenarios such as NFT trading, ETH is the main trading medium and can be circulated across multiple blockchains through cross chain bridges, thus possessing the "general equivalent" attribute. These characteristics are similar to the position of gold in the world economy, so ETH has the potential to possess the attribute of storing assets of value.

This article originates from the International Financial Journal