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Post: NerdWallet: What is the Ethereum merge and why does it matter? Here’s an explainer.

This article is reprinted by permission from NerdWalletThe investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

The Ethereum network, which powers the cryptocurrency Ether, is making moves to become more sustainable. It’s planning to switch from an energy-intensive proof-of-work consensus mechanism to a more sustainable proof-of-stake system. The Ethereum

merge is the moment at which this switch will take place.

Ethereum’s website states that a final merge date is not set, though a leader on the project tweeted that Sept. 19 was the target date. But the project, which has been in development for a few years, has been delayed several times before. While it seems that plans for the merge have become firmer, more delays are possible.

Central to the merge is the goal of reducing energy consumption. Ethereum estimates its energy consumption will drop by more than 99.95%. It also claims the merge will lead to better scalability.

Read: 10 rules every new crypto trader should obey so you don’t lose your shirt

Why the merge is happening

To explain this transition, the Ethereum Foundation uses an analogy in which it describes Ethereum as a spaceship in mid-flight: “The community has built a new engine and a hardened hull. After significant testing, it’s almost time to hot-swap the new engine for the old mid-flight. This will merge the new, more efficient engine into the existing ship.”

So what’s wrong with the old engine? Mainnet, the blockchain used since Ethereum’s inception in 2015, uses proof-of-work to securely add new transactions and other information. A proof-of-work consensus mechanism requires user computers to solve increasingly difficult computations before being allowed to add a new block. This method, which is used by many cryptocurrencies including Bitcoin
is secure, but it’s also energy-intensive. Ethereum proof-of-work consumes the same amount of energy on a yearly basis as some entire countries consume in the same time frame.

Proof-of-stake is an alternative that consumes less energy. Instead of devoting electricity, which fuels computing power, users who want to be part of the verification process will put their personal cryptocurrency on the line in a process called staking. These users, called validators, are randomly selected to verify new information to be added to a block. They receive cryptocurrency if they confirm accurate information. If they act dishonestly, they stand to lose their stake.

Also see: Lost money from $4.5 million crypto wallets exploit? Here’s what you should do

How the merge could work

An important technology behind the merge is the “Beacon chain” — a proof-of-stake ledger of accounts that has been adding and verifying transactions distinct from Mainnet since its launch in December 2020. It’s been undergoing testing, gaining a track record and otherwise becoming established in its own right. (For example, it now has more than 400,000 validators.)

If and when the merge occurs, the information from Mainnet will be transferred to the Beacon chain — the mid-flight-rocket-engine swap in Ethereum’s parlance.

What will change

Mining will no longer be possible. If Ethereum moves from mining to staking as planned, it won’t be possible to verify transactions on Mainnet through mining. Instead, validators on the Beacon chain will then confirm all new transactions. The rate at which new coins enter circulation will decrease by about 90% because mining rewards, which are larger than staking rewards, will cease. The energy needed to maintain Ethereum should also drop.

Sharding will become possible. Sharding, which splits validation work into smaller amounts, should allow the network to handle more transactions. It also could increase network participants by allowing people to run Ethereum on small devices, like phones. Sharding is not part of the merge, but it will be on the table for future updates.

Read: BlackRock partners with Coinbase to offer bitcoin access to institutional investors, despite market downturn

What won’t change

Gas fees and transaction speeds. The merge will not result in lower gas fees or faster transaction speeds, according to Ethereum’s website.

The way you access your ETH. Because the merge will transfer the entire transaction history, those digital assets will be accessible in the same way as before.

What it means for you

For investors: No action needed, but watch out for scams

If you currently own Ether or any other digital asset on Ethereum, you don’t need to do anything, according to the network’s website. Ethereum warns against scammers who suggest you need to upgrade or transfer to a new token, like “ETH2.” (No such token exists.)

For stakers and miners: A change in operations

If you currently operate an Ethereum node or if you are a staker on the Beacon Chain, you need to take certain steps to ensure a smooth transition. If you are currently a miner, you will no longer be able to mine after the merge.

Neither the author nor editor held positions in the aforementioned investments at the time of publication.

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Kurt Woock writes for NerdWallet. Email: kwoock@nerdwallet.com.

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