Risks And Flaws of the Ethereum Merge – A Complete Guide

In the crypto blockchain network, Ethereum is considered one of the most important computing platforms. Though a numbers of advancements happened in Ethereum since its inception but still there is a lack of scalability. In order to meet the demands of scalability all around world, the present architecture of Ethereum is considered insufficient.

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For this purpose, an advanced version of Ethereum was aspired by the developers and the Merge is one of them. Here is a comprehensive article about the emergence of an upgraded version of Ethereum, the Merge and the risks and benefits that are attached to it.


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What is The Ethereum Merge?

The Ethereum network officially transitioned to Proof of stake mechanism when the Ethereum network was integrated with this protocol after the Merge. At present, the execution layer of the original blockchain network and the consensus layer of Ethereum known as Ethereum 2.0 have integrated with each other fully.

The Ethereum network transitioned from proof of work to proof of stake network and on September 15, 2022, this transition was completed. Because of this transition the consumption of energy by Ethereum reduced to about 99.95%.

The mainnet of the Ethereum called as the execution layer merged with the beacon chain that is the proof of stake consensus layer in a technical perspective. The first step in the development of Ethereum is the Merge and the Surge, the Verge, the Splurge and the Purge are its further stages.

The co-creator of Ethereum named Vitalik Buterin is of the view that about 55% of the set of development that has to be done on the network is marked by Merge. This will help in in increasing the scalability, security and sustainability of the network while keeping the decentralization intact.

By making the network secured with the help of Ethereum staking, the requirement of proof of work protocol has been eliminated by the Merge. By providing the computing power that is necessary for the validation of transactions and the security of the network, the Ethereum holders can get a chance to win rewards by staking.

One can also deduce that now instead of the miners, the Ethereum validators are responsible for validation of the transactions that are carried out on the network since the emergence of the Merge.

The decreased issuance of Ether (ETH) to the validators by using the rewards for their efforts in preserving the network is another major shift that is caused by the transition of Ethereum towards proof of Stake. Ethereum became a deflationary asset as a result.

At present the deposits that are made cannot be withdrawn in the Ethereum staking mechanism. Ethereum of worth billions is staked at present but it is stuck there until the feature of withdrawing feature has developed in the system.

Why was the Upgrade in Ethereum Needed?

Being a decentralized entity, not any single authority controls the blockchain network. The users can therefore carry out their transactions in a permissionless and decentralized manner.

As the blockchains are becoming popular among the people, the scalability demands of the network is also becoming difficult to be fulfilled. To carry out the transactions at a faster rate, the speed of the platform needs to be increased.

Sometimes, the network gets blocked as multiple transactions occur at the same time over the network. The time taken by every transaction also increases as a number of transactions stay on the blockchain pending. As a result, the customers have to pay a higher gas fee to carry out the transactions.

However, achieving the scalability can be a major issue keeping the decentralized nature of the intact. Vitalik Buterin mentioned that it is difficult to achieve the decentralization, scalability and security of the blockchain network at the same time. Ethereum used to operate on the Proof of work mechanism before the Merge upgrade that created a lot of scalability issues to the customers.

For this purpose, the developers of the Ethereum network then worked on the limitations and then struggled to overcome them. Finally, they came up with the upgraded version of Ethereum termed as Ethereum 2.0.

Importance of Merge for Ethereum Miners

In order to validate the transactions, proof of stake is used by the network that has made the GPU mining unprofitable. Since its inception, with the miners constantly involved in the transaction validation process, the Ethereum network is dependent on the proof of work protocol.

However, the validators who verify the transactions and the builders who turn the transactions into bundles together are used by the beacon chain or proof of stake layer of Ethereum. The ability of the builder and validator to select and validate the blocks respectively is determined by the amount of cryptocurrency owned by them.

The proof of stake mechanism was adopted by the Merge by combining these two layers that made the network much sustainable.  Because of this, the validators are now paid more incentives to preserve the network and thus Ethereum mining becomes an unproductive way to earn rewards.

The miners were allowed to earn rewards by validating the transactions by the network that withheld about 95% hashing power of GPU. The cryptocurrency of the validator is at stake because of the proof of stake network and for acting maliciously, it acts as a disincentive for them.

The hash rate of Ethereum also dropped to zero that could be noticed easily and remained constant there in the following of merge. When a network uses lesser computing power in order to verify and add the transactions on the blockchain, this refers to lower hash rates.

On the other hand, this is not the case in Ethereum. Here if the hash rate is lower, it may be because that the miners have moved to some other cryptocurrency that is working using the proof of work protocol or has turned their rigs off.

Working of New Consensus Mechanism of Ethereum

By investment of energy, the capital is put at risk by the miners to validate a block in the proof of work protocol. On the other hand, the cryptocurrency is put at stake by the validators in proof of stake protocol. The validator needs to deposit about 32 ETH initially into a smart contract so that a validator can be up and be able to run the network.

The validator can immediately begin staking as soon as the funds are deposited, and they are locked on the chain. In case any malicious act is done by the validator, the Ether deposited by him gets destroyed at the moment. Therefore, it can be said that ether acts as a collateral.

In addition to running a validator node, Ether can be staked in other ways too. staking can be done through a staking pool, using a staking service provider for delegate staking or by the centralized exchange.

It is the duty of the validator to check whether if the new blocks are propagated on the network in the correct manner or not. Moreover, the new blocks are also created and propagated by him.

As soon as the transaction is executed on the block by the validator, in order to confirm the legitimacy of the block the signatures of that block are confirmed by the validator. The validator sends an attestation for a block if it is valid, and it is then sent across the network.

The block timing is decided by the difficulty level in the proof of work mechanism. However, the slots of 12 seconds and epochs comprising of 32 slots are already fixed as slots in the proof of stake protocol.

For every slot that is given, a validator is selected randomly that serves as a block proposer. He is assigned the duty that new blocks will be created by him during the slots and then will be sent to the nodes of other networks.

Benefits of Proof of Stake Protocol

As the Proof of Stake protocol decreases the consumption of Ethereum by about 99%, the experts are of the view that the Proof of stake protocol is a lot better than the Proof of work mechanism. Moreover, the Proof of stake mechanism provides the security to the investors by staking their assets that make it difficult for any external entity to attack.

Some of the benefits of Proof of stake mechanism are as follows.

  • Provides Scalability

The systems that are based on Proof of stake network are far more scalable than the systems that are based on Proof of work protocol. The scalability helps in carrying out a greater number of transactions every second. The scalability is achieved on the network even before the construction of the block. This helps in making millions of requests in less then a second.

  • The Risk of Centralization is Reduced

Using the Proof of stake mechanism over the blockchain networks reduces the centralization risks and it will lead to a greater number of nodes eventually. The network gets more secured in this way and the profit gain becomes higher by integrating proof of stake mechanism.

  • Malicious Actors to pay Higher Penalties

In case any validator or person is caught in regard of any illicit activity, the deposits made by him initially are cancelled immediately. The economic penalties while using the Proof of stake mechanism are much higher than the Proof of work mechanism. This makes the 51% attacks much costly and thus reducing the scams and cybercriminal activities.

  • Lowers Entry Barriers

In case the participants want to create new blocks over the blockchain, they do not need any special and elite hardware for this purpose. This has lowered the entry barriers for the participants on the blockchain network.

  • Efficiency

Though the systems that are based on the Proof of stake mechanism are less reliable still the experts and professionals are of the view that they are more energy efficient and less expensive than Proof of Work based systems. The validators on the network using Proof of Stake can own a significant number of tokens that would help them providing incentives in order to secure the network.

Will the Ethereum Ecosystem Change After Merge?

No, there are no significant changes made by Merge for the non-node operating users and ETH holders. However, the developers, operators and the providers need to make few necessary adjustments. After the Merge, the users who already owned funds and wallets need no change or upgradation in the ETH that they are using, or they own.

Neither the value of Ether has changed not the quantity after the Merge, moreover, the wallets also function in the same way as they were before it. Though Ethereum transitioned to a new consensus mechanism, still all the history of the network is still intact.

The way of operation of the network and the way in which transactions are carried out is the only new thing for the Ethereum holders. The developers, node operators and the miners are more affected than the regular users by the Merge.

This can be understood by the example as after the Merge, in order to obtain the data, the third-party execution will no longer work therefore, both the consensus and execution clients need to be run by the providers and staking node operators. Moreover, for the transaction fee and maximum extractable value, the clients are also required to set a recipient address.

For both the execution layer and the consensus layer, the clients also have to be run by the non-validating node and infrastructure provider. The developers of the decentralized apps and smart contracts have to make themselves familiar with the changes that are occurring over the block structure and the block timing.

Risks and Flaws Related to Ethereum Merge

There are certain risks and flaws related with the Ethereum merge, some of which are mentioned below.

  • Centralization

The concentration of power within the network is one of the major flaws of the Merge. The staker will be rewarder according to his position on the network. Due to this reason, a situation may arise where the wealthy groups or firms may control the majority percentage of the staking procedure. This may result in creation of an imbalance over the blockchain network.

About 64% of the stake on the network is controlled by 5 prominent organizations. Whenever any controversary arises, the transactions are censored potentially and spend the funds in an increased manner after deciding among themselves that which chain they will support.

Some of the experts criticize the Merge that it will turn the rich further richer establishing the power of the stakeholders at present.

Furthermore, one can use the ETH holdings in order to earn interests by staking them. However, it may eliminate the ones out of the market who are not able to stake. This will result in giving the ones ability to stake in the market who have huge amounts of money. This will increase the rate of centralization in the network even more.

  • Risk of Scams

When such prominent transitions such as Merge happen in any network, the scammers always take benefit of such opportunities. They may scam the users asking for an upgrade and thus making them do something such as losing the tokens.

One of the potential source of scams is the wallet upgrade. These are used to trick the users by making them download harmful websites calling it as an official update.

  • Electricity and Hardware Expenses

The miners who have been mining since years on the Ethereum network have decided that they will continue on the network. These miners are of the view that they have paid high expenses of electricity and hardware and they are gaining much through their experience in the past and they have decided to stick to it.

This divides the community into two groups and there are two versions of Ethereum that are running side by side and competing with each other. Though there are very less chances of this situation to occur still the investors should be aware of it.

  • Initial Investment

The requirement of high initial investment is another problem that is associated with using the Proof of stake mechanism. The owner is required to own a high amount of cryptocurrency if he wants to become a validator on the blockchain network. The size of the network decides the amount of cryptocurrency that should be held by the owner.

However, for the staking purpose, it is necessary that the user owns a large amount of crypto. However, in case of price hikes or inflationary situations, it is difficult for one to own a high amount of cryptocurrency or assets.

Conclusion

Despite some flaws and risks, the experts are of the view that Merge will bring a number of new applications, developments and new decentralized applications in the Ethereum blockchain network.

Moreover, the largest benefit this Merge upgrade has provided to the developers is the increased scalability that will help in carrying out the transactions easily. This will add to the security and transparency of the data over the blockchain and thus meeting the demands of the users all around the globe.


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