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Ethereum Merger

Posted on September 20, 2022 by admin1  27

In News

  • Ethereum, the world’s second most valuable cryptocurrency, has completed a significant software overhaul recently.

About

  • Revamping of Ethereum:
    • It is known as ‘The Merge’. 
    • It will cast aside the need for crypto miners and gigantic mining farms, who had previously driven the blockchain under a mechanism called ‘proof-of-work’ (PoW). 
    • Instead, it has now shifted to a ‘proof-of-stake’ (PoS) mechanism that assigns ‘validators’ randomly to approve transactions and earn a small reward.
  • How it worked till now: 
    • Ethereum is a decentralised cryptocurrency, meaning that it does not have institutions like banks approving the transactions that happen on its network. 
    • The approvals were earlier happening under the PoW consensus mechanism which was essentially done by miners. 
    • Miners would compete to solve complex mathematical puzzles using a massive infrastructure of cutting edge computer hardware, and the first one to solve the puzzle would be chosen as the validator. 
    • This method was almost entirely dependent on crypto farms, which are massive warehouses lined with rows of computers which would solve the puzzles.
    • Problem: These mining farms were energy guzzlers, leading to one of the biggest criticisms of the crypto industry that they sometimes consumed more electricity than entire countries, and were therefore a big concern in terms of environmental sustainability.
  • New Change: 
    • ‘The Merge’ and the shift to the PoS consensus mechanism. 
    • Ethereum is still a decentralised platform, but under the new concept, it would not need miners and mining farms to authenticate transactions anymore. 
    • Instead, a validator will be randomly assigned using an algorithm from a pool of people who ‘stake’ their coins, which essentially means pledging at least 32 Ethereum tokens on the network. 
    • This would entirely eliminate the need for miners on the Ethereum network.
    • Cryptocurrencies that use proof of stake include Cardano, Binance Coin, and Solana.

Significance of Merge

  • Enhanced Security: It will make transactions on the Ethereum network extremely secure.
  • Supporting Network: Given that some of the most popular applications of cryptocurrencies such as non-fungible tokens (NFTs) and decentralised finance (DeFi) are based on the Ethereum network, the overhaul could have far-reaching consequences in the future.
  • Reduced Energy Consumption: The move to PoS will reduce ethereum’s energy consumption by nearly 99.95 percent.
  • Environmentally Beneficial: It is also being seen as an environmentally conscious move as it claims to cut down on its carbon footprint, nearly entirely.
  • Lower Cost: It will help in reducing the cost per transaction, charged by miners and validators. 
  • More Returns: It will also allow ordinary people to earn returns on ethereum by participating in this new process of validation (staking). 

Ethereum

  • Ether (ETH), the cryptocurrency of the Ethereum network, is the second most popular digital token after bitcoin (BTC).
  • It is open access to digital money and data-friendly services for everyone.
  • Ethereum is programmable which can be useful for lots of different digital assets – even Bitcoin.

Bitcoin

  • In 2009, an anonymous hacker or hacker group called Satoshi Nakamoto introduced Bitcoin.
  • It was described as a ‘peer-to-peer electronic cash system.’
  • It was a completely decentralized system due to the absence of any servers and central authority.
  • Bitcoin was the first cryptocurrency which became widely popular. Later other cryptocurrencies also came up like Litecoin, Namecoin and PPcoin.

Ether and bitcoin are similar in many ways

  • They both are digital currency traded via online exchanges and stored in various types of cryptocurrency wallets. 
  • Both of these tokens are decentralized, meaning that they are not issued or regulated by a central bank or other authority. 
  • Both make use of the distributed ledger technology known as the blockchain.

Crypto Currency

  • It is a digital currency which can be used in place of conventional money.
  • In the cryptocurrencies, cryptography is used to secure and verify the transactions. It is also used to control the supply of cryptocurrencies.
  • Characteristics of Cryptocurrencies:
    • Irreversible: A transaction done by cryptocurrency is irreversible and cannot be reversed.
    • Intangible: The cryptocurrencies are not backed by any tangible good or any kind of guarantee.
    • Instant and global: The transaction is instantaneous and since the network is global, the transaction can be done across the globe without restrictions.
    • Secure: It uses cryptography technology which is almost impossible to break.
    • No central authority: There is no gatekeeper like that of government and central banks and users are responsible for all the transactions.

Source: IE

 
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