In a very big event for the merge and the crypto space, Ethereum just switched its oldest test network, Ropsten, to proof of stake. A first step towards the ETH mainnet's own merge which
would improve the network's scalability, efficiency, and speed.
The staking mechanism in Ethereum 2.0 will replace the proof of work model, in which cryptocurrency miners use powerful computers to complete complex mathematical functions known as hashes. To verify Ethereum transactions before they are recorded on the public blockchain, the mining process consumes an increasing amount of electricity.
Proof of work systems consume a massive amount of electricity. Bitcoin mining, for example, currently consumes 130 terawatt-hours of electricity per year (TWh). That is currently more than the entire country of Norway's power consumption.
ETH currently has an annual power consumption comparable to Finland and a carbon footprint comparable to Switzerland. Fortunately, the merger is expected to reduce Ethereum's carbon footprint by up to 99.95%, addressing one of the cryptocurrency's major criticisms.
Since April 2022, Ethereum has been running two parallel blockchains: one that uses proof of work and another that uses proof of stake. The merger will unite the legacy Ethereum Mainnet blockchain (ETH1) and the new Beacon Chain (ETH2) into a single blockchain.
Ethereum developers recently dropped the ETH1 and ETH2 terminology due to concerns that it would confuse users ahead of the merge.
Following the completion of the merge, these two versions of Ether will be combined into a single token.
Staking will replace mining to verify Ethereum transactions once the merger is complete.
To participate in the transaction verification process, users must stake a certain amount of cryptocurrency. An algorithm determines which validator gets to add the next block to a blockchain in a proof-of-stake model based on how much cryptocurrency the validator has staked.
To become an Ethereum validator, investors must stake at least 32 ETH. Currently, there are over 300,000 Ethereum validators. The more ETH a validator stakes, the more likely it is to generate blocks. Each time a validator creates a block, the validator earns Ethereum rewards for handling validation duties.
Currently, the staking yield on Ethereum's Beacon Chain ranges between 4.3 and 5.4 percent per year (APR).
With Ethereum trading around $1,900 and a minimum requirement of 32 ETH, which is more than $59,000, staking can be quite expensive for the average investor.
Individual investors, on the other hand, can join staking pools, which are groups of Ethereum stakers who pool their resources and split the rewards. Most major cryptocurrency exchanges also offer staking services to investors who are unable or unwilling to commit 32 ETH on their own.
The primary goal of the Ethereum 2.0 update is to improve scalability so that the network can handle more transactions without causing delays or charging excessive fees.
The Ethereum network currently processes 1.1 to 1.5 million transactions per day on average.
These figures are expected to skyrocket following the release of Ethereum 2.0, which will enable significantly more transactions to be processed per day. The network can currently only handle 15 transactions per second.
Ethereum 2.0 aims to exponentially increase this to around 150,000 by the time the upgrades are fully implemented. If this becomes a reality, Ethereum will undoubtedly become one of the fastest and most scalable blockchains in existence, increasing its popularity even further.