Ethereum has always used the PoW consensus mechanism until Dec 1, 2020, when it introduced the Beacon Chain testnet to experiment with the PoS consensus mechanism.
The Beacon Chain introduced staking to Ethereum. Although, the testnet is still quite different from the mainnet as all transactions and interactions with smart contracts still remain on the mainnet; the Beacon chain consensus layer will soon be swapped with the current execution layer and the Ethereum Blockchain will fully transition into PoS. This swapping process is known as “the merge” and is currently estimated to happen around September 15-26, 2022 according to Watcher.guru
Proof of Stake is a consensus mechanism that requires validators of a Blockchain to stake their tokens in order to validate transactions on the Blockchain. Proof of Stake (PoS) and Proof of Work (PoW) are the most popular consensus mechanisms but PoW requires you to set up a mining rig to be a validator (or miner). Mining rigs are expensive to set up and they consume a lot of energy resources.
The Beacon Chain and Ethereum mainnet have since the year 2020 been running parallel but the merge will essentially swap the current mainnet execution layer running PoW with the Beacon Chain which is the new PoS layer.
Transitioning to PoS is something Ethereum developers have been working on since the inception of the Blockchain in 2015. It is believed that the PoS model is more scalable than the PoW. In fact, there are more reasons people prefer to use PoS to PoW.
Consequently, Ethereum will stop mining and start staking instead. Staking is another way to keep your crypto assets safe. Additionally, it discourages attacks from miners because whoever attempts an attack on a Blockchain running PoS risks losing their entire staked assets.
How will the merge affect Ethereum?
Scalability: this is one of the major reasons for the transition of the Ethereum Blockchain to PoS. Sharding has been introduced as the solution to Ethereum’s scalability.
To achieve scalability in Computer, you either do it vertically by increasing the nodes’ capacity so they handle more data and processes or horizontally by adding more nodes and spreading the load across the nodes. The latter is the process known as Sharding and it allows for unlimited expansion as more and more people can create nodes. It also further aids decentralization.
Sharding is not yet part of the Beacon chain or mainnet and won’t be part even after the merge. Sharding is expected to ship with the next major upgrade to Ethereum which would be sometime in 2023.
Security: the risk of attack will be reduced since the consensus mechanism has changed. A 51% attack is possible in both PoS and PoW but very unlikely in PoS; the reason is that, in PoS, you’ll need to hold at least 51% of the entire staked ETH (about $15bn) to attempt such an attack. However, honest validators can choose to continue the valid chain and propose to others to do the same; this will eventually result in the burning of the ETH of the attacker, and the original chain is maintained.
Less energy consumption: it is already no news that PoW consumes a lot of energy. For context, after the merge, the Ethereum Blockchain will reduce energy consumption by 99.95% running PoS.
Mining will stop and validators do not need a rig to participate in PoS. This means that almost anybody can run a node if they have the required funds to be a validator (at least 32ETH). More participation means more security and also more decentralization.
Reduced ETH supply issuance rate: at the time of this writing, the total ETH paid to miners daily totals 13,000. After the merge, this issuance rate will be reduced to 1,000. This reduction is about 90% which is definitely a plus to the Ethereum community because the lower the supply, the higher price goes.
Burning of gas fees of every block: the gas fees paid to create each block will be burned (removed from total supply forever). Consequently, the more new blocks are created, the more ETH that is burned.
Contrary to popular opinion, the merge will neither reduce gas fees on Ethereum nor will it increase transaction speed noticeably. The factors that determine transaction speed and gas fees wouldn’t change after the merge.
Generally, what the merge does to Ethereum is to scale it, increase the security, and further decentralize the Blockchain.