Author: @SixSix | @0x长安 | @RealResearchDAO

Foreword

The idea of writing this article is based on the "darkest moment" when stETH depegged from ETH and the price of ETH fell below $1,000. I had a long discussion with our other researcher, 长安. At that time, the distrust of ETH in the entire industry was extremely high, and most people believed that as the degree of ETH deleveraging further deepened, the price of ETH would also fall below.

In fact, to this day, the industry's most significant concern that ETH may fall into the abyss again has not been eliminated.

Whether it is concerned about the continued macro downward trend in the future, the increased risk of ETH crisis, or the distrust of the prospect of "the Merge", it is difficult for investors to find trust in ETH again as before.

Now, that the Merge is imminent, what are the prospects of the world's most active public blockchain? Opinions vary from person to person. It is necessary for us to outline a more scientific judgment as much as possible by delving deeper.

Introduction

After multiple delays, the time for ETH “the Merge” finally arrives. As confirmed by ETH developer Tim Beiko, this big event will arrive on September 6th this year.

"The Merge" is not only a big event for ETH, but also serves as a verification of the entire Crypto industry and its sociological theory.

Whether it is the transformation of the democratic governance structure or the game among interest groups, all will show the current development dilemma in the field of Web 3 at a glance.

We emphasize decentralization, embrace the fairness and rights of each participant, and disgust bureaucracy and centralization. But it’s still impossible to completely divide us from them.

Now, with two ETH validating node operators pledging to resist censorship, ETH may face a thrilling leap in the near future.

POS = Centralization?

An article "The Cost of Centralization" published by Cornell University made an intuitive interpretation of centralization.

Centralization, in essence, has chosen a path of centralizing reform risks. Being able to plan and use resources more effectively also means taking on more responsibilities.

POS is centralization in a sense, but it does not mean 100% centralization.

In fact, since 2018, the debate on whether the POS system is a regression from direct democracy like POW or the implementation of a genuine democratic representative system has never stopped.

Is POS centralized? If you have to come to a conclusion, then this conclusion may be binary, Yes and No.

In the performance, the shift from direct to indirect democracy means that fewer people are responsible for the outcomes. But it cannot be directly identified as a democratic retrogression.

Indirect democracy, or the POS system, is at least relatively successful in addressing the problem of democracy's scale. Yes, in terms of the size of democratic coverage, POS at least provides more people with the possibility to participate in governance.

After the Merge is implemented, the operation of the entire ecosystem will be maintained by the two roles of verification nodes and validators. The number of the former may not exceed 3 digits, while the coverage of the latter can reach as many as several hundred thousand people.

Compared with the current "classical democracy" of ETH, the merge after "the Merge" seems to allow more people to enjoy the right to democratic decision-making.

Contrary to everyone's perception of direct democracy and absolute fairness of POW. The Proof-of-Work mechanism has now become a cognition of inefficiency, waste of resources, and inability to undertake complex ecological construction.

POW's "Original Sin"

Direct democracy may evolve into the tyranny of the majority, which has been verified many times in the long history of human beings.

In the POW mechanism, everyone can freely join the network to become a node and process data, and each node must compete for the accounting right through computing power competition to process data. Think about it, a piece of data needs to be checked by everyone on the network, and everyone has to spend a lot of computing power for a piece of data, which naturally leads to a waste of resources and low efficiency.

Effective Proof-of-Work requires constant internal friction between miners. Although this approach is fair in terms of results, it also means that the losing competitor is continuously incurring sunk costs.

The idyllic classical governance structure can ensure as many people as possible play a role in the early stage of ecology; but when an ecological living environment changes and the continuous external pressure makes the internal pastoral life unsustainable, then the ecological need for high efficiency and high decision-making will increase significantly.

Athens in 508 BC was not spared the fate of being conquered by the centralized regime Sparta because of its direct democracy.

In POWs that use computing power as the way to determine democratic outcomes, those with low computing power often encounter "power" and "dictatorship".

In the current Ethereum ecosystem, the voting rights owned by the community are actually seriously weakened by the mining pools. After the voting results are generated, the voting of the large mining pools is required, which is the so-called computing power war.

On the basis of the expansion of the mining pool, Ethereum has in fact lost the soil for true democratic decision-making, and the entire ecological structure is engulfed by the interests of miners and cannot be turned.

This is similar to the complex relationship between the Chinese government and real estate.

In August of this year, JP Morgan held a conference call devoted to the issue of "China's real estate bubble". The bigwigs from the financial industry have summed up 3 points of view:

• China's early economic development is closely related to local government land transactions;

• Real estate lobbyists are trying to convince the government to propose more favorable policies to some extent;

• The government has an "enigmatic confidence" in tackling the housing bubble.

Just as real estate drives a country's economic boom, this example has been effectively verified in many East Asian countries. During the development of Ethereum, absentee workers diligently packed information from various smart contracts. The huge base of miners has also become the foundation of the ecological prosperity of the Ethereum network.

But at the same time, the continuous expansion of miners also makes the Ethereum network too expensive, which in turn further hinders the upper limit of the development of the Ethereum network.

Therefore, Ethereum chose to reform.

The Periodic Pains of Reform

Reform is difficult because it means reaching interests that go deeper than souls, breaking from the underlying economic structure.

In the real world, every reform means the transformation of the identities of exploitative groups and profit-making groups, and this transformation process will surely usher in strong opposition from vested interest groups.

Let's turn our attention to the far east. Let's take China as an example again, but this time the object is not real estate, but workers.

After 1949, the Chinese government established a large number of state-owned factories and recruited a large number of workers to complete industrial modernization in order to catch up with the pace of world development as soon as possible.

Such decisions, in the early stages of national development, are beneficial. Concentrating on doing big things has also become a common cognition in China at that time.

However, with the gradual enrichment of China's industrialization accumulation and the sweeping wave of globalization, in the last decade of the 20th Century. On the one hand, Chinese workers are engaged in coping with the dangers, pains, and opportunities of institutional reform, enterprise restructuring, and changing their jobs from certainty to uncertainty. On the other hand, they consciously or unconsciously slide into the sea of ​​confusion, chaos, and infinite possibilities. The labor pains in the Northeast echoed the rise of Shenzhen, the migrant workers entering the city and the Three Gorges Dam immigration flowed together, the return of Hong Kong and Macau, the entry into the WTO, and the Olympic bid reflect the expectations and demands of China's rapid economic development.

When faced with more intense competition, when the value produced by state-owned enterprises and workers cannot meet the pursuit of China's rapid development, the worker unemployment of the 20th Century has appeared, which has brought a very long-lasting negative impact on China.

In the process of the Merge of Ethereum, it also encountered the same problem as China.

A Merge is a milestone event in the history of Ethereum. This upgrade changed the consensus model of Ethereum from PoW to PoS, but it is not only a technical upgrade but also involves huge interest and institutional issues.

Forks

Just recently, Ethermine, the world's largest Ethereum mining pool, announced that it will completely abandon its POW mining scheme on September 15. After this date, it will no longer be possible for users to continue mining ETH on the Ethereum network using GPUs or ASICs.

At the end of this announcement, Ethermine used the words "safe journey" to say goodbye to the users of the mining pool and itself.

These two words may also contain the reluctance to let go of the glory of the miners in the past.

In the PoW stage of Ethereum, miners compete for accounting rights through hash collisions and sort transactions. On the other hand, after adopting the Proof-of-Stake Ethereum, people randomly become verifiers to sort transactions in the network by staking Ethereum on a new chain (beacon chain), thus forming a consensus on the state of the world. After the official integration of Ethereum, the overall energy consumption of the network will be reduced by 99%.

At present, all Ethereum PoW miners have to face such a choice: those who have paid back their money will choose to quit, and those who have not paid back their money will have to face a serious dilemma.

The forks.

Ethereum's existing mining machines are mainly divided into two categories: graphics card mining machines and ASIC mining machines.

After Ethereum completes the POS transformation, in fact, these miners can also mine other types of cryptocurrencies. However, due to the small market value of these projects using PoW consensus, the profits are far less considerable than those in Ethereum mining, and the price fluctuates greatly. Therefore, this part of the graphics card mining machine has not been withdrawn at present.

Therefore, forking may become the best choice for the majority of miners to "save themselves". Just like the previous ETH fork of ETC (Ethereum Classic).

However, the lessons of BCH’s (Bitcoin Cash) successive forks are the first, and rash forks due to differences in consensus will cause irreversible damage to the ecosystem itself.

Therefore, as of now, as many as 20 industry giants including Chainlink, Curve Finance, Paradigm, Tether, etc. have expressed their opposition to the forks.

We cannot predict what Ethereum will become after "the Merge", nor how much damage the fork will cause to the Ethereum ecosystem.

But for now, in the face of the urgent interests of miners, the forks of ETH seem inevitable.

For the entire Ethereum ecosystem, this is not only a periodic pain from the "reform", but also suffering from long-term negative impact.

It’s time to make a change

Although in Vitalik’s plan, the Merge is the established policy and the only way for the development of Ethereum.

But at the same time, the sense of crisis from reality is also prompting Ethereum to "reform".

In Ethereum 1.0, the network can only support about 30 transactions per second, which is also a serious problem at present. The network is very congested and expensive.

3AC Founder Su Zhu once said that he has given up on Ethereum, and newcomers can no longer afford to use this chain.

Indeed, as Su Zhu said, due to the high price of gas, new congestion is prohibitive for projects in the Ethereum ecosystem, and to a certain extent, it has caused the outflow of users. From the point of view of the number of active users, the increase in the scalability of ETH will allow more new users to enter.

As for the impacts on GameFi, most of the current GameFi projects are not built on ETH. The reason is that due to the asymmetry between the high gas fee and the game participation cost when the game is moving forward, users can still accept the high gas cost. However, when the GameFi project is in a death spiral, the gas consumed by players in the process of experiencing the game far exceeds the value of the tokens earned in the game, which leads to users being more inclined to sell game assets rather than continue to experience the game.

From the perspective of the number of users, other chains that have low gas fees and low entry and error costs can often attract more users, and are also more favored by project parties. GameFi built on Ethereum will choose to flee due to high gas fees, such as Axie Infinity and Crabada. This also leads to the fact that GameFi cannot be grown well in the current Ethereum soil. After the Merge, this problem is expected to be alleviated.

In fact, not only GameFi but also many NFT projects feel the same. Yuga Labs launched Otherdeed NFT collection in May 2022. Due to the increase in demand, the Ethereum network suddenly becomes congested, causing a Gas War. Each transaction fee is as high as several thousand dollars, which is 100~200 times more than the normal value. Bored Ape co-founder Garga.eth said Otherdeed mint is a “painful time” for the NFT community. And he claimed that ApeCoin needs to migrate to its own chain in order to expand properly.

The existing new public chain/Layer2 basically revolves around the concept of Ethereum’s competitors, while Solana, Arbitrum, BSC, Fantom, Polygon and other "high-performance" public chains that have emerged in the last cycle have repeatedly exposed extreme centralization, network downtime, severe congestion, high gas fees, etc.

But with the emergence of faster, cheaper, and safer new public chains endorsed by capital brands such as Aptos and Sui, does the market still need the merged Ethereum?

For the industry, there can be many answers to this question, but for Ethereum, there can only be one answer: the upgrade must be completed to cope with the more intense public chain competition.

The last step moving toward “the Merge”

The Merge's roadmap consists of three phases:

• Phase 1: Establish a beacon chain, introduce a POS mechanism, bring collateral for Ethereum, and lay the foundation for the upgrade. The beacon chain is now online.

• Phase 2: The Ethereum mainnet merges with the beacon chain.

• Phase 3: Fragmentation, which will expand the ability of Ethereum to store data, but the technical difficulty is relatively large. It is expected to be launched in 2023-2024.

The first stage has now been completed, from POW to POS mechanism. Users act as node verifiers by staking ETH instead of being miners. Energy consumption has been greatly improved. Ethereum developer Carl Beekhuizen stated in an article published on May 19, 2022, that Ethereum will complete the transition to Proof of Stake (POS) in the next few months. The energy efficiency of POS will be improved by about 2000 times, which means that the total energy consumption will be reduced by 99.95%, boosting the green, clean and efficient development of Ethereum in the future.

It is worth noting that the completion of the transformation from POW to POS in Ethereum only represents a change in the consensus mechanism, and does not mean a significant improvement in scalability. The most critical and most difficult step is the sharding technology in the third stage, and sharding is the solution to the lack of scalability.

At present, the Ethereum ecosystem has the largest traffic and the most abundant ecological facilities in the industry. Although it is still congested and expensive, there is still no public chain that can replace it.

If "the Merge" can be successfully completed, the faster and safer Ethereum will further consolidate its no.1 position.

But the emergence of a new environment also means new challenges.

First of all, the integration of Ethereum may face pressure from two aspects of miners: a sudden drop in computing power & forks.

With the increasing certainty of integration, miners will choose to slowly withdraw from the Ethereum PoW consensus at the right time. At that time, the overall computing power of the Ethereum network may drop suddenly, and the remaining miners will have extremely high block rights, extremely low crime costs and considerable gains will bring a devastating blow to nearly 3,000 applications on Ethereum.

Second, the renowned Twitter influencer @lex_node tweeted that “US validators (including the very powerful Coinbase) will push for protocol-level censorship.” If "Office of Foreign Assets Control of the U.S. Department of the Treasury" needs to sanction an Ethereum account, it is completely achievable, as it is now against Tornado Cash.

Although Vitalik has responded positively to these two problems: for example, if the computing power of the entire network drops significantly, so that the security of the network is affected, the Merge of Ethereum will be advanced. As well as public calls for other validators to join forces to veto nodes that support censorship, etc.

Changes in governance structures, the introduction of new technologies, and the emergence of new challenges have all brought great uncertainty to Ethereum’s fate.

The only certainty is uncertainty. It is both the reality and the ideal. The development of Ethereum is, to a certain extent, the epitome of the entire Crypto and Web3 industries.

In addition, Ethereum is experiencing a thrilling leap from POW to POS, from one governance system to another governance system, and the entire industry is paying attention to whether Ethereum can merge successfully and eventually become a governance paradigm for industry development.

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