The Ethereum network is expected to transition to a proof-of-stake (PoS) model in mid-September 2022, which could change the world of cryptocurrency in profound ways. For investors, these are exciting — and frightening — times.
Ethereum is the second-most popular decentralized blockchain, behind only Bitcoin in market cap. Unlike Bitcoin, Ethereum has undergone several changes to improve its scalability and security.
Previously referred to as “Ethereum 2.0,” the PoS transition will make Ethereum more environmentally friendly and could potentially provide enormous performance improvements. Here’s what you need to know to prepare for the next generation of the blockchain.
What will the Ethereum merge do?
Most cryptocurrencies verify transactions via proof of work (PoW), which requires computers to solve cryptographic puzzles. This creates a secure network, but carries a tremendous cost at scale: Bitcoin’s PoW network consumes 0.55% of global electricity production, roughly the same amount of energy as Malaysia.
PoS models were created as an alternative. Under this structure, validators hold and “stake” tokens, essentially offering their own coins as a collateral. The blockchain randomly selects validators to “mine” each block, and multiple validations are required before the block is validated. Validators are rewarded with tokens or cryptocurrencies (in this case, Ether).
In simple terms, PoW blockchains are competitive, while PoS blockchains are not. Ethereum’s PoS methodology will verify transaction submissions with “shards,” which are organized in a shard block; a minimum of 128 validators are needed to validate transactions.
The Ethereum Foundation announced their goal to transition to PoW in December 2020, but they’ve taken their time to actually complete the process — and with good reason, since a misstep could ruin the security or scalability of the network.
The merge will start around September 10th, but it won’t take effect immediately. The Ethereum protocol support team has announced a timeline for the upgrade:
- The Bellatrix upgrade will hit the Beacon Chain on September 6, starting the process.
- When the network reaches a total mining difficulty level value (called a “TTD value”), The Paris upgrade will shift the mainnet to a proof of stake.
- The Beacon Chain will finalize the transition by producing a block. This will occur about 13 minutes after the first post-TTD block is produced.
According to Ethereum’s developers, there will be a period of about 14 days before the beginning of the merge (the Bellatrix upgrade) and the mainnet merge. The upgrade should be finalized around September 15, 2022.
What will happen to Ethereum tokens — and ETH value — after the merge?
If you currently hold ETH, you’ll still have access to your crypto. You’ll also be able to participate in staking to earn rewards (some cryptocurrency exchanges, including industry leader Coinbase, already allows users to stake Ether as “Ethereum 2.0,” but staked cryptos cannot be withdrawn or sold).
We don’t know how PoS will change Ether’s value, but we can make a few guesses:
- Increasing the scalability of ETH may make it more useful for real-life transactions, which would bring investors to the table. Some analysts expect Ether’s price to hit $2,00 or higher at the time of transition, though this is pure conjecture. At time of writing, the price was about $1,548.
- Some miners who prefer PoW validation may try to fork the network. If this occurs, people who hold Ethereum on the current blockchain would receive the same amount of crypto on the forked blockchain, similar to what happened when Bitcoin Cash (BCH) forked from Bitcoin (BTC).
- Validators can expect an annual percentage yield (APY) of anywhere from 5-12% from their staked ETH. The exact APY will depend on the number of investors who start staking — more validators means fewer rewards.
- The upgrade will carry technical risk. If PoS decreases the performance or security of the network, the value of Ether could crash.
Of course, if you don’t have access to your Ether, you won’t enjoy any of the benefits of the PoS transition — and you can’t sell your crypto to exit your position.
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