Eth2, Ethereum 2.0, ETH 2.0…The project has been called many things in the past, but earlier this year the Ethereum community settled on the “merge.” Most simply, the merge is a long-planned Ethereum upgrade aimed at improving the network. Such upgrades are commonplace, but this is the most important one to date, and its success will pave the way for developers to introduce a host of new features to the network. The merge will, well, merge the current Ethereum mainnet—or the main public Ethereum blockchain used by everyone—with something called the Beacon Chain. Currently, both chains exist in parallel. But only the Ethereum mainnet, which currently uses a mechanism called proof of work, is processing transactions.
Once the merge is complete, the Ethereum mainnet will shift away from proof of work and instead adopt the Beacon Chain’s proof-of-stake mechanism.
What’s proof of stake?
Proof of stake (PoS) is a type of consensus mechanism that differs from the traditional proof-of-work (PoW) one.
A consensus, what?
A consensus mechanism describes the way Ethereum—or other blockchains—determine the legitimacy of transactions posted to its network. It is how a blockchain governs itself.
Ethereum can be seen as a distributed database of nodes—or computers that run software to verify blocks and the transaction data within them. To reach consensus on the network and make a decision, the majority of nodes must be in agreement, and the choice of consensus mechanism determines how they do that.
So, how does proof of stake work?
Once Ethereum shifts to a proof-of-stake consensus mechanism post-merge, the network will rely on trusted entities known as validators to verify transactions and add new blocks to the blockchain. A validator will be chosen at random each time a new block is to be added, which will occur every 12 seconds or so post-merge.
Anyone can apply to be a validator by depositing 32 Ethereum (about $61,000 at mid-August prices)—a sum intended to ensure that participants have a stake in the success of the network—and run up-to-date software. As the Ethereum Foundation explains, prospective validators will then be added to an “activation queue that limits the rate of new validators joining the network.” Once a validator is “activated,” it will be eligible to review and approve new blocks the Ethereum network proposes to add to its blockchain.
In return for securing the network, validators will earn Ether as reward.
While the 32 Ether staked as collateral serves as a major incentive to behave appropriately, there are also punishments for validators that are incompetent or malicious. Namely, they can be penalized with the loss of some or all of their deposit. The merge hasn’t happened yet, but the Beacon Chain already has over 415,000 validators.