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Ethereum Merge: Ethereum’s change to Proof of Stake

You may have recently heard about “The Merge” that the Ethereum blockchain is set to undergo in May or June of this year. We created this short article to help readers understand exactly what it means.

What is Ethereum?

Ethereum is well known as being the second largest cryptocurrency by market capitalization, with a market capitalization in the 12 digits. Ethereum was founded in 2013 by several well known programmers in the cryptocurrency space, such as Vitalik Buterin and Gavin Woods.

Ethereum is also known for being the primary blockchain utilized by NFT creators and DeFi projects. Like Bitcoin, Ethereum currently uses proof of work as its consensus mechanism, which as a result comes with slower transaction speeds and high energy costs. In order to reduce costs and improve transaction speeds, there are several Layer 2 projects working to improve the Ethereum ecosystem, such as Polygon. This is similar to how Bitcoin Lightning is working to increase the scalability of the Bitcoin blockchain.

The Ethereum Merge

In an effort to reduce its electricity consumption and quicken transaction speeds, Ethereum will be switching over to proof of stake as its consensus mechanism. The Ethereum proof of stake change is expected to happen in either May or June 2022, when miners will be replaced with validators. In order to become a validator, you will need to stake 32 ETH – for those who wish to help validate the blockchain but do not have that much ETH, they will be able to participate in staking pools, similar to how there are mining pools today for those with smaller amounts of mining power. Staking rewards are expected to be about 7% to 12% once the switch is made.

Why is Ethereum making this switch?

Ethereum had always intended to be a proof of stake chain, however they decided to go with proof of work to speed up their go-to-market with the plan being to switch to proof of stake later on. As cryptocurrencies have gained traction over the last few years, regulators and lawmakers have started to take note of the large energy consumption that comes with it. Ethereum for instance uses roughly the same amount of energy as the Netherlands does on a yearly basis. The Ethereum change to proof of stake will reduce Ethereum’s electricity consumption by ~99%, making it much more environmentally friendly.

Additionally, Ethereum is hoping to speed up its transaction speeds. In 2023 Ethereum is aiming to roll out several other improvements such as sharding and rollups in order to try and get the level of transactions it can handle to as high as 100,000+ per second.

What else should I know about the Ethereum Merge?

While most Ethereum holders are very excited for the merge, miners and chip manufacturers are not as pleased, with their sales and stock prices plummeting. Unfortunately the merge is not expected to lower Ethereum’s notoriously expensive gas fees, which will likely remain relatively pricey for the foreseeable future.

How does The Merge relate to iGaming?

While ETH has not been as popular of a payment rail for iGaming as other cryptocurrencies, such as Bitcoin, the Ethereum blockchain is the preferred chain for NFT smart contracts and for many metaverse related projects. As the iGaming industry starts to move into the metaverse with virtual casinos in places such as Decentraland, it is important to know about infrastructure changes that the Ethereum blockchain undergoes.

Article Update – June 2022

The Ethereum merge is now expected to happen in August 2022 following some of the final proof of stake testing on the Beacon Chain. Unfortunately for Ethereum holders, the market capitalization has seen a dramatic decline since we first published this article, falling nearly 75%. This decline is not unique to Ethereum however, as almost every cryptocurrency and token has seen their trading price plummet starting with the collapse of the Luna/Terra ecosystem in May 2022. The overall market decline forced many liquidations on leveraged and borrowed positions, leading to margin calls that further crashed the price. The future outlook for Ethereum is still bright however given its position as the favored blockchain for those building products using blockchain technology. Ultimately, the future of Ethereum rests on how successful the merge is when it is initiated in August or September, along with if the Layer 2 solutions are able to solve the scalability issues that afflict the Ethereum chain in its present state. The future of Ethereum is likely to be murky for the next year, since the plans to introduce sharding to reduce the transaction costs is not on the roadmap until 2023.

If you are interested in offering a sportsbook or casino that is built on-chain, Lion Gaming Group offers white label betting solutions over a variety of blockchains, including Ethereum, Avalanche, Moonbeam and more. Contact [email protected] today for a free consultation.

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