The transition of Ethereum from Proof of Work (PoW) to Proof of Stake (PoS) is confirmed to proceed without delay. The Merge to PoS is anticipated to be completed by the end of 2022. To date, the total amount of Ether staked on the Ethereum Beacon Chain has surpassed 13 million, with the number of validators exceeding 350,000.
This year marks a transformative period for Ethereum, the leading public blockchain. The Merge to Proof of Stake represents the most significant technical upgrade since its genesis block. We believe PoS will foster a more prosperous Web3 ecosystem by deepening interconnections and reducing centralized power structures and their inherent drawbacks.
For all blockchain and Web3 participants—developers, miners, analysts, and more—understanding the implications of this upgrade and how to adapt to the new yield and DeFi landscape is crucial. This article systematically details the transition from ETH1.0 to ETH2.0, explains the changes brought by ETH2.0, and assists participants in seamlessly integrating into the ETH2.0 ecosystem.
The Dawn of ETH2.0: Origins and Reasons
The Catalyst for The Merge
In 2020, the "DeFi boom," fueled by projects like CryptoKitties, led to a massive surge in transactions on the Ethereum network. DappRadar's Q3 2020 report highlighted that Ethereum transaction volume soared to $119.5 billion in the third quarter, an increase of nearly 1200% compared to the previous quarter. However, this growth caused network congestion and a sharp rise in transaction fees, which at times averaged $14, setting a historical record. The soaring fees resulted in numerous transaction delays, leading to criticisms from figures like EOS founder BM, who noted that Ethereum fees were too high for most standard transactions.
Ethereum's ambition is to become a world-class computer, but it currently faces several challenges. The most frequently cited issue is its low scalability. The network supports thousands of decentralized applications and must process a high volume of transactions per second. However, Ethereum 1.0, operating on PoW, can only handle about 10-50 transactions per second—far fewer than centralized networks like PayPal or Visa. This limitation has made high transaction fees a significant point of criticism. Additionally, PoW's high energy consumption is another concern.
The Transformative Impact of The Merge
The Merge primarily addresses a range of issues beyond scalability. It serves as Phase 0 in solving Ethereum's scalability problems and does not directly involve scaling techniques like sharding. Therefore, this upgrade will not reduce the high Gas fees on the mainnet; that requires the combination of shard chains and Layer 2 solutions. At this stage, the Beacon Chain is deployed, and validators use Proof of Stake to create blocks.
Enhanced Fairness
The Ethereum Foundation argues that under PoW, larger capital investments in hardware and maintenance give major players higher returns and advantages over smaller participants. In contrast, PoS lowers the entry barrier for validators. Any user can join as a validator by staking 32 ETH—a far lower requirement than the substantial investments needed for PoW mining operations. Validators, chosen randomly by the Beacon Chain, create new blocks (acting as miners) or verify new blocks (without mining). This process eliminates the need for computational power competitions and reduces hardware demands, enabling broader participation. A standard laptop and a reliable internet connection are sufficient. All stakers achieve more equal returns on investment, and the increased number of participants promotes greater decentralization.
Improved Security
PoS facilitates easier recovery from attacks. Vitalik Buterin, in his article "Why Proof of Stake," explains that in GPU-based PoW, attacking the network costs only the price of renting enough GPUs to surpass existing miners. Such attacks can be executed with minimal cost and time. For example, ASIC mining entails about one-third ongoing costs (including hardware updates, maintenance, and electricity) and two-thirds capital costs, estimated at around $487. While ASICs enhance security through high centralization costs, they also raise the barrier to entry for miners. In PoS, costs are almost entirely capital-based, related to running a node. As the staking ratio increases, the cost of attacking the network is expected to rise significantly, with Vitalik estimating it could reach around $10,000.
In PoW networks, the only response to a 51% attack is to wait for the attacker to stop. This approach overlooks more dangerous threats like Pawn Camping Attacks, where attackers repeatedly target the chain to paralyze it. PoS offers better defenses. For certain types of 51% attacks, particularly those involving the reversal of finalized blocks, PoS includes a built-in slashing mechanism. This mechanism automatically destroys a significant portion of the attacker's stake (without affecting others).
Additionally, The Merge paves the way for shard chains. The security of shard chains is critical to the entire Ethereum network, and their deployment depends on robust safety measures. Validators for shard chains will be randomly assigned by the Beacon Chain, making collusion among validators on a single shard highly improbable—less than one in a trillion, according to the Ethereum team—thus ensuring shard chain security.
Greater Energy Efficiency
PoW requires miners to invest in hardware, electricity, and mining pools, leading to substantial energy consumption. Switching to PoS reduces energy usage by over 95%, as stakers only need minimal network and power resources for rewards. In the global context of carbon reduction and environmental sustainability, PoS aligns with Ethereum's vision for a sustainable network.
The Transition: From Miner to Validator
Validators: The New Miners of ETH2.0
In ETH2.0, "miners" are replaced by "validators," who must deposit ETH into an Ethereum smart contract—a process known as staking. Staked ETH acts as collateral, incentivizing validators to perform their duties correctly. Validators who fail to fulfill their responsibilities (e.g., going offline) or engage in malicious behavior will have a portion of their staked ETH destroyed. Conversely, those who act honestly receive ETH rewards.
The process of finalizing a transaction involves validators making "attestations," which are more complex than a simple vote. There are two types of attestations: LMD GHOST votes, which attest to the chain's head, and FFG votes, which justify and finalize checkpoints on the blockchain. If a validator receives a valid block, they attest to it, effectively voting for its addition to the chain. Periodically, a node is tasked with proposing a new block, which other validators then attest to. When multiple forks exist, the chain with the most attestations in its history is deemed the correct one.
All validators participate in FFG voting for each checkpoint, while only a randomly selected subset engages in LMD GHOST voting per slot—an opportunity to add a block to the Beacon Chain every 12 seconds.
Additionally, validators may be randomly chosen to join a sync committee, a group of 512 validators who sign block headers. This allows light clients to retrieve verified blocks without accessing the entire historical chain or the full validator set.
Staking Rewards, Penalties, and Slashing
Rewards
Validators stake ETH as collateral to encourage honest behavior. Rewards for protecting the network increase the staked ETH over time. Validators earn attestation rewards when their votes are legitimate, effective, and consistent with the majority.
When selected as a block proposer, a validator receives rewards if their proposed block is finalized. Proposers can also increase their rewards by including proofs of other validators' misconduct in their blocks.
Penalties
Penalties involve burning a portion of a validator's staked ETH through various mechanisms. Attestation penalties apply when a validator fails to submit an FFG vote, submits it late, or provides an incorrect vote. The amount burned equals the reward they would have earned for a correct attestation. This means a lazy but honest validator who misses attestations loses up to three-quarters of the potential rewards. Note that failing to participate in LMD GHOST validation does not incur penalties but results in missed rewards.
If a validator assigned to a sync committee fails to sign a block, the penalty equals the ETH value they would have earned for successful signatures.
Slashing
Slashing is a severe action that forcibly removes a validator from the network and results in significant loss of staked ETH.
It occurs when serious violations are detected. Immediately, up to 1/64 of their staked ETH (capped at 0.5 ETH) is burned, followed by a 36-day removal period. During this time, the stake is gradually reduced. At the midpoint (day 18), an additional penalty is applied, proportional to the total staked ETH of all validators slashed in the 36 days prior to the event.
This means the slashing magnitude increases with more validators being slashed. The maximum penalty can be the entire effective balance of the slashed validators (e.g., full loss of stake if many are slashed).
Navigating the ETH2.0 Ecosystem
For Developers: A Seamless Transition
Developers working on Ethereum can rest assured. The common APIs for pre- and post-Merge architectures, along with the reuse of existing components like the Geth execution client, ensure an uninterrupted development experience. This means minimal to no rework for existing applications.
The similarities between PoW and PoS interfaces mean no API changes are required. Leveraging existing components also eliminates the need to rewrite smart contracts, dapps, or migrate infrastructure. Dapps relying on random opcodes may require some infrastructure updates. Ethereum developers are encouraged to test their dapps and infrastructure using the recently launched Kiln testnet. Increased client choice and flexibility allow developers to mix and match solutions, such as using a lightweight client for the execution layer and a heavyweight staking client for the consensus layer.
Migrating to PoS also brings more predictable block times and fees, reducing uncertainty when designing high-traffic solutions based on 12-second block times and EIP-1559 base fees.
For Web3 Participants: Staking with Lido
After the full consensus switch, Ethereum's issuance rate will drop below 2%, significantly lower than current levels. The traditional mining model of recouping investments in one year and doubling in two will no longer apply. PoS mining resembles wealth management, with an expected annualized yield stabilizing below 10% in the long term.
Many participants may find the 32 ETH staking threshold too high for most PoW miners. However, demand drives supply, and Lido emerges as a leading Dapp for ETH2.0 staking, friendly to PoW miners.
Lido is a Dapp built on the Ethereum 2.0 Beacon Chain. It allows users to participate in staking without locking ETH or meeting the 32 ETH requirement. Lido pools and manages users' ETH, enabling staking and earning without deep knowledge of Beacon Chain details. Currently, Lido's Total Value Locked (TVL) reaches $19.5 billion, ranking second in DeFi TVL, just behind Curve.
👉 Explore staking platforms for seamless participation
How to Get Started
Visit the Lido website and click "Stake now" to begin. Lido supports multiple networks, including Ethereum 2.0, Solana, Kusama, and Polygon. For Ethereum, select the Ethereum 2.0 Beacon Chain option.
After connecting your wallet, enter the amount of ETH you wish to stake and click "Submit." The process is similar for other networks.
Once the transaction is confirmed, your staked ETH starts earning rewards. The protocol automatically issues stETH tokens to your wallet, which can be traded on the market. This mechanism maintains liquidity while ETH is staked, with stETH's price pegged to Ethereum, representing your share in the protocol (similar to Compound's cTokens).
As a Dapp exchange, Lido charges a fee on all rewards generated.
Frequently Asked Questions
What is the main goal of Ethereum's transition to Proof of Stake?
The primary goal is to enhance scalability, security, and energy efficiency. PoS reduces energy consumption by over 95%, lowers entry barriers for validators, and improves network resilience against attacks, setting the stage for future upgrades like shard chains.
How does staking work in ETH2.0, and what are the risks?
Staking involves depositing ETH to become a validator, responsible for proposing and attesting to blocks. Risks include penalties for offline behavior or malicious actions, which can lead to loss of staked ETH. However, honest participation yields rewards.
Can I participate in staking without 32 ETH?
Yes, through liquid staking platforms like Lido. These services pool users' ETH, allowing participation below the 32 ETH threshold. Users receive staked tokens representing their share, which remain tradable.
Will The Merge reduce Ethereum's gas fees?
No, The Merge does not directly address scalability. Gas fee reduction relies on Layer 2 solutions and shard chains, which are part of future upgrades beyond the initial PoS transition.
What happens to existing Ethereum applications after The Merge?
Existing dapps and smart contracts will continue functioning without changes due to compatible APIs and reused components. Developers should test on testnets like Kiln to ensure smooth transitions.
How does PoS improve security compared to PoW?
PoS introduces slashing mechanisms to penalize malicious validators, making attacks cost-prohibitive. Random validator selection and distributed responsibilities reduce centralization risks and enhance network resilience.