Newsletter #21: What the Ethereum ‘Merge’ Means for Web3 Gaming

From the Editor

GM Fellow Tigers,

On September 15, 2022, Ethereum, the world's second largest blockchain network, transitioned from the proof of work (PoW) consensus mechanism to proof of stake (PoS). Many on the crypto twitter called it a historic event for the industry.

So what exactly is the Merge?

According to the Ethereum Foundation, with the latest update, the Ethereum Mainnet will merge with a proof-of-stake blockchain, also known as the Beacon Chain, in the ETH ecosystem. Proof of stake brings a fundamental change to Ethereum as the network will no longer require miners to use huge amounts of electricity to keep the network secure and validate transactions. Instead, the new consensus mechanism requires validators to lock in 32 ETH($45,000 at the current rate) into a smart contract. This capital serves as collateral and can be destroyed if the validator tries to cheat the system or doesn’t fulfil their obligations.

Why is the Merge such a big deal?

The proof of work consensus mechanism used by bitcoin and pre-merge Ethereum uses insane amounts of energy to keep the network secure. The energy consumption of proof-of-work-based networks grows in parallel to their adoption. Research conducted by Columbia Climate School shows that Bitcoin alone uses more electricity than many developed countries. Unsurprisingly, this has brought a lot of backlash to these cryptocurrencies and to the industry in general. However, Ethereum's move to PoS will be a paradigm shift for the crypto space as the update will reduce the energy consumption of the network by 99.9%. Apart from making the network more environmentally sustainable, the Merge also sets the stage for future updates on the network. It’s apparently the 1st of 5 major updates planned for Ethereum.

Here are some of the major changes that the new update will bring to Ethereum.

Reduce the network's energy consumption by 99.9%.
Diminish barriers to entry like the need to buy expensive hardware to participate in network validation.
Exponentially increase the cost of carrying out a majority (51%) attack.
Make the network’s native currency(ETH) deflationary
Bring more stability to the block validation process.

What the update will not fix:

There were some rumours in the web3 world that the Merge would solve two of the most pressing issues that Ethereum faces:

High Transaction(Gas) Costs.
Low Transaction Throughput(the network currently processes around 15 transactions per second.

Vitalik himself clarified that these problems will be addressed in future updates.

Now that you’re up to speed with Ethereum’s Merge, let’s look at how this update will affect web3 gaming.

At the time of writing this newsletter, it's been four days since the merge was finalised, and as far as we can tell, there’s no immediate effect of the update on our space. If anything, the price of ETH has dropped by 10%. It might be helpful to think of the Merge as the first step towards making Ethereum faster, cheaper, and more scalable. However, these improvements will come into effect with future updates that will happen over the next decade or so.

The market share of Ethereum in web3 gaming is 34%, second only to Binance’s BNB Chain, according to Footprint Analytics. Ethereum is likely to become the dominant chain in the web3 gaming space. Here are two reasons why:

More developers are building for Ethereum than for any other chain. Furthermore, many upcoming AAA-style games, such as Illuvium, Mirandus, and Big Time, are being built on Ethereum.