Quick Explanation of Eth Merge, Sharding, and Proof-of-stake

Ethereum launched in 2015 trying to be the a "world computer". An outlandish claim if you think about it. To accomplish something like that, it would need to be able to do the work of 100s of super computers, but... it's only a decentralized network of a few thousand nodes, which... are supposed to be relatively easy to run at home on a good laptop.

Anyway, it became apparent to even the most ardent Ethereum fans who tend to be blind to all criticism, that Ethereum could barely scale their network to one global niche use case, let alone everything. NFTs and defi take place heavily on other networks because Ethereum couldn't scale.

Supposedly, Vitalik and Joe Lubin, the primary founders of Ethereum, knew at launch that Ethereum wouldn't scale and they'd need to upgrade to Eth 2.0. Of course, they didn't tell anyone this until years later, they were busy selling the "world computer" fraudulent claim. They did say at the time of launch that they wanted to go to Proof-of-stake for environmental reasons (not scaling). More on that below.

The Merge

Early in Ethereum's history, they did begin a road map of upgrading to Ethereum 2.0, trying to address both scaling and the environmental question at one time. It has been going slowly and 7 years later, it's about to get its first big test with the Merge.

The upgrade is called "the Merge", I assume, because of the design of Eth 2.0. Since one network and block chain cannot scale (by the nature of its properties) Ethereum 2.0 creates 64 "shards" or separate block chains with separate networks - a node will work on one shard, while other nodes are trusted to work on the other shards - then the shards are woven back together into a "beacon chain".

(Note: bitcoin scales through stacked protocols, so the base layer doesn't need to scale the number of transactions or calculations, only value throughput using larger transaction sizes. Other functionality is moved to other layers, for fast payments, or smart contracts, etc. However, that cannot work the same with Ethereum's design.)

The beacon chain has been operational for a year or so, but the shards and the weaving of shards back into the beacon chain does not happen yet.

Proof-of-stake

They are also transitioning to Proof-of-stake instead of Proof-of-work mining. These are called "consensus mechanisms" because they allow a decentralized network to come to a consensus on a central truth on the state of the network without a trusted centralized player. PoW is the only mechanism shown to work. PoS is actually older than bitcoin, and has been tried many times on altcoins since, each time resulting in consensus failure.

Ethereum, of course, thinks this is just an engineering problem. Kind of like all technocratic Marxists. With enough lines of code and elbow grease from developers, they can make pigs fly. A whole separate problem is if flying pigs is a stable outcome. LOL

PoS is seen as much more environmentally friendly as well, because it doesn't use mining. In PoW, it is a race to find a random number that will hash to a specific value, earning the miner the privilege to add a block to the block chain. Very simple and cannot be cheated.

PoS is where participants lock some of the coins in a stake (32 ether to be exact, ~$40,000 right now), and the privilege to add the next block is assigned randomly via an algorithm.

In PoW, if the block the miner produces is not valid, eg they added some coins or an invalid transaction, it is rejected by the independent nodes on the network, and the miner is out all that energy and cost to find the block. The cost to do the work secures your incentives, and penalizes your dishonest behavior.

In PoS, if the block the block producer makes is not valid, their stake is "slashed". But slashing is a forward operation, meaning your punishment is begun after your completed being dishonest. Who will impose your punishment? Other nodes must slash you. But what if other nodes are conspiring with you? You can see it sounds elegantly simple, but implementing it in a stable formula is impossible in my opinion.

There are many problems with slashing, but I'll give you two. 1) If it is a big player, like an exchange that is staking for clients, all these clients will get slashed if the exchange makes a mistake in forming the block. 2) Some one can purposefully produce invalid blocks, perhaps causing some negative outcome, while shorting the price of ether. They get slashed but get paid on their short position.

As for PoS in general, the big concern in the community right now is that most of the stake is aggregated to large entities, like exchanges or hedge funds, and these entities are regulated directly by the US government financial regulators. Therefore, Ethereum's block producers will now be controlled directly by the government. They have to be worried about getting slashed by the network and the government. So much for any claim of "decentralization".