Ethereum initially launched with a proof-of-work (PoW) consensus algorithm in 2015, but the vision has always been for Ethereum to become an energy-efficient proof-of-stake (PoS) network. The Ethereum community explored various PoS consensus mechanisms, including "Slasher" and "consensus by bet". In 2017, the community settled on “Casper the Friendly Finality Gadget” as the PoS finality system.
The Beacon Chain
The beacon chain is a fully independent network which has a PoS consensus layer. It is running in parallel to the current Ethereum mainnet, where the consensus layer currently remains PoW. By keeping the PoS chain isolated from the main network, a ready-to-ship solution is being perfected without risking the decentralized application platform of the Ethereum PoW chain. A one-way bridge from the PoW network to the PoS network began accepting deposits (as of November 2020) and the beacon chain is currently live, ready for action and secured by millions of ETH deposited across over 240K validators. Since its launch in December 2020 the beacon chain has been finalizing 100% of its epochs with no downtime.
While the beacon chain provides a solution to transitioning the Ethereum consensus algorithm, the Ethereum network will not live split in two forever. To fully realize the transition to PoS, Ethereum’s history on the PoW network will be preserved as the PoS consensus layer is merged in as a replacement for PoW. This will be done through what is known as “The Merge”. Once completed, the PoW consensus layer in Ethereum will be removed and consensus on all future blocks on the Ethereum blockchain will be achieved by the new PoS consensus layer. None of the transactions done on the Ethereum network will be lost in this transition - "The Merge" will have no effect on the data layer of the Ethereum network. "The Merge" is not the launch of a new Ethereum version, but rather an exciting upgrade to the consensus layer - bringing Ethereum in line with the original vision laid out at its genesis.
Why is Ethereum switching to Proof of Stake (PoS)
Ethereum in its current state is using proof-of-work (PoW) to ensure consensus amongst the thousands of nodes in the network. While PoW is reliable and secure, it is also energy intensive.
Alternatively, proof-of-stake (PoS) on Ethereum guarantees the security of the network in a different way. In PoS, anyone with 32 ETH can deposit that ETH to become a validator, a node that participates in the network's consensus algorithm. Finalizing a block requires 2/3 of all active validators to sign off on it. Should a malicious actor try to tamper with the underlying protocol by using a large number of validators to revert a finalized block (the equivalent of a "51% attack" in PoW) their funds are slashed — meaning they lose a portion of their staked ETH. This makes attacks extremely expensive.
PoS does not require the same energy-intensive hardware as PoW. Any relatively recent consumer hardware should be capable of running the software required to operate a 32 ETH staking node. If you deposit more than 32 ETH, you will be assigned multiple "validator slots" by the protocol, but you will still be able to run them from a single computer, though hardware requirements go up the more you stake. Most estimates put the expected energy savings from the switch to PoS to be around 99%.