Ethereum is the second most valuable blockchain following Bitcoin, and is number one in NFT transaction volume. Now, the Ethereum Merge is making its network even better.
Shortly before the merge, Buterin tweeted a quote from Ethereum researcher Justin Drake, saying the merge would reduce global electricity consumption by 0.2%.
Ethereum’s mainnet merge happened on September 15, 2022. This completed Ethereum's transition to proof-of-stake consensus, officially deprecating proof-of-work and reducing energy consumption by ~99.95%.
Now that the merge is complete, what else does Ethereum have in store? Ethereum’s co-founder Vitalik Buterin shared his updated roadmap on where Ethereum protocol development is at and what's coming in what order.
The Ethereum Merge moves the blockchain from a proof-of-work consensus mechanism to proof-of-stake. This merge means that ETH holders will operate as validators opposed to energy-intensive computers doing the work, hence creating a more efficient blockchain and reducing its carbon footprint.
The Merge is just one part of the overall upgrade. Below, we will discuss what The Merge is and what it means for users of the Ethereum blockchain.
Currently, Ethereum operates on a proof-of-work (PoW) consensus mechanism. This mechanism requires special computers to solve arbitrary mathematical problems to prevent anybody from compromising the network. Although PoW is very effective, it is also extremely energy-intensive.
Even though Ethereum still utilizes proof-of-work, its new mechanism proof-of-stake (PoS) is currently operating parallel to it on the Beacon Chain. This chain is responsible for creating new blocks, validating them, and rewarding validators with ETH for keeping the network secure, without the use of smart contract functionality.
Mainnet will enable the new network to run smart contracts into the proof-of-stake system, and includes the full history and current state of Ethereum. This is to ensure that the transition is smooth for all ETH holders and users.
The Merge is when these two chains will finally come together. Upon completion, The Merge will successfully end the proof-of-work mechanism and initiate the new proof-of-stake mechanism.
The Ethereum Merge officially marks the end of the blockchain’s proof-of-work consensus mechanism and its transition to a new proof-of-stake consensus layer. The goal of The Merge is to reduce the network’s energy consumption significantly and enable Ethereum to scale to even greater heights.
Considering the Beacon Chain is solely used for the testnet merges, it has not been processing transactions on the mainnet. Rather, it’s been reaching consensus on its own state by agreeing on active validators and their account balances.
After The Merge, the Beacon Chain will be the engine for all network data, including execution layer transactions and account balances.
The Merge gets us one step closer to achieving the full scale as outlined in the Ethereum vision.
According to Ethereum, a post-merge cleanup upgrade will be implemented to address other features and will take place very soon after The Merge is complete.
To ensure a successful merge, developers are minimizing additional features that could delay it. This means those of you waiting to withdraw staked ETH will have to wait a while longer after The Merge is completed.
Also, let's not forget about the Shard chain portion of the upgrade. Originally, Ethereum developers planned to work on the Shard chain before The Merge to address the current scalability issue. However, with layer 2 scaling solutions in high demand, the priority has shifted to swapping proof-of-work for proof-of-stake.
It’s easy to get lost in all the talk that’s going around on Twitter and elsewhere. Below I will outline some of the most common misconceptions regarding The Merge as stated on Ethereum’s official website.
The Merge will reduce gas fees
Contrary to popular belief, gas fees will remain the same post Merge. Gas fees are determined by network demand relative to the capacity of the network. The Merge eliminates the use of proof-of-work, transitioning to proof-of-stake for consensus, but does not change any parameters that directly influence network capacity or throughput.
Transactions will be quicker
Transaction speed will largely remain the same on layer 1. On proof-of-work, the target was to have a new block every 13.3 seconds. On proof-of-stake, blocks will be produced 10% more frequently than on proof-of-work. This is an insignificant change that is unlikely to be noticed by users.
You can withdraw your staked ETH
Users are not able to withdraw their staked ETH post-merge. The main focus is to get the transition from PoW to PoS, as a result, actions like this were put on the back burner. The following Shanghai upgrade will enable staking withdrawals.
When withdraws are enabled, stakers will all exit at once
Validator exits are rate limited for security purposes. After the Shanghai upgrade enables withdrawals, all validators will be incentivized to withdraw their staking balance above 32 ETH. These funds do not add to yield and are otherwise locked. Depending on the APR (determined by total ETH staked), they may be incentivized to exit their validator(s) to reclaim their entire balance or potentially stake even more using their rewards to earn more yield.
Full validator exits are rate limited by the protocol, so only six validators may exit per epoch (every 6.4 minutes, so 1350 per day, or only 43,200 ETH per day out of over 10 million ETH staked).
Staking APR is expected to triple post-merge
According to Ethereum, more accurate predictions reveal a 50% increase in APR post-merge, not 200%. This isn’t the result of an increase in protocol ETH issuance (ETH issuance after The Merge is decreasing by 90%), rather it’s the result of a reallocation of transaction fees that will start going to validators instead of miners.
The Merge will cause network downtime
The Merge is designed to ensure a smooth transition to proof-of-stake with no downtime. The Merge is triggered by terminal total difficulty (TTD), which is a measure of the total mining power that has gone into building the chain. When the criterion is met, blocks will go from being built using proof-of-work in one block to being built by proof-of-stake in the next.
Although the long-term impact of Ethereum’s Merge will be significant, there are some things you should be aware of before it happens to help you prepare.
Despite changing from proof-of-work, the entire history of Ethereum since genesis remains intact and unaltered after the transition to proof-of-stake. Any funds held in your wallet before The Merge will still be accessible after The Merge. No action is required on your end.
That being said, at least one proof-of-work fork will carry on post Merge. This means there will be two versions of your NFTs (one on PoW and one on PoS).
Even though everything is being done to protect users after the merge, there is still a concern for a potential replay attack. Essentially, this attack replicates transactions on one blockchain and executes them on another.
This attack isn’t guaranteed, but it is worth mentioning as it’s still a possibility. So what can you do to protect your assets?
The Merge of the main chain with the Beacon Chain aims to solve a lot of problems.
More scalable
The ultimate goal of the upgrade is to make Ethereum more scalable. That means the network needs to be capable of handling thousands of transactions per second to make transactions faster and more cost effective to use.
In comparison, Visa claims to have the ability to handle 24,000 TPS. However, they average around 1,700 TPS with an estimated 150 million transactions per day. So, if Ethereum can successfully scale to be able to handle thousands of transactions per second, mainstream adoption becomes much more of a reality. The Merge is a big step in the right direction to increasing scalability of the network.
Increased security
The more blocks that are verified on Ethereum, the more secure the network becomes. As the adoption of Ethereum continues to grow, the protocol becomes more secure against all forms of attack. Even though proof-of-stake is secure, it's a more complicated system. But, if executed properly, the result will be an even more secure network.
Better sustainability
Today’s Ethereum network is not environmentally friendly. The amount of energy consumed by the special computers designed to solve equations is outrageous—not to mention expensive for those who set them up. Since proof-of-stake removes high-power computing from the consensus algorithm, it’s claimed that the network will become 99.95% more efficient than it is today.
All that being said, there is a common misconception that The Merge will reduce the current gas fees. It won’t. Gas fees will remain the same. But, there’s still hope. The Merge is just part of the macro upgrade that is taking place on Ethereum. Of course, the end goal is to reduce gas fees, we’re just not quite there yet.
On August 5, 2021 Ethereum executed an upgrade known as the London hard fork. This fork brought on a major change in the form of EIP-1559—a code that began to remove ETH from circulation and changed how transaction fees on Etherum work.
Currently, anyone who makes a transaction on the blockchain pays a base fee that is burned (rather than going to miners). Burning is the process of sending something to an inaccessible address. ETH is sent to a burn address that takes it out of circulation.
Although new ETH is created every time a block is added to the chain, a small amount of ETH is also disappearing, causing a deflationary pressure on the network.
A similar scenario has already been experienced on the Bitcoin blockchain. Bitcoin’s most recent halving occurred on May 11, 2020, when BTC rewards were reduced from 12.5 BTC to 6.25 BTC. At that time, Bitcoin was $8,800.
Then, as many of us know, it nearly doubled in price over the next six months, and today 1 BTC costs about $31,000.
Now Ethereum is about to experience what’s referred to as “Triple Halving”.
In theory, the combination of EIP-1559 and The Merge into a proof-of-stake mechanism, would represent a “triple halving,” as they would reduce sell pressure by an estimated 90%.
The Merge will cut rewards for new blocks drastically from 12,800 ETH to 1,280 ETH per day (about 90% according to Blockchain analytics firm IntotheBlock), creating a system where more ETH is burned via gas fees than is created daily. As a result, ETH will become a deflationary asset, where before, it was an inflationary one.
Because the amount of ETH issued post-merge is expected to drop by 90%, many are speculating that the price of ETH could skyrocket. But, no one knows if that will happen for sure.
90%, many are speculating that the price of ETH could skyrocket. But, no one knows if that will happen for sure.
Ultimately, The Merge gets us one step closer to achieving the full scale as outlined in the Ethereum vision. The main goal of The Merge is to expedite the transition from proof-of-work to proof-of-stake.
According to Ethereum, a post-merge cleanup upgrade will take place after The Merge.
To ensure a successful merge, developers are minimizing additional features that could delay The Merge. This means that those of you waiting to withdraw staked ETH will have to wait a while longer after The Merge is complete.
Also, let's not forget about the Shard chain portion of the upgrade. Originally, Ethereum developers planned to work on the Shard chain before The Merge to address the current scalability issue. However, with layer 2 scaling solutions in high-demand, the priority has shifted to swapping proof-of-work for proof-of-stake.
The Shard chains aim to expand Ethereum’s capacity to process transactions and store data, but are not used for executing code. These shards will be rolled out in numerous phases and will gain more features over time.
Sharding is often used in computer science to split databases horizontally to spread the load.
In Ethereum’s case, sharding will create new chains known as “shards”. Hence, reducing network congestion and increasing transactions per second and providing additional, cost effective, storage layers for applications and rollups to store data while still maintaining the same security of the Ethereum mainnet.
The Shard portion of the upgrade will likely occur some time in 2023.
In reality, The Merge is the next sensible step in the Ethereum upgrade process. The ultimate goal is to make Ethereum more scalable, secure, and sustainable. Although The Merge won’t complete the upgrade entirely, it gets us closer to completion and to mainstream adoption.
The term ETH2 is no longer considered proper terminology. The reason being is that The Merge will combine two chains to make one new chain. There will only be Ethereum. To better distinguish these terms, ETH is now regarded as the ‘execution layer’, which handles transactions and execution.
And ETH2 is now known as the ‘consensus layer’, which is solely responsible for handling the proof-of-stake consensus.
There are no guarantees that the price of ETH will increase after The Merge. However, current trends indicate that it’s a possibility. In the last 30 days leading up to the completion of the Goerli Merge, the price of ETH has spiked nearly 70%, reaching over $1,900 and steadily maintaining.
If this trend continues, there’s no telling how high the price of ETH could be after a successful merge. The sky is the limit.
