Ethereum is about to undergo a major shift in a couple of days. If you’re an ETH hodler, here’s a quick breakdown of The Merge and everything you need to know.
What is “The Merge”?
The Ethereum blockchain is about to transition from Proof of Work (PoW) to Proof of Stake (PoS).
This shift has been in the works for years – the Proof of Stake Ethereum blockchain which is also known as the Beacon Chain was launched way back in December 2020. It has been running in parallel with the original Proof of Work Ethereum Chain ever since.
After years of testing and several test merges on Ethereum’s testnets, the official Merge of the original Proof of Work Ethereum mainnet and the Beacon Chain is finally in sight.
Wen Merge?
According to the Ethereum Foundation, The Merge is likely to occur between 10 – 20 September 2022. Developers are working to a soft deadline of 19 September 2022.
Why such a wide estimate?
The merge isn’t something that you can pre-set an auspicious date for. Instead, it is a two-step process where milestones have to be reached before it is triggered.
The two-step process involves:
1) Bellatrix network upgrade
This is where the consensus layer of the Ethereum blockchain undergoes a network upgrade.
It is scheduled to take place at epoch 144896 on the Beacon Chain, which is estimated to take place on 6 September 2022, 11:34:47am.
What is epoch?
On a blockchain, an epoch is a unit of time. It is defined differently on every blockchain. On the Ethereum blockchain, an epoch is the time taken for 30,000 blocks to be completed on the chain.
2) Paris execution layer transition
Once the Bellatrix upgrade is done, we’ll have to wait for the next milestone to complete the Merge. This would be triggered by the Terminal Total Difficulty (TTD) of 58750000000000000000000 which is estimated to occur between 10 to 20 September 2022.
Once the execution layer hits the TTD, the subsequent block will be produced by a Beacon Chain validator. Upon the finalization of this first block, the Merge would be considered completed.
Do note that these dates are estimates as the process could be delayed further if there are lesser blocks being minted in the coming days. Or, if the developers find any major issues worth postponing the merge for.
What is TTD?
Miners have to solve mathematical problems in order to compete to mine a block, this process has a ‘difficulty’ level depending on the demand for new blocks. The more demand, the higher the difficulty. The Terminal Total Difficulty as its name suggests is the cumulative difficulty of the current block and all the previous blocks before it.
Okay, so what?…
Why Merge?
The transition to PoS will make Ethereum more energy efficient, more secure and more scalable (in the future).
The key advantage to PoS is that is consumes about 99% less energy than PoW. According to this research by FTSE, PoS Ethereum will consume about 2.62 megawatts of energy compared to the existing PoW’s 5.13 gigawatts!
But power savings isn’t the only factor. As investors, you’ll probably want to know if ETH will perform well in the future.
So, here’s both the Bull and Bear case to consider:
Why is it a game changer for Ethereum? [Bull Case for The Merge]
The bulls of Ethereum reckon that the Merge will lead to a “Triple Halvening” event. Halvening is a concept taken from Bitcoin’s algorithm where the amount of bitcoin rewarded to miners halves every few years. Each halvening event usually leads to price spikes as supply drops and is deemed to be more valuable by traders.
In Ethereum, the Triple Halvening is believed to bring on similar price pushes, bringing about a supply reduction that’s equal to three Bitcoin halvings. Here’re the three events that would lead to the Triple Halvening:
1) Reduced ETH Issuance
After the Merge, the annual Ether (ETH) issuance will drop from 4.3% to 0.43%, that’s a saving of about 13,000 ETH daily.
Blockchains tend to issue coins to miners or validators as a reward for securing the blockchain functional and for processing transactions.
As compared to PoW, PoS costs less while providing a high blockchain security. This cost savings means the network will not need to issue as much ETH to keep the network safe and functional.
For hodlers, this is good news because the lowered issuance means that your ETH is not being diluted as quickly.
2) Shift towards deflationary tokenomics
The reduced issuance alongside Ethereum’s 5th Aug 2021 upgrade, EIP-1559 would make ETH’s tokenomics deflationary when gas prices go up. And this makes Ethereum hodlers bullish about its future…in the next bull run.
What is EIP-1559?
Although it sounds like robot-speak, EIP-1559 simply stands for “Ethereum Improvement Proposal #1559”.
EIP-1559 was included in the London Hard Fork during July 2021 and went live at block 10499401 on 5 August 2021.
It changed the monetary policy of Ethereum by reducing miner fees and burning a portion of the original fees. Burning of the fees helps reduce the amount of ETH in circulation. It was so hyped that this website was created.
This is believed to make ETH “ultrasound money”, a play on Bitcoin’s nickname as “sound money” due to its capped supply. In ETH’s case, it would become deflationary as EIP-1559 and The Merge would make its supply deflationary once more Ether is destroyed than created per transaction.
However, there’s a minimum gas fee threshold for ETH to become deflationary. At the point of writing, gas fee is rather low at about 14 gwei (compared to 200+ gwei in the bull market) due to lower usage and the proliferation of Layer 2 solutions.
Whether or not Layer 2 solutions or even alternative L1 chains would steal Ethereum’s market share remains a question.
3) Locked Staked ETH
Validators are already staking their ETH for rewards in anticipation of the Merge. And these staked ETH cannot be unlocked until subsequent upgrades coming after the Merge.
This means that current stakers will not be able to sell their ETH for a quick buck, depressing prices.
That said, validators would be able to unlock their ETH in the future. There may be a mass selling event when the ability to unlock staked ETH is activated.
Okay, so what does it mean for hodlers?
In short, hodlers who are bullish about Ethereum’s future would be looking forward to the Merge as it would potentially increase the value of ETH in the long term.
But…there’s always two sides to any narrative in cryptocurrency.
To give you a balanced view, here’s
Key Risks of the Merge [Bear Case for The Merge]
1) Risk of delays [Short-term]
The Merge has been a work in progress for years due to the technical difficulty of shifting from PoW to PoS. A developer describes the process as being akin to “changing a plane engine in mid flight”.
Although we have an estimated timeline for the Merge, it could still be delayed if developers find any bugs or potential issues that might blotch the process.
2) Staking yields would likely be diluted in future [Long Term]
The move to Proof of Stake allows any ETH hodler to stake their ETH and earn a yield on their coins. At the point of writing, the annual yield is about 4%. It is estimated that this yield would increase to 5% after the Merge. Although some say it could go up to 8% or higher.
If you’re thinking of buying ETH just to stake for higher yields post Merge, think again.
Here’s the flip side to consider. Unlike mining, the barrier of entry for staking ETH is way lower – you could become a validator with 32 ETH, or use liquid staking platforms like Lido and RocketPool.
As more stakers jump onto the bandwagon, there’ll be more competition among stakers. If the growth of stakers outpaces the amount of ETH fees for validators, it could result in lower actual yields over time.
That said, this is a longer term risk.
At the point of writing, the centralization of validator distribution worries the community more as we see several validators owning a major portion of staked ETH:
This risk is not likely to affect investors in the short term and should resolve as more stakers are onboarded post Merge.
3) Layer 2s could steal Ethereum’s thunder [Mid – Long Term]
Layer 2s (L2) are scaling solutions for Ethereum. There are several mechanisms, but most of them batch transactions in order to lower the cost.
Two major L2 solutions at the point of writing are Optimism and Arbitrum.
As L2 protocols capture more users, there’s no telling if these protocols would decide to switch to their own tokens or stop relying on Ethereum as the underlying blockchain in the future.
4) Censorship [Mid – Long Term]
This isn’t directly related to the Merge, however it could impact Ethereum’s long term growth nonetheless.
Recently, the US Treasury sanctioned Tornado Cash, a decentralized crypto mixer. This move raised questions about how untouchable cryptocurrency really is, despite its claims of being decentralized. The episode has seen stablecoin issuers like Circle freezing addresses related to Tornado cash.
A crypto mixer increases anonymity and privacy by ‘mixing’ up transactions, making it more difficult to trace the trail of coins.
The question in everyone’s minds now is: Can regulators sanction other decentralized protocols? What about centralized entities? And would those protocols submit to regulators demands?
For example, in the situation where major ETH depositors like Lido and Coinbase (see ‘Depositors by Entity’ chart above) were told to shut down. Would they go ahead and stop staking? This could take out majority of the staked ETH and create havoc on the network.
For now, we can only speculate but how this unfolds would affect Ethereum’s position:
- Protocols could reject sanctions as a community.
However that would mean losing institutional players from funds to centralized cryptocurrency exchanges as well as other entities like stablecoin issuers. For context, at the point of writing, the value of USD collateralized stablecoins on Ethereum is ~$92B.
Taking this route could also mean that Ethereum would no longer be able to break into the mass market in the future.
- Protocols could work with regulators.
This would give regulators the ability to sanction and control transactions made on the decentralized blockchain. This move could attract institutional players however, it would mean that Ethereum could be giving up on its ideals.
Ideals are not worth much on balance sheets. But, it could cause a massive drain in developers and related talents which could slow down Ethereum’s progress in the long run.
And those are the ‘risks’ associated with the Merge.
Now, let’s talk about the most important question you are likely to have now:
Hodling ETH: What do you need to do to prepare for the Merge?
If you’re an ETH hodler, there’s really nothing much to be done, except to wait for the Merge. After the Merge, your ether will still appear as ETH in your wallet.
However, there are some things you might want to take note of.
Centralized exchanges may pause transactions temporarily
Binace for one has already announced that they would temporarily pause ETH and ETC-20 token deposit and withdrawals until The Merge is complete.
If you’re trading actively on centralized exchanges, do take note of their latest announcements regarding the Merge. You may not have access to your ETH or ERC-20 tokens temporarily before or after the Merge.
If you hold your ETH on centralized exchanges, you may miss out on potential airdrops
With the Merge approaching, the existing miners led by Chandler Guo, are coming together to try to fork the blockchain and keep Ethereum running on Proof of Work.
Most of the key applications and entities on or related to Ethereum have stepped up to support the Proof of Stake Ethereum, hence this PoW fork is unlikely to affect Ethereum’s future progress.
However, if the PoW fork does happen, ETH holders would likely get an airdrop of the PoW version of Ethereum; ETHPOW.
If you hold your ETH on centralized exchanges, you may have to wait for the exchange to distribute them to you. Some may not even bother to distribute them, especially if they do not list it.
Cryptocurrency investors with a significant amount of ETH may still want to shift their ETH to a private wallet in order to receive all the potential airdrops. You could sell it for a quick buck on smaller exchanges like BitMEX or keep them as souvenirs.
At the point of writing, ETHPOW is already trading, however its value has crashed from $140 from the initial hype made by the miners to the current ~$50.
Misconceptions about the Merge
Still have questions? Here’re three major misconceptions that Ethereum investors have:
- You need to do something
Most of us don’t really need to do anything.
Fret not, you won’t lose your coins, they will remain as ETH in your wallet.
Beware of scams that tell you otherwise!
- The Merge could cause ETH to crash if stakers sell their ETH enmass
The feature to unlock staked ETH will not be available immediately after the Merge. Instead, it would be part of a subsequent major upgrade (aka the Shanghai upgrade) to be done after The Merge. It is estimated to take place at least 6 -12 months after The Merge. In the mean time all staked ETH, staking rewards and newly issued ETH will be locked up on the Beacon Chain.
On top of that, validators will only be able to unstake their ETH in batches – only up to 6 validators can exit in an epoch.
Hence, there wouldn’t be any massive selling event. #calmdown
- The Merge lowers gas fees and increases speed
During the bull run, everyone was complaining about Ethereum’s high gas fees (aka transaction costs) and slow speeds. However, the Merge doesn’t solve these issues.
Instead, at the moment Layer 2 solutions like Optimism, Arbitrum, StarkNet, zkSync and many others help the blockchain to scale and reduce fees via different mechanisms.
In future, sharding would be added as an upgrade to the Ethereum blockchain. This would help to lower Ethereum’s gas fees and allow it to scale to ~100,000 transactions per second. Sharding is not part of the Merge; according to Ethereum’s roadmap, it would be implemented in ‘The Surge” (more on this below).
So, if you’re using the Ethereum blockchain to access defi protocols or buy NFTs, don’t expect the gas fees to be cheaper if we enter a bull market anytime soon.
- The Ethereum blockchain will go down during The Merge
and cause a minor panic among the unknowing public…
Nope.
The Merge will be a smooth transition with zero downtime. #dontpanic
What to expect post Merge?
The Merge is just the first step, albeit a major milestone, of a series of upgrades that will see Ethereum transition smoothly from Proof of Work to Proof of Stake.
Vitalik Buterin, co-founder of Ethereum had shared the roadmap for the planned upgrades post-Merge, conveniently providing us with rhyming names;
“While it might sound like the title of a “Rick and Morty” episode, the surge, verge, purge, and splurge are actually key parts of Ethereum’s scaling, cleanup, and evolution”
Vitalik Buterin
Here’s a quick summary of each stage post-merge:
- The Surge: addition of sharding which allows Ethereum to scale from its current 15-20 transactions per second to 100,000 transactions per second. We won’t go into the technical details here, but you can dive into the world of sharding, starting from here.
- The Verge: reduces storage requirements for validators, encouraging decentralization of the Ethereum network.
- The Purge: clearing off the old network history to simplify the protocol and reduce storage requirements for nodes. Much like clearing the browsing history on your favorite internet browser.
- The Splurge: miscellaneous smaller upgrades to make sure the network runs smoothly.
tl;dr
The Merge is likely to occur between 10 – 20 September 2022.
If you own Ether (ETH), there’s no need to stress about the Merge.
ETH hodlers won’t lose their coins and most wouldn’t need to do anything nor upgrade anything. Beware of scams that tell you otherwise!
If you really want the potential airdrops of ETHPOW which has already crashed in value, move your ETH into your own private wallet.
New to all these? Let seasoned cryptocurrency investor, AK explain everything you need to know about cryptocurrency and find out if you should gain exposure to the scene. Join his free cryptocurrency masterclass here.
FAQs
When Ethereum merge will happen?
The Merge is likely to occur between 10 – 20 September 2022.
See the latest estimated date on wen merge?
What will happen to Ethereum after the Merge?
Ethereum will move to Proof of Stake after the Merge. This would result in lower energy expenditure, higher security and better scalability.
Will Ethereum Merge be successful?
Who knows.
The probability of a successful merge isn’t 100%, however the odds are looking good.
Why is Ethereum Merging?
Proof of Stake is known to be less energy intensive, more secure and better for scaling. However, it is more complex.
It is also more secure as the lower barrier of entry allows more validators to take part in the staking and validation process. An attacker would also need to own >51% of all the staked ETH in order to take over the network.
Also, PoS is known to consume less energy and has lower carbon emission which the anti-blockchain camp likes to harp about. This move could attract users who are conscious about their carbon emissions.
What is Proof of Work?
Proof of Work (PoW) is a consensus mechanism used in blockchains to validate transactions in a decentralized manner. It relies on miners who have to provide high computation power and compete to solve complex mathematical problems in order to validate transactions for rewards.
Bitcoin runs on Proof of Work.
What is Proof of Stake?
Proof of Stake is an alternative consensus mechanism first introduced by Sunny Kind and Scott Nadal in 2012. Instead of relying on high computational power, validators stake / lock their tokens in order to validate transactions. In return, they’ll receive rewards for staking their tokens to support the network.
Proof of stake is known to consume less energy than Proof of Work, with some sources stating that PoS is 99% less energy intensive than PoW!
