Much has been said about the Ethereum merge within the last few weeks. Many people have called it the most critical event in the history of crypto. This article is aimed at bridging the knowledge gap & simplifying the concept of Ethereum merge. Let’s get to it!
What does the Ethereum merge mean? The purpose and economic implications of the merge.
The Ethereum merge is joining the existing layer of the Ethereum blockchain (the mainnet we're currently using) with the new proof of stake consensus layer, the Beacon chain. The Ethereum mainnet operates on a proof of work (POW) consensus mechanism. The network is secured by miners who consume electricity to validate transactions and add them to a block in the blockchain. There is no need for miners in the proof of stake (POS) mechanism. Validators secure the network.
These validators must stake Ethereum to validate the network. Instead of having many miners competing in an energy-intensive fashion to solve the puzzle and create the same block, validators are chosen based on a selection algorithm that considers the size of their stake.
Once a validator is selected, they have the exclusive right to create a block.
This mechanism consumes less electricity and has higher transactions per second (TPS).
The purpose of the transition to POS is to make the Ethereum blockchain more energy efficient, secured and scalable.
Due to the risks involved in transitioning to POS from POW, the Ethereum researchers decided to split it into two steps.
The first step was to launch the “Beacon chain”. This was successfully executed in December 2020.
This created a parallel POS chain that could be tested for some time without impacting the existing POW chain. This also gave enough time to stakers to stake more ETH so that the amount of staked ETH would be sufficient when the POS chain fully launches.
The Beacon chain currently has over four hundred thousand (400,000) validators and over 13 million ETH actively staked.
The Merge is the second step of the launch. This phase merges the POS Beacon chain with the already existing POW mainnet.
Next development would be the Sharding, estimated in 2023-2024, expanding ETH capacity to store data, work harmoniously with L2s to scale throughput and reduce network fees. More info on Sharding: https://ethereum.org/en/upgrades/sharding/
⚒️Why is this merge necessary, and what is the motivation behind the merge?
It will comply with Ethereum ESG (Environmental, Social, Governance). The POS mechanism uses less energy so it would have little or no importance on the environment.
It will lead to a reduction in the Ethereum issuance. Since both the POW and POS chains are funded by Ethereum issuance, the POW network would cease to exist, thus dramatically reducing ETH issuance after the merge. This concept is called “Triple halving”.
It makes the network more decentralised. Ethereum enthusiasts can be more involved in the network by becoming validators.
📈What are the positive implications of the merge?
The block time on the merged POS chain would be lower than what is obtainable in the existing POW chain. There will also be a reduction in the block time variance which should cause a faster confirmation of transactions.
It would further cement the distinction between Bitcoin and Ethereum as Bitcoin would be known for its POW mechanism and Ethereum for its energy-efficient POS mechanism.
The merge would become a deflationary event, likely decreasing the ETH supply over time.
📉Are there risks involved in the merge?
The Ethereum merge promised to be one of the most significant events in the history of cryptocurrency, but it comes with a few risks.
Some of the risks include:
Threat to stablecoins: There are concerns that the Ethereum merge may threaten stable coins' stability. Most stablecoins on the Ethereum blockchain are locked in smart contracts. Some major DAOs express their fears that major stablecoins such as USDT and USDC may lose their pegs due to negative funding.
There is also the possibility of network outages or downtime during the transition from Proof of Work (PoW) to Proof of Stake (PoS). The Ethereum team has been working for the past one and a half years to prevent this from happening, but there's a growing possibility.
The merge could lead to perpetual backwardness in the contract as the future may trade below the market spot price.
Risk to DeFi: The merge risks Decentralized Finance (DeFi).
DeFi platforms like Aave are already putting cautionary measures in place to mitigate the effect of the merger on them in case it takes a negative toll.
Aave recently started a governance vote to pause ETH borrowing temporarily. Binance has also announced that it will pause ETH and ERC-20 deposits and withdrawal during the merge/upgrade.
❌The Misconceptions about the Ethereum merge
#1 Ethereum gas fee will reduce after the merge. This isn't true!
At least the merge doesn't do this directly. Reducing gas fees would involve working on the network capacity and throughput. The merge doesn't do this but can lay the groundwork for this procedure later.
#2 Ethereum transactions would become faster after the merge.
There's some truth to this rumour, but Ethereum transactions would not be “noticeably” faster. The beacon chain allows validators to publish a block every 12 seconds instead of 13.3 seconds in the mainnet.
Ethereum developers believe transitioning to PoS will enable a 10% increase in block production. The slight improvement will go unnoticed by users.
#3 Investors would be able to withdraw staked ETH after the merge.
Staked ETH (stETH) is a cryptocurrency backed by Ether, and it currently lies locked on the Beacon chain. Most users are euphoric and expecting to withdraw their staked ETH after the merge, but the developer community has debunked the rumours confirming that the upgrade doesn't facilitate this change. Withdrawal of staked ETH would be made available during a further ("Shanghai" ) upgrade.
#4 Validators will not be able to withdraw ETH rewards till the Shanghai upgrade.
This is another huge misconception. Validators would immediately access their rewards after the merge is completed. If you've read to this point, then I trust you now know enough to be able to explain to anyone the risks involved and debunk the misconceptions about the merge.
What does the Ethereum merge mean for NFTs?
Are your NFTs safe? Would there be duplicate NFTs on forked chains?
Ethereum is one of the Blockchain holding the highest amount of NFTs, and we've seen people pay ridiculous amounts in ETH to purchase NFTs. What happens to these NFTs after the merge?
The simple answer is “Probably nothing.”
Your NFTs would still be in your wallet and tradeable on marketplaces and Dapps.
Two key activities that could result from the merge and have the most significant impact on NFTs would be Fork spin-offs and Relay attacks.
What are Fork spinoffs?
Contrary to popular opinion that everyone in the Ethereum community is on board with the Ethereum merge, there are notable critics.
These critics don't want the chain to move away entirely from the Proof of Work mining for reasons best known to them.
As a result, some of the builders have come together, and they're planning to fork the Ethereum network by creating a spinoff chain that would continue using the Proof of Work system.
The most prominent example is ETHPOW, led by well-known Ethereum Chinese miner Chandler Guo.
This is going to cause confusion & create an avenue that scammers can exploit.
⚠️ Another speculative effect of the merge on NFTs is “replay attacks”.
This involves “replaying” a transaction made on the proof of work network on the proof of stake Mainnet. For example, a BAYC holder could sell the duplicated version of his NFT on the proof of work chain. If a dubious person “replayed” the same transaction of the proof of stake chain, the seller risks losing the original version of that chain. This is less likely because these forks would have a different chain ID from the merged network.
If this were to happen, the safest course of action would be to stick to a particular chain. Do not interact at all with the proof of work chain. If you don’t, you have no reason to worry about replay attacks.
Here is everything you need to know about the Ethereum Merge, you can find below a thread to go further on the technical part:
