Ethereum: The Merge

Ethereum: The Merge

What is The Merge?

  • The Merge is an upgrade to Ethereum execution layer, also known as Mainnet, by swapping the current proof-of-work consensus with the new proof-of-stake consensus layer, the Beacon Chain.
  • After the Merge, Beacon Chain will be the consensus engine for all network data. But, this won’t erase any history data, since it will also merge all transaction history of Ethereum. This means your funds are safe, and you don’t need to do anything

When is The Merge expected?

  • No official date has been announced for The Merge, but it has been announced that it is planned to happen in Q3 or Q4 2022, with the provisional launch date of September 19th.

Why is the merge necessary for Ethereum?

1. Proof-of-stake is more energy efficient than proof-of-work. Reasons:

  • The Merge eliminates the need for energy-intensive mining and instead secures the Ethereum network with staked ETH.
  • Block proposer is chosen randomly from validators, which need less energy than proof-of-work where miners race to get the reward.

2. Proof-of-stake is more secure than proof-of-work. Reasons:

  • It is more secure because attacks on proof-of-stake based blockchains will need a lot more resources. This is because attacks on proof-of-stake networks need at least around 51-66% of all staked coins.
  • Moreover, Ethereum staked by malicious validators may be slashed, which makes attacking it more unprofitable.

3. The Merge creates more use cases for holding Ethereum. Reasons:

  • Ethereum supply is expected to decline significantly as a lot will be staked in validators. Combined with the EIP-1559’s burn mechanism, it will make ETH price and demand rise.
  • Staking ethereum gives real yield which comes from the tips for validating transactions. This means that to mint new ETH, you will need to hold ETH as stake first.

4. The Merge provide more flexible scalability solutions to ethereum networks. Reasons:

  • Proof-of-stake consensus algorithm has better latency but requires less computation, bandwidth and storage than the proof-of-work algorithm. This is because the proof-of-stake algorithm is more simple and faster to reach consensus, rather than relying on hashrate.

What is the fundamental change that will happen after the merge is carried out?

  • Change in the consensus mechanism of the network. To become a validator, now there is a need to stake Ethereum. Block proposer is then chosen randomly from validators, with those who stake more get a higher chance to be chosen.
  • Change in  hardware requirements for those who want to be validators, because validators will no longer need high performance GPUs for mining.
  • More people can participate in securing the network, since to participate you will only need to stake 32 ETH for one validator slot. Even if you don’t have enough ETH, you can still participate by pooled staking, which pools your resource with others to reach 32 ETH. There are already some pooled staking providers that operate on other proof-of-stake blockchains, for example Lido.
  • There will be a large drop in ETH issuance due to the base fee burn mechanism combined with the fact that more ETH will be staked and less in circulation. This creates a phenomenon called "Triple Halving" because it is projected to affect Ethereum like Bitcoin halving, except it happens three times at once.

How will it affect the miners, developers, investors and users of Ethereum?

  • Miners: Miners will have to migrate to proof-of-stake mining with staked Ethereum. Those who still want to mine using proof-of-work mining are expected to move to other non-Ethereum proof-of-work networks.
  • Users: The Merge will not alter the transaction history in Ethereum and any funds held before, and transaction fees will remain relatively the same. However users will enjoy more decentralization and security enhancement from The Merge
  • Investors: The drastic decline in ethereum issuance will be positive for ethereum price and make Ethereum deflationary in nature.
  • Developers: More scalability solutions can be applied to Ethereum after The Merge since the proof-of-work algorithm is changed to proof-of-stake algorithm.

What are the advantages and disadvantages of the merge?

The advantages of the Merge are:

  • The Merge removes the barriers to entry  to become a validator by removing hardware requirements and using Ethereum staking  in exchange. Even if you don’t have 32 ETH you can still participate through pooled staking by combining your ETH with others through a third party. This will allow more people to become validators, creating a more inclusive environment, and promotes decentralization.
  • The Merge will also make Ethereum more eco-friendly than before. A lot of proof-of-work blockchains have been criticized for their energy-consuming nature, which contributes a lot to environmental damage. The Merge will change Ethereum into a proof-of-stake blockchain, which means less energy will be used in Ethereum.
  • The Merge will make Ethereum more scalable than before, because they change from proof-of-work system to proof-of-stake system. In a proof-of-stake system it is easier and cheaper to start validating since there is no need for high end mining equipment and specialized knowledge.
  • The proof-of-stake system also has greater transaction speed and capacity, since it reaches consensus faster than proof-of-work. This is because Beacon Chain, Ethereum’s proof-of-stake consensus layer, divides stakers to 128 committees and randomly assigns them to blocks. Then the proposed block is approved after it fulfills the ⅔ voting threshold. With this, it has the potential to process 100.000 transactions per second after the shard chain launches.
  • Proof-of-stake system has higher adaptability than proof-of-work. This is because its mechanism is more versatile which makes it can adapt to more use cases than proof-of-work.

The disadvantages of the Merge are:

  • The main disadvantage of The Merge is that proof-of-stake mechanism is still a relatively new technology. Comparing it with proof-of-work that has been used for a long time and by many large projects, this will be the first time proof-of-stake is used in a project as large as Ethereum.
  • The other disadvantage is the challenge to implement it. This is the reason why it took so long for The Merge to happen, because the implementation of proof-of-stake mechanism is harder and there is a need for extensive testing and debugging.