ResearchSep 14, 2022
Chain Insights — The Ethereum Merge Explained
What is Happening With the Ethereum Blockchain?
The day that has been highly anticipated in the crypto community is almost here, the launch of ETH 2.0, or as many know it, the Merge. Ethereum is the second largest blockchain network after Bitcoin, and is moving from its Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS). Since its inception, Ethereum has required computer hardware systems to mine and earn rewards by solving cryptographic algorithms under the PoW protocol. Since the initial launch of the Beacon Chain in late 2020, this network runs simultaneously with the Ethereum network, and requires a PoS protocol, meaning users must stake (lock in) their own cryptocurrencies in smart contracts to earn rewards when the Merge goes live. The Beacon Chain is sometimes referred to as “spine that supports Eth 2.0 system”. The Beacon Chain is the main controller of the Ethereum PoS network, and is in charge of managing the PoS protocol and coordinating parallel chains (also known as shards). It will become fully operational as the Merge is set to be complete. To learn more about the pros and cons of PoW and PoS, refer to our previous article which breaks down each consensus mechanism.
What This Means for Ethereum
After a slew of delays, the Ethereum Merge is set to go live sometime around September 15, 2022. After Eth2.0 goes live, there will be a number of upgrades made to the network, as a direct effect of migrating from PoW to PoS. When asked the reasoning behind the Merge, Vitalik Buterin, Co-founder of Ethereum, responded, “Because it [PoS] is more secure, less energy-intensive, and better for implementing new scaling solutions. While it has always been the plan to transition to proof-of-stake, it is also more complex than proof-of-work, and refining the mechanism has taken years of research and development.”
The Merge is set to have a 99.9% reduction in energy consumption by node validators. It will also make ETH a more deflationary asset, as there are currently 13,000 Ether mined per day. After the Merge is live, however, there will be 1,600 Ether rewarded per day, which is a 90% reduction, slowing down Ether’s inflationary growth. The Ethereum Foundation also anticipates faster transaction confirmations, and the ability to add more scaling solutions to the network. Currently, Ethereum is home to thousands of dApps (decentralized applications), and can only process 15 transactions per second, which increases gas fees (transaction fees) on the network. After the Merge, Ethereum would theoretically be capable of handling thousands of transactions per second, reducing network congestion.
What Will Happen to ETH Miners?
After the Merge is complete, Ethereum Miners will be unable to mine new blocks on the network. Many miners will stop mining and instead “stake” Ether in order to earn rewards on the PoS network. Individuals who wish to keep using their mining hardware will need to switch to another proof-of-work network. Following the Ethereum Merge, some miners intend to create a “forked” version of the proof-of-work blockchain, which is essentially a clone of the blockchain that still uses the old miner-friendly system. It is unclear whether these chains will gain traction and become profitable for miners in the long haul. The difficulty level on Ethereum’s PoW network will increase to the point where mining new blocks will be virtually impossible after the Merge.
How Can You Stake Ether?
To participate as a validator and stake Ether, a user must deposit 32 ETH into the deposit contract and run three separate pieces of software: an execution client, a consensus client, and a validator on the Ethereum network. As a validator, users will be responsible for storing data, processing transactions, and adding new blocks to the blockchain. Users will help keep the network safe, and earn Ether in the process. For those unwilling to stake that much ETH or feel uncomfortable about it, there are several alternative options. One of the most popular methods is “pooled staking”, which enables users to stake any amount of ETH, and earn fractionalized rewards. This will be carried out by third parties, not the Ethereum network, so apply this method with caution. The same can be said for centralized exchanges offering rewards on staked Ether.
Will The Merge Lower Gas Fees on the Network?
As many users hoped for lower gas fees on the Ethereum network following the Merge, the Ethereum Foundation announced that gas fees will remain the same, even after the PoS upgrade is complete.
Will the Price of Ether Go Up?
Although this is hotly debated and speculated across investors around the world, there is no direct proof that the price of Ether will skyrocket after the Merge. Some believe the effects of the Merge are already priced in, while others think there will be no significant change at all.
Experts feel divided about where the price of ETH is heading, and it depends ultimately on the success of the Merge in the coming months. With any software upgrade at this scale, Eth2.0 can easily be susceptible to bugs or technical issues, which will have an impact on the Crypto industry as a whole.
Will ETH2.0 Completely Replace ETH?
No, it is not accurate to think of ETH2.0 as a separate blockchain. Ether will remain the sole cryptocurrency native to the Ethereum Blockchain. The Merge simply represents the new PoS upgrade that will join Ethereum’s mainnet. Exchanges such as Coinbase and Kraken list “Ethereum 2 (ETH2)”, as an asset that can be staked.
Will Transaction Speeds Increase?
Ever so slightly. The Ethereum Foundation announced that transaction speeds on the Layer 1 network will remain relatively the same. Layer 2’s are secondary protocols that are built on top of an existing blockchain network to try and solve transaction speed and scaling difficulties for Layer 1’s, such as Bitcoin and Ethereum.
How Will The Merge Effect Building on EVM-Compatible Blockchains?
Decentralized Applications and projects built on the Ethereum blockchain or other EVM-compatible blockchains won’t be affected directly by the Merge. Instead, the Ethereum Foundation warns that the upgrades following the Merge will require developers to make some tweaks to their existing software. Developers and builders who are seeking secure solutions to manage their blockchain’s network infrastructure can utilize Chain Cloud. The software enables developers to manage and deploy nodes instantly through a user-friendly dashboard. Chain Cloud users will have access to 24/7 support teams that can assist with any questions or concerns following the Merge.
Will You Have to Do Anything After the Merge?
No, the Merge is scheduled to occur immediately after the final PoW block on the Ethereum network is mined. With the issuance of the first PoS block, the network will continue to operate from that point forward. Ethereum users will not need to take action while the upgrade to PoS is in effect.
For existing ETH holders, there is nothing you should do if you are holding, trading, or using ETH on apps. Your ETH balance should remain the same after the Merge, and you can resume your regular activities as if nothing has changed.
To ensure communication with the latest version of the network, Ethereum software providers and node operators (the computers that run the Ethereum network) will need to update their software following the Merge.
Stay Alert for Rising Scams and Phishing Attacks
As mentioned earlier, “ETH 2” will be a version of Ether available to be staked on exchanges, but not a new cryptocurrency. Scammers will take advantage of this confusion at full force, and put ETH holders at risk for scams. Malicious attackers will use tactics to try and get users to swap out their current ETH for “ETH 2”, and ultimately steal the user’s Ether. Users in the space have remained vigilant against scams, but it is still important to address this to more novice users.
On Crypto Twitter, there has been a rapid increase in verified profiles impersonating Vitalik Buterin, and offering phony giveaways in light of the Merge. Twitter is plagued with bots, used to impersonate big names in the industry, such as Binance CEO Changpeng “CZ” Zhao.
Be sure to avoid clicking any suspicious links and giving up your seed phrase, as we are closing in on the Merge. For more information on how to keep your funds safe, visit: https://ethereum.org/en/security/.
DISCLAIMER: NOT FINANCIAL OR INVESTMENT ADVICE
The information provided in this article does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website’s content as such. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.
Chain is a blockchain infrastructure solution company that has been on a mission to enable a smarter and more connected economy since 2014. Chain offers builders in the Web3 industry services that help streamline the process of developing, and maintaining their blockchain infrastructures. Chain implements a SaaS model for its products that addresses the complexities of overall blockchain management. Chain offers a variety of products such as Ledger, Cloud, and NFTs as a service. Companies who choose to utilize Chain’s services will be able to free up resources for developers and cut costs so that clients can focus on their own products and customer experience. Learn more: https://chain.com.
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