The Ethereum Merge is set to take place on the 15th September 2022, with questions abound as to what it all means, this article will answer everything you need to know about 'the Merge'
The Merge is a major event occurring on the Ethereum Blockchain, where it will change from using Proof of Work to Proof of Stake.
It is called ‘the Merge’ because it involves the merging of two independent blockchains that are presently running in parallel. The current main Ethereum Blockchain runs entirely as a Proof of Work blockchain at present with the network being maintained by mining machines around the world consuming a large amount of energy.
The Beacon Chain is a new Ethereum Blockchain launched on the 1st December 2020, which was designed to do one thing different, to be a Proof of Stake Blockchain. Presently there are no transactions, no tokens and no DeFi apps on the Beacon Chain. It is an empty chain running a Proof of Stake consensus mechanism. The primary advantage of Proof of Stake block chain is the much greater energy efficiency and thus reducing the environmental impact of mining blocks to run a blockchain.
The merge will involve the main Ethereum Blockchain being merged with this special purpose built Beacon Chain blockchain and once merged, the main Ethereum blockchain Proof of Work validation will be replaced by a brand new Proof of Stake consensus mechanism.
The Merge has become hyped up over the last number of months and will have a big effect on the economics of Ethereum in a number of ways so here we explore all the changes it will produce and the problems that will remain with ethereum post merge.
There will be a reduction in Ethereum Issuance
Currently miners who are running the Proof of Work blockchain to provide security are issued Ethereum to compensate for the service they provide. After moving to Proof of Stake there will no longer be a need to issue large amounts of Ethereum to these miners to pay for security. The currently yearly issuance of Ethereum will reduce lower from its’ current rate of 4.3% which should be a good thing for the future price of Ethereum. Post merge ETH issuance is expected to drop by over 90%.
The Merge will reduce Energy Consumption of the Ethereum Network
There will be a big reduction in Ethereum energy consumption post merge to around 99.5% less than its current usage.
This is because Proof of Stake secures a blockchain with capital instead of running high energy requirement mining machines. Proof of Stake is secured by running a simple node that most home computers can run and the energy needed is comparable to basic computing usage like the stuff you are doing now to read this article. It is estimated the cost of running the Ethereum network will be around 2.6MWh per year making it one of the most environmentally friendly financial systems in the world.
Running a node will require 32 ETH
32 ETH will be required to stake and run a node to help secure the Proof of Stake blockchain.
The lower the amount of ETH staked required to run a node the more nodes are able to come online and while this is good for decentralisation, it acts as a constraint on scale, because the more nodes there are, the more total messaging there is between nodes.
32 ETH was chosen as an optimal amount to help get the correct balance between decentralisation and scale of the network.
This requirement may be reduced in the future with improved consumer hardware and messaging compression.
Ethereum will become a Yield producing asset
For those who stake their ETH on the new Ethereum Blockchain, they will receive a 5% interest rate in return for helping secure the network
The Merge will not lower Ethereum Transaction fees
One of the big myths surrounding the merge is that it will lower the sometimes extortionate fees on the network, with some users paying a US dollar equivalent of $120 a transaction at the height of the recent bull market.
This seems to have come about as this vision of lower transaction fees is scheduled to happen in another future version of Ethereum dubbed Ethereum 2.0 where Proof of Stake will have another feature known as Sharding enabled. Sharding would allow partitioning of the blockchain lowering transaction fees vastly.
Many people seem to have confused the Merge with Ethereum 2.0. At one point around 2020 it was thought moving to Proof of Stake and Sharding would come at the same time and the resultant reduction in transaction fees. This idea has stuck with many online articles and YouTubers reiterating the myth that transaction fees will lower with the merge. Sharding will lower Ethereum Gas fees but sadly won’t occur for many years as developers have realised the complexity of introducing sharding on and up and running network will take years to solve (a nice analogy is that you are trying to change the wings on an aeroplane mid-flight!).
A sharding system is already up and running on one of the newer Blockchains known as Kadena. Unfortunately this update won’t ship on Ethereum until 2024 at the earliest leaving it wide open to a loss of market share to blockchain competitors offering lower transaction fees like Kadena & Solana.
The Merge will not speed up transaction speeds on the Ethereum network
After the Merge the transaction speeds on the network will not speed up by any significant amount which remains a major problem. The average block time on Ethereum (how often a block is added to the Ethereum blockchain) is currently 13.6 seconds. After the Merge it gets marginally faster to 12 seconds.
The equals a 12% increase in transaction capacity but overall is negligible amount. For comparison, the average block time on Solana is currently 400ms, which is around 3 blocks per second. Clearly Ethereum has some catching up to do if the speed of the network is to compete with the newer block chains.
The price could drop post merge
There is a strong possibility the price of Ethereum could drop in the weeks and months post merge as the hype dies down. Overall the Merge will be a positive event for the Ethereum price in the longer term particularly as it will become more ESG friendly network for investors. There is a still a lot of work to be done for it to capture the efficiency of the likes of Solana but it does have first mover advantage in the world of Layer 1 blockchains and as a result remains the number two cryptocurrency by Market-cap second only to Bitcoin.