The Gist — The Ethereum Merge 🐼

With the announcement of The Mainnet Merge date (September 15th or 16th!) I wanted to take this opportunity to cover some of the popular talking points related to The Merge. I won’t get into the technical details in the post. I aim to give you a high-level idea of what’s happening.

Contents

• The Merge... What is it?
• What it isn't
• Why Proof of Stake
• Tokenomics
• Timeline
• What's Next

The Merge… What is it?

If you follow the blockchain space at all, there is a good chance that you have heard of The Merge. The Merge is a term that is used to describe arguably the biggest update to the Ethereum network to date. Ethereum.org defines it as follows:

The Merge represents the joining of the existing execution layer of Ethereum (the Mainnet we use today) with its new proof-of-stake consensus layer, the Beacon Chain.

Essentially, this update is the transition from the proof-of-work (PoW) consensus algorithm to a consensus algorithm called proof-of-stake (PoS). A consensus algorithm is a method in which the nodes that are running the network agree on the current state of the data on the network (i.e. does everyone agree that person A sent person B x number of Ether?).

PoW and PoS are similar in the sense that they require the operator to provide capital to validate and run the network. For example, a miner in PoW would use their capital to purchase expensive hardware to run the necessary software. Whereas in PoS, a validator will use capital to purchase Ether, which can be used as a “stake” to be granted the ability to run the necessary software. This is sometimes generalised as proof of capital.

The transition to PoS eliminates the need to run energy-intensive mining hardware to validate transactions. Instead, it secures the network using staked ETH. Some big wins will come from the transition. It is estimated that energy consumption will drop by ~99.8% post-merge. In addition to the sustainability improvements, there will also be some security, scalability and tokenomics improvements.

What it isn’t

Before going any further, I want to cover some common misconceptions about the update. For more info, ethereum.org has a great section on its website about misconceptions. I will summarize some that I have personally heard many times below.

This is Eth2

• Mostly false. The Merge is one of several updates that will be made to Ethereum over the next couple of years. These updates were originally branded as Eth2. However, that led to confusion in the community, so each update has been given its own name. Check out this link for more info.

There is a new coin

• This is false. There is not much to say here. If anyone is telling you there is a new ETH coin, they either don’t know what they are talking about or they are scamming you. All your existing ETH should continue to work as is.

Lower fees

• This is false. Unfortunately, The Merge will not have an effect on gas fees. However, this was never a goal of The Merge and is just a misunderstanding by those who have been pushing this narrative. Fortunately, though, the current rollup-centric road map for scaling Ethereum does improve fees. Optimistic Rollup layer 2’s are already live and available for use. Arbitrum and Optimism are two implementations of optimistic rollups worth checking out.

Faster transaction time

• This is mostly false. How new blocks are published differs between proof-of-stake and proof-of-work. However, the amount of time it takes to publish a new block is not different enough to provide a significant change in transactions per second. Similar to the above point, the rollup-centric road map is also actively addressing this issue.

Why Proof of Stake

I already mentioned the environmental benefits of PoS that the energy consumption of the network will drop by ~99.8%. That isn’t the only benefit, though. A couple of years ago, Vitalik Buterin wrote a great article on Why Proof of Stake. I’ll cover the three main points he made below.

Higher security

It would take 5–20x more capital to perform a 51% attack on Ethereum PoS vs Ethereum PoW. The reason for this is that there is more economic efficiency with PoS, which drastically increases the amount of money needed to attack the network. I won’t show the exact math here but check out Vitalik’s article I linked above for more details.

Better attack recovery

In a PoW system, if the chain suffers from a 51% attack, there isn’t much one can do. The miners executing the attack exist outside of the system. So unless there is some sort of physical intervention, there is nothing to be done. Alternatively, with Proof of Stake, the ‘staked’ capital all exists within the system. If someone attacks, the attacker can be force-exited, and their stake can be slashed or deleted.

More Decentralized

To become a successful miner in PoW, you must invest millions of dollars. This could include buying hardware, property to keep the hardware, energy costs to run the equipment, etc. This also allows wealthy miners to compound their investments through economies of scale. For example, one could take advantage of cheaper GPUs because of a bulk order discount. This is a benefit that a non-wealthy miner might not have access to.

On the flip side PoS doesn’t require any special equipment for someone to become a validator and the PoW economies of scale doesn’t exist. Which instantly makes it more accessible to the public. Also, it only takes 32 ETH to become a validator. Yes, this is still a lot but is much less expensive when compared to the millions needed to run a successful PoW mining farm. Also, individuals could stake for less by joining decentralized staking pools like Rocket Pool. Overall, by making becoming a validator more accessible to more people, it is making the network more decentralised.

Tokenomics: Will this affect the price?

I have no idea how The Merge will affect the price of ETH. However, I do want to cover some big changes that may improve the tokenomics of Ethereum. This has led to people making the case for price movement leading up to and after The Merge. It is important to make clear though that no one knows for sure how the price will respond to this event.

Tokenomics (combining “token” and “economics”) is a term often used to describe elements of a cryptocurrency that make the cryptocurrency valuable.

Three main changes come with The Merge that could improve Ethereum's tokenomics.

1. Reduced ETH issuance

As mentioned above, the transition to proof-of-stake means that validators no longer need to run expensive equipment to run the network. So the network can decrease the distribution of ETH that was used to incentivise people to run the network.

It’s estimated that the distribution of ETH will decrease from 4.3% annually to just 0.4%. For reference, pre-merge around 13k ETH is distributed to miners per day. Post-merge, the distribution to stakers will be about ten times less than that. That is a significant amount of sell pressure that will be removed from the market.

2. Burning of ETH with EIP-1559

EIP-1559 went live in August of 2021. This update introduced a requirement to burn part of the fee that is paid for every transaction on Ethereum. This means that with every transaction, the network is permanently taking some ETH out of circulation.

If you want to learn more about why this EIP (Ethereum Improvement Proposal) was implemented, I recommend checking out this interview with Tim Roughgarden.

3. Staked ETH

The Beacon chain, which was shipped in December 2020, first introduced staking on Ethereum. Since its launch, the Beacon chain has existed separately from the Ethereum Mainnet, and individuals have been able to stake their Ether and earn rewards. The Merge will bring Mainnet into a fully proof-of-stake system, eliminating the need for mining.

Staking enables you to put up a stake of ETH in return for access to run software that processes transactions for the network. Individuals are rewarded for participating in this process. There is currently 13 million ether staked on the Beacon Chain. The thing is, this ether can not be unstaked until an update that will likely come months after The Merge. So this is all ETH that can neither be bought nor sold for the foreseeable future.

Tripple Halving

These three factors above have been coined as the Triple Having. All three combined are thought to put “deflationary pressure” on the network. This essentially means the circulating supply of ETH is decreasing, which can in turn cause the price to go up. The term is meant to be similar to the Bitcoin Halving, which happens every four years and cuts Bitcoin issuance in half. It is thought that the deflationary pressure described above could have the equivalent effect of three Bitcoin halvings, hence the name “Triple Halving”.

These screenshots from Ultra Sound Money do a good job of visualising the burn, supply growth, and issuance that are discussed above, pre-merge and post-merge.

Pre-merge (source: ultrasound.money)

Post-merge (source: ultrasound.money)

Timeline… Wen Merge?

The transition to proof-of-stake has been ongoing since the creation of Ethereum. Teams have been working through just this checklist since July of 2021. That list only scratches the surface of the work that has gone into the merge. While launch dates have been moving targets over the years because of the development work and testing needed, we are finally at the point where a date has been set for The Merge! The official Merge on Mainnet Ethereum will happen on September 15th or 16th 2022, depending on when the TTD (total terminal difficulty) is hit. Here are some of the dates below that have led up to the official launch!

• October 2020 — ETH deposit contract deployed
• December 2020 — The Beacon Chain was shipped. This brought staking to Ethereum and laid the groundwork for future updates.
• August 2021 — Ethereum London Hard fork went live, implementing EIP-1559. While this doesn’t directly impact The Merge, it is often credited for improving the tokenomics of Ethereum and will contribute to making Ethereum deflationary post Merge.
• December 2021 — Kintsugi testnet merged. This was the first long-lived testnet to go through the merge.
• March 2022 — Kiln testnet merge.
• June 2022 — Ropsten testnet merged successfully.
• July 2022 — Sepolia testnet merged successfully
• August 2022 — Goerli testnet was successfully merged. Goerli was the last testnet to merge before Mainnet. This opened the door to setting the official Mainnet merge date.
• 🔥🐼September 15th/16th 2022 — THE MAINNET MERGE🐼🔥

What’s Next

As mentioned earlier, The Merge is one of a series of upgrades. The remaining upgrades are called the “surge”, “verge”, “purge”, and “splurge.” These are a key part of Ethereum’s scaling, cleanup, and evolution. Vitalik Buterin gave a great talk at the Ethereum Community Conference recently, where he discussed these future developments.