The Ethereum Merge: Game changer of the decade

Introduction

The Ethereum network is undergoing an important upgrade that will bring the world's second-largest blockchain closer to its long-term goal of scaling it for a billion users. The mainnet merge has been in the works since 2017 when development was first announced.

The Merge is a highly anticipated event in the cryptocurrency space, and it's expected to have a major impact on the Ethereum network and the technologies that are built on top of it. In this article, we'll explain what The Merge is, why it's happening, and what it could mean for the future of Ethereum.

What is “the Merge''?

“The Merge” is a terminology provided to shift the consensus mechanism from proof of work to proof of stake model by combining the beacon chain with the existing execution layer of Ethereum (the mainnet). Proof of work and proof of stake are two different methods of securing a blockchain. The main difference between the two is that proof of work requires a miner to solve a complex problem before they can add a new block to their chain while proof of stake requires users to lock up their coins in order to be able to participate in the network.

To understand this, it is critical to know what a beacon chain is!

Beacon chain, the backbone of the Ethereum merge.

Beacon chain, launched in December 2020, is a special-purpose blockchain which uses the Proof of Stake consensus mechanism and runs parallel to the Ethereum blockchain. Being an empty chain, there are no transactions, tokens or DeFi apps on the beacon chain.

It can merge with the Ethereum blockchain and replace Ethereum’s PoW mechanism, without having to worry about any other variables. As a result of this merger, Ethereum's PoW validation mechanism will be replaced with a new PoS consensus mechanism.

The Merge marks the official switch to the Beacon Chain as the block production engine. The mining process will no longer be the means of generating valid blocks. Instead, proof-of-stake validators take on this role, determining the validity of all transactions and proposing blocks. As a result, there is no need for energy-intensive mining and instead ETH is staked to secure the network. The Ethereum vision is being realized in a truly exciting way - more scalability, security, and sustainability.

Source: ethereum.org

Why is it happening?

The main purpose of this merge is to lower transaction costs by allowing all transactions that are currently pending on the old chain to be placed on the new one. However, there are other reasons as well:

The merge can improve the efficiency of Ethereum’s codebase by moving from an old version of Solidity (the programming language used when writing smart contracts) to a new version that has been optimized and improved. As a result, the code will be made more secure and efficient, and its energy consumption will be optimized.

Furthermore, merging the two chains together can create more room for future development by removing unnecessary code that was not needed in either chain anymore.

ETH PoS energy consumption comparison. Source: Ethereum.org

What’s the hype all about?

Ethereum is the first blockchain ever to undergo such a massive change. Being by far the largest and most robust economic ecosystem in crypto, the Merge is considered one of the biggest events in crypto history since the genesis of Bitcoin itself.

Despite the bear market, there is a lot of buzz around the Merge, particularly after Ethereum developers confirmed it would take place around the week of September 19. In a nutshell, it is expected that we’ll see a revamped and improved Ethereum that is:

• More environmentally friendly;
• Potentially more scalable, and
• Potentially a deflationary asset.

What would the merge do?

As a result of The Merge, Ethereum will undergo a few changes. Among these changes will be a new security model for the network. As Ethereum moves to proof of stake, miners with powerful computers will no longer be needed to solve complex computations. Instead, participants stake ETH tokens with validators to secure the network. Staked ETH will now serve as the security for the chain. Following The Merge, transactions on Ethereum will be ordered by validators, not miners. These entities will determine the order of slots (the new term for blocks).

Eth 2.0, A buzzword deprecated!

‘ETH 2.0’, now renamed as “Ethereum upgrades” refers to the future version of Ethereum that will have PoS and sharding enabled. By late 2021, core developers had stopped using the term, preferring 'execution layer' and 'consensus layer' instead. That means;

Eth1 → execution layer

Eth2 → consensus layer

Execution layer + consensus layer = Ethereum

The word has been deprecated as it created misleading mental models and created an inaccurate representation of Ethereum upgrades. Additionally, the terminology was being used by malicious actors to trick users into swapping their ETH for 'ETH2' tokens or migrating their ETH before Eth2 upgrade. As a clarification mechanism, the terminology was updated to eliminate this scam vector.

Source: blog.ethereum

Can Ethereum become deflationary after the merge?

One of the most pertinent questions facing the cryptocurrency industry right now is whether or not Ethereum (ETH) will become deflationary post-merge.

The term "deflation" refers to when there are fewer units on hand than before, and this can happen for two reasons: either because more units were created than originally intended or because fewer units were spent by users than expected. Deflation can also occur if no new transactions are made for a period of time, which means that people may not be spending their money as much as they used to or if miners stop mining new blocks at regular intervals—these outcomes lead to less inflation per unit over time.

The Merge will result in a reduction of yearly ETH issuance from 4.3% to 0.43%. Because of its fundamental efficiency improvements, PoS is an excellent consensus mechanism. The PoS protocol is designed to provide the highest level of blockchain security at the lowest possible cost. As a result, security costs are reduced, decreasing the amount of ETH that must be issued to cover them.

To clarify further, let's understand what "The Triple Halving" is about.

The Triple Halving

In the community, "the Triple Halving" refers to the large drop in ETH issuance that will occur once "The Merge '' occurs and Ethereum becomes a proof-of-stake (PoS) network. In other words, "The Triple Halving'' is a play on Bitcoin's "Halving". It is known that Bitcoin halves its issuance rate every 4 years. Similarly, Ethereum will see its issuance rate reduced by roughly 90% at the time of "The Merge'' which is equivalent to *3 Bitcoin "Halvings" happening at once! Ethereum will experience an issuance reduction in an instant which will take an additional 12 years to be matched on Bitcoin's network.

According to the current Proof-of-Work (PoW) model, Ethereum issues roughly 13,500 ETH per day, or 4.3% of total ETH supply every year. However, the PoS issuance model is determined by how much ETH is actively staked on the network. According to current projections, "The Merge" will result in an issuance rate of 0.3% to 0.4%.

Deflationary projection of ethereum post-merge. Source: Into The Block

Popular Misconceptions

• The Merge would lower gas fees and improve the scalability

Misconceptions have arisen due to the confusion between Ethereum 2.0 and The Merge. These two updates, PoS and Sharding, were once thought to be coming simultaneously in Ethereum's history. In the course of R&D progression, the team realized they could compartmentalize the updates and ship them separately.

As far as "The Merge" is concerned, it is limited to upgrading Ethereum's consensus mechanism. As a result, Ethereum's current user experience will not be impacted in any way. Future updates to the Ethereum roadmap, such as sharding, will directly improve gas prices and scalability. The Ethereum community currently considers sharding less important than "The Merge" - which eliminates wasteful proof-of-work (PoW) energy inefficiency.

• There will be downtime due to the Merge.

Several people believe that the Merge will cause downtime for the chain. This is completely false. A huge amount of effort has been put into making sure the Merge to Proof of Stake proceeds smoothly, without affecting users at all.

• You can withdraw staked ETH once the merge occurs.

Right now, there are 433,916 Ethereum validators on the Beacon chain.

Withdrawals are not yet enabled with The Merge. The following Shanghai upgrade will enable stake withdrawals. The Beacon Chain will still lock ETH staked, staking rewards awarded to date, and newly issued ETH immediately after The Merge.

It is expected that withdrawals will not be possible until the Shanghai upgrade, which is the next major upgrade following the merge. This means that ETH will remain locked and illiquid for a minimum of 6-12 months following The Merge.

Conclusion

Once “The Merge” is completed, Ethereum’s Proof-of-work consensus layer will be removed, and a Proof-of-stake consensus layer will be used to achieve consensus on all future blocks on the Ethereum blockchain. The transition won’t affect the data layer of the network, which means, none of the transaction data on the Ethereum network will be lost. Although it would put most miners out of work, they might have to shift towards proof of chain networks such as “Ethereum Classic”.

"The Merge" is not the launch of a newly-released Ethereum version, but an important upgrade to the consensus layer - bringing Ethereum in line with the original vision.