What is the Ethereum Merge?

There is a sense of excitement within the Ethereum community as the project works on transitioning from the proof-of-work (PoW) to the proof-of-stake (PoS) consensus mechanism to aid with confirming transaction blocks. The process has been dubbed "the Merge" and should address several issues such as scaling and energy-efficiency. For example, the annual energy consumption of Ethereum has soared with the rise of decentralized apps (dapps) to reach over 44.5 TWh per year, which is about the same energy consumption as major financial centers like Hong Kong and Singapore.

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What is the Ethereum Merge?

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To address the problem, an Ethereum 2.0 proposal was put forward, which addressed the scalability trilemma and outlined the future of the network. The two major upgrades of ETH 2.0, proof-of-stake consensus and sharding, promise to deliver fast transaction times with low network costs without sacrificing scalability, security, or decentralization. The Merge is Phase 0 of the rollout of the Ethereum 2.0 improvements set for this year.

Phase 0 (The Merge) – Proof-of-Stake Beacon Chain, a more efficient and fair transaction block consensus mechanism.

Phase 1 – Sharding to increase scalability and throughput by a factor of hundreds.

Phase 2 – dApp migration to ETH 2.0 shard chains.

In the first phase (0), the Merge will make the Ethereum blockchain network more environmentally sustainable, secure, and scalable (3S's). This means a more elegant PoS algorithm that can run from your Raspberry Pi and any other portable computing device will replace the monstrously power-hungry mining machines with high hardware and electricity costs.

Remaining Competitive

Over the past four years, many new blockchains have launched and leapfrogged Ethereum in implementing some or all the features named above, along with zero-knowledge proofs and other layer 1 and layer 2 scalability solutions.

To remain competitive, Ethereum knows it has to address its existing issues. The multi-year rollout approach ensures that the network that holds billions of transactions does not get disrupted. It is a highly complex process that has been compared to changing a plane's engine mid-air.

In December 2020, the Beacon Chain went live as a fully independent PoS consensus layer running parallel to the Ethereum mainnet. The Kiln Testnet Merge then went live on March 15, 2022, with a complete transition initially set for Q2 of this year.

Despite the enthusiasm toward the Merge, the Ethereum community will have to wait a little longer before implementation. According to Tim Beiko, an Ethereum core developer, the launch might not be in Q2 as predicted earlier, but much later within the year.

All in all, "The Merge" is expected to replace PoW with the more energy-efficient PoS consensus layer, the Beacon Chain. This means transaction blocks will no longer be confirmed by solving computationally intensive puzzles. Each validator node will stake 32 ETH and receive rewards for securely confirming blocks. Once the Merge takes place, proponents of Ethereum expect the network to become the most used, most powerful, and most energy-efficient blockchain. The energy used to confirm blocks on the blockchain is expected to fall by 99.5%. So far, the transition is on track to happen without transaction loss or downtime.

What the Merge Will Not Do?

The primary purpose of the Merge is to upgrade the consensus mechanism with the significantly more energy-efficient PoS and deliver the 3S's. The upgrade will have no direct impact on the many dApps running on the Ethereum blockchain, which occupies about 75% of the total market share. It will not lower the high transaction fees immediately.

Let us bust a few myths circulating ahead of the Merge.

Lowering gas fees – unfortunately, the Merge will not lower your DeFi, NFT, and other transaction costs on the Ethereum chain, since it is only related to the consensus mechanism securing the network. However, the implementation does prepare the path for the future upgrade to sharding that will lower gas fees.

Stakers will require 32 ETH to participate in the new PoS protocol – each full node will be required to stake 32 ETH to operate in the PoS network. However, validators can participate in validator pools and commit fewer amounts to participate in running a validator node through services such as RockerPool.

There will be a new ETH 2 token minted – this cannot be further from the truth. The network is only undergoing an upgrade, so there is no need for a new token.

The Triple Halvening – Towards a Deflationary Currency.

The Merge is expected to cause a significant change in the supply of ETH in the short term. Once the Merge takes place, the issuance rate of Ethereum will be based on the amount of ETH actively staked. As a result, an immediate ETH issuance reduction of about 90% from the current annual issue of about 4.3% to 0.03-0.04% of the total ETH supply is expected, which reduces the supply by about 3 times compared to the rate of Bitcoin after every four years.

A second deflationary headwind will be the implementation of EIP-1559, which replaces user bidding with an automated bidding system and the burning of all transaction fees, thereby reducing the ETH supply.