What is the Ethereum Merge: everything you need to know

Ethereum was created with the expectation that Proof-of-Work was temporary as the creators always planned to move to Proof-of-Stake. Given the undeniable success of Proof-of-Work as a consensus model for Bitcoin, Ethereum could have gone straight to PoW. At the same time, Ethereum’s complex Proof-of-Stake structure was being designed, tested, and debugged. Merge is the latest step in Ethereum’s strategy to completely abandon the PoW consensus mechanism and move to PoS one.

Understanding the Merge

The Merge is the first-ever precedent for transitioning an active network from Proof-of-Work to Proof-of-Stake. Before the merge, the matching of new blocks was provided by miners. After the Merge, this process will be provided by validators, i.e. Ethereum holders whose coins are locked in staking. The transition from PoW to PoS is the starting point of a new era for Ethereum.

What date is the Ethereum Merge? The Ether Merge successfully took place on September 15, 2022. But this is not the final step in Ethereum`s PoW to PoS transition. Next, we will see 4 more important steps, and the “movement” will stretch for several years. 

Let’s take a closer look at the further stages of the transition.

The Surge

The key process of this phase is sharding, which is the horizontal division of the blockchain into multiple pieces known as “shards”. There will be a total of 64 Shard Chains. Each shard will contain its transaction history, which will speed up and simplify the validation process. 

The Surge aims to further increase the scalability of the network through cheaper Layer 2 blockchains, making it easier to work with nodes in Ethereum.

According to Vitalik Buterin, right now, Ethereum can process about 15-20 transactions per second. Ethereum 2.0 will be able to process 100,000 transactions per second, i.e. the throughput will increase by more than 5,000 times.

The Verge

During this phase, developers will implement code fragmentation, gas cost changes, and data storage optimization. 

The implementation of Verkle trees will allow more data to be placed in the tree while using smaller proofs. Following the technical updates of this phase, users will be able to become validators of the network without having to store large amounts of data on their computers. Again, it is a big plus for scalability.

The Purge

The idea behind implementing The Purge is to reduce the amount of space that validators need to have on the hard disk. This can be accomplished by simplifying the protocol by purging old network history over time. This will ultimately reduce network congestion. 

The Splurge

The final phase of Ethereum’s transition to the Proof-of-Stake consensus mechanism will consist of small updates and tweaks aimed at making the entire Ethereum network run as smoothly as possible after the 4 previous updates (Merge, Surge, Verge, and Purge).

Motivation Behind the Ethereum Merge

The transition of the second largest blockchain with all the dApps and the DeFi ecosystem to a different algorithm is a complex multi-step process. The team has been preparing for this for seven years. The reasons why Ethereum needs to change the consensus level are the following:

• Low bandwidth. As the blockchain has grown in popularity, it has faced increasing complexity. It is now a huge ecosystem with tens of thousands of projects, transaction volume has exceeded a trillion, and the network is used by most DeFi projects and stablecoins. Yet Ethereum’s throughput remains at 15 transactions per second. Because of this, Ethereum has had problems more than once. PoS can significantly scale the network, increasing TPS by hundreds of thousands of times.
• High gas price and low transaction speed. Ethereum has significantly increased trading volumes, which puts a serious load on the network due to insufficient bandwidth. Because of this, absurd situations occur, when an ETH transfer worth a few US dollars requires a commission of more than $40 or even $60, depending on the workload of the miners. There is also the problem of maximal extractable value (MEV) when miners rearrange transactions in a blockchain as they want to increase their commission income. Firstly, this is unfair, and secondly, it slows down the network.
• The Proof-of-Work mechanism is very energy intensive. PoS will reduce power consumption by 96-99%, making it much more environmentally friendly. It does not require special expensive equipment, validators will only need to stack 32 ETH to be authorized to validate transactions, block issuing, and coins.
• ETH inflation vs deflation. The transition will fundamentally change the Ethereum tokenomics and slow down the annual inflation rate to less than 1%. Thus, ETH will become an asset with a value accumulation function, thanks to the reallocation of burn and issuance mechanisms. ETH emission will fall by 90% in the process.

How has the Ethereum Merge affected the crypto industry?

The network of the second largest cryptocurrency by market capitalization has seen one of the most important updates in the history of the blockchain industry, i.e. The Merge. While Ethereum is the star of the show when it comes to the Merge, it’s not necessarily the only crypto that could benefit. This has affected other altcoins as well.

According to experts, the successful The Merge will likely boost the price of all crypto assets, especially Ethereum and other projects associated with it. Bitcoin prices could also rise as investors in general gain more confidence in the asset class.

As noted by analyst Evin Cheikosman, who wrote a piece on the Ethereum transition for the World Economic Forum (WEF), one of the main consequences of The Merge will be changes in energy consumption. Tens of thousands of Web3 projects are based on the Ethereum blockchain. Over 70 million wallets are tied to the network, and the total capitalization of the cryptocurrency exceeds $274 billion as of December 2023. And all of this until recently was carried on the shoulders of the mining industry, a sphere that is very voracious in terms of electricity. With the transition of Ethereum to the PoS algorithm, the situation is changing dramatically. According to preliminary estimates, the network’s power consumption has been reduced by 96.3%.

The successful transition of the world’s second cryptocurrency to PoS will have a direct impact on market regulation. This opinion is shared by many financial analysts, including experts from Citigroup and JP Morgan. Developers also remind that the Merge should not be perceived as a one-time event. Although the transition has officially taken place, work is in full swing inside the network. The Ethereum team has outlined a roadmap and will be developing aspects such as security, decentralization, and speed of operation.

The Pros of the Ethereum Merge

Ethereum is increasingly popular among crypto users every year. To continue growing at a rapid pace, such an influential coin needs to meet global needs for security, speed, and sustainability. That’s why by moving to Proof-of-Stake, the Ethereum team will:

• solve the scalability problem. Participating in maintaining the network will be more affordable, thanks to PoS. All validators need to do is stake 32 ETH. Although this is quite a large sum, participants no longer have to think about where to place equipment and how to pay huge electricity bills. The next two points follow from the first.
• reduce congestion and increase blockchain throughput by solving the scalability problem. 
• make Ethereum more environmentally friendly.
• enable institutional acceptance of Ether (including by eliminating the energy costs of mining);
• provide increased security for less money.

The Ethereum founder claims that the Proof-of-Stake mechanism is much more secure and efficient compared to the previous PoW model. Due to the increased threshold of entry into the network (remember, it is 32 ETH), many attackers simply will not be able to enter it, and therefore, it will be much more difficult to attack.

The Cons of the Ethereum Merge

Analysts do not rule out that the Merge may hurt tokens on the Ethereum network. Moreover, network downtime cannot be ruled out because not all protocols will be switched from Proof-of-Work to Proof-of-Stake.

Another huge group of opponents of the current modernization of Ethereum are the miners, who no longer have a place in the Ethereum system. However, the miners can continue to operate and there is a possibility that we will see ETHPoW (another ETH hardfork). How successful the new fork will be is still unclear. Some top platforms, such as NFT marketplace OpenSea and exchange Uniswap, have already expressed their readiness to support the only official version of ETH, the updated Ethereum on PoS.

When talking about the disadvantages of Merge, experts voiced the fear that the update is rather double-edged. It can conversely reduce the security of the Ethereum blockchain and lead to its further centralization, as large market players, including various organizations and companies, will participate in the staking.

It is believed that after the transition to PoS, it will become easier for governments around the world to control Ethereum at the protocol level and they will be able to impose restrictions and rules on large organizations that hold large amounts of ETH. As a result, this could lead to censorship of Ether transactions.

Potential Future Developments Post Ethereum Merge

The Merge is the foundation of Ethereum’s further development, including in the context of blockchain scalability. The hardfork made the network energy efficient and positively affected the cryptocurrency’s supply, but it did not solve the existing problems of the ecosystem by itself.

Analyst Ben Lilly of Jarvis Labs believes that the full benefit of the upgrade’s advantages will become apparent over time as the fervor around the Merge subsides. For example, it will become deflationary over time, and staking will provide investors with a guaranteed return on the escrow of their assets.

The Merge will undoubtedly have a big impact on Ethereum’s development in the future. The roadmap for the project’s development envisages a number of large-scale updates. In particular, the developers plan to fully integrate zero-disclosure-proof technology and turn Ethereum into a quantum-resilient network.  But beyond that, Ether’s transition to a new model is significant for the entire crypto industry as a whole.

FAQ

When is the Ethereum Merge?

In December 2020, the developers launched the Beacon Chain signaling network. This PoS-based blockchain operated for almost two years in parallel with the Ethereum mainnet, which relied on Proof-of-Work. However, it did not see any economic activity other than ETH staking. On September 15, 2022, The Merge update was activated on the Ethereum network. Under The Merge, the execution (Mainnet) and consensus (Beacon Chain) layers merged. Validators changed miners, and the project finally switched to Proof-of-Stake.

Will the Ethereum Merge result in a new token?

You do not have to do anything as an ETH owner to prepare your wallet or your tokens for the Merge. The Merge will mean no change for your tokens, which will stay on the main chain. The ETH holders who are interested only in holding, trading, or using their ETH on decentralized applications (Dapps) do not have to actively do anything to prepare for the Merge. For ETH holders interested in staking, you can stake your ETH on the PoS consensus layer to earn rewards.

Some miners have proposed a new hard fork to the Ethereum mainnet.​​ This group of miners, led by a crypto investor and miner Charles Guo, plans to continue running PoW on a duplicate of the Ethereum network and launch a new token called ETHW. However,  the majority of the Ethereum community supports the move to PoS and will not support the fork. 

Will the Ethereum Merge eliminate mining on the Ethereum network?

As a result of the transition from Proof-of-Work to Proof-of-Stake, blockchain security is now ensured not by miners, but by validators – users who have deposited and locked their share of coins (staking). The complexity and hash rate of Ethereum mining has dropped to zero. This means that miners are no longer mining the largest altcoin by capitalization. Despite the Ethereum community’s abandonment of mining, its members have kept their equipment – in particular, video cards and ASIC miners. In this regard, some of them preferred to engage in mining other cryptocurrencies. Mostly, ether miners moved to Ravencoin, Flux, Ethereum Classic, and Ergo networks.

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