What was the Merge?
"The Merge" referred to a shift from Ethereum's proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) validation system. Ethereum's core developers have pushed for this transition for many years in the hopes that a PoS model will make it easier to scale without sacrificing decentralization. Ethereum developers have also been vocal about PoS mitigating environmental impact.
Initially, Ethereum relied on crypto miners who would supply computing power to verify transactions. This initial PoW model was based on Bitcoin's consensus algorithm. Like Bitcoin, Ethereum miners used their computers to compete against each other to validate new blocks and collect crypto rewards.
In contrast, PoS requires a blockchain's validators to lock their cryptocurrency on-chain to earn a percentage of fees. A PoS algorithm selects who gets to validate each block and distributes rewards proportional to their stake. The more a person stakes, the greater chance they’ll validate more blocks.
Developers used the phrase "Merge" to describe the moment when the PoW chain fuses with the new PoS Beacon Chain. During the Merge, all the transaction data and dApps (decentralized applications) on the PoW Ethereum migrated to the new PoS chain. The Ethereum Foundation likened the Merge to swapping out a rocket ship’s old engine with a new one mid-flight.
What is the Beacon Chain?
The Ethereum Beacon Chain is the PoS chain that the original PoW chain "merged" into. Created at the end of 2020, Ethereum's Beacon Chain ran alongside the PoW chain, mirroring its transactions as developers got ready for the Merge.
When the Beacon Chain went live, the Ethereum Foundation allowed people to stake their ETH on the new blockchain to secure the network. Ethereum validators need to stake a minimum of 32 ETH, and they can’t withdraw their ETH until a future post-Merge upgrade called "Shanghai."
A major reason for releasing the Beacon Chain ahead of the Merge was to build a large validator pool. Before the Merge, Ethereum had roughly 430,000 validators on the Beacon Chain.
What's the purpose of the Merge?
Proponents of the Merge believe the Ethereum 2.0 upgrade is the first step in addressing the chain's scalability issues. While switching to PoS won't eliminate high gas fees or slow transaction speeds, it sets the stage for new solutions like "sharding."
The proof-of-stake consensus mechanism will help developers create parallel chains known as "shards" that can store pieces of transactional data from the main Ethereum chain. The hope is that this sharding technology will ramp up Ethereum's transactional throughput and reduce network fees.
Another reason Ethereum switched to PoS was to reduce its energy consumption. Environmentalists have long criticized PoW chains for their power use and CO2 emissions. After the Merge, Ethereum reduced its energy and pollution scores by about 99.95%.
What was the ETH 2.0 release date?
After years of delays, the Ethereum Merge went live on September 15, 2022, at 6:43 AM UTC. Most centralized crypto exchanges (CEXs) paused Ethereum withdrawals during this time. However, since the Ethereum Merge was successful, trading activity has resumed as usual.
What are common misconceptions about the Merge?
As news of the Merge began spreading on social media, it picked up many misconceptions. Here’s what many people think about the Ethereum Merge:
- Ethereum gas fees will go down: The Ethereum Merge won't impact network fees. While future innovations like sharding may cut Ethereum's gas prices, the move to PoS isn't enough to resolve this issue.
- Ethereum 2.0 can process 100,000 transactions per second (TPS): The only thing the Merge changed about transaction speed is that the average block time drops to 12 seconds from 13–14 seconds. Ethereum will need further upgrades to reach its goal of 100,000 TPS.
- People need to convert their ETH to the ETH 2.0 blockchain: If people hold ETH or other Ethereum-based assets, their tokens automatically migrate to the PoS chain during the Merge. Anyone that says people need to bridge their crypto from Ethereum 1.0 to Ethereum 2.0 is either misinformed or malicious.
- Everyone needs 32 ETH to stake on Ethereum: If people want to become an Ethereum validator, they need to stake at least 32 ETH. However, anyone can delegate below 32 ETH to a staking pool for crypto rewards. While delegators don't enjoy voting privileges, they also don't have the responsibility of maintaining an Ethereum node.
Are there downsides to the Merge?
Although many are optimistic about the Merge, some have critiqued Ethereum's move to PoS. Most notably, critics argue that Ethereum 2.0 will have a greater risk of centralization due to staking pool providers.
Platforms like Lido Finance and CEXs like Coinbase offer Ethereum staking pool services. These sites allow people to deposit less than 32 ETH and receive token rewards. Some worry that these large staking pools can use their voting power to dictate the future direction of the Ethereum blockchain.
There are also fears that the U.S. Securities and Exchange Commission (SEC) will deem ETH a security token. If this is the case, Ethereum will have to comply with SEC regulations.
What will happen to Ethereum's price post-Merge?
There's speculation surrounding how the Merge will impact the price of Ethereum's native cryptocurrency, ether (ETH). While it's impossible to predict the price action of any digital asset, the Ethereum 2.0 upgrade will decrease the daily issuance of ETH tokens.
Since there’ll no longer be mining rewards on the Ethereum blockchain, the Ethereum Foundation estimates staking rewards will hover at 1,600 ETH per day. Considering the daily mining rewards were about 13,000 ETH pre-Merge, that's a reduction of about 90%.
Also, thanks to the EIP-1559 upgrade, a portion of every transaction fee on Ethereum gets burned (i.e., taken out of circulation). If the total network activity on Ethereum rises over time, Ethereum's burn rate could exceed its daily issuance. Therefore, ETH could become a deflationary asset. Assuming the demand for Ethereum goes up, the decreased supply may lead to a price increase.
However, just because ETH's daily issuance went down post-Merge, it doesn't mean its price will automatically go up. Ethereum still has many scalability concerns, and there are competing layer-1 chains like Solana that can steal market share. Also, it's unclear how layer-2 scaling solutions like Polygon will impact the price of the native ETH token.
On the positive side, Ethereum's move to PoS might pique the interest of more institutional investors. Now that Ethereum is environment-friendly, it meets the Environmental, Social, and Governance (ESG) requirements many firms follow. It's also easier for big investors to earn a yield on ETH by staking it on-chain.
Since the Merge is relatively new, predicting an objective read on the future of Ethereum's price action can be challenging.
What happens after the Merge?
The Merge is the first update in a five-step plan to build a more scalable Ethereum. The following stages are as follows:
- The Surge: The first phase of post-Merge upgrades will focus on increasing the speed and efficiency on the Ethereum blockchain using layer-2 solutions and sharding technologies. Developers expect to start "the Surge" in 2023.
- The Verge: During the Verge, Ethereum will introduce a novel technology called "verkle trees," which help store large data pools using less computational space. Ethereum's co-founder Vitalik Buterin hopes verkle trees will enable more people to become validators, thus increasing the network's decentralization.
- The Purge: Next, Ethereum will "purge" any unnecessary historical data to clear up congestion and make it easier for more people to run a node. By eliminating this superfluous data, Ethereum's leaders hope to increase the chain's throughput to 100,000 TPS.
- The Splurge: Finally, Buterin named the final stage "the Splurge," which simply refers to all the "fun stuff" people can look forward to on Ethereum. This could include novel innovations in DeFi (decentralized finance), NFTs (non-fungible tokens), and GameFi.
The Ethereum proof-of-stake chain is live, but there are still many questions about what this change means for crypto. Supporters believe Ethereum 2.0 will make Web3 more accessible to users. However, some are worried about the influence large staking pools might have over blockchain governance.
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