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The Ethereum Merge is only a couple of months away.
Over the last few weeks, I have read and heard a lot of misconceptions about the merge: some people believe it is going to reduce gas fees, some people believe it is going to unlock all the staked ethereum all at once … but none of these things are going to happen.
So I decided to write this article to describe what exactly is going to happen and what effects it will have on the Ethereum protocol.
The merge is the change of consensus mechanism for the Ethereum protocol: it is going to move from Proof-of-Work to Proof-of-Stake.
But let’s dive a little deeper to understand what exactly is going to happen and the implications of such a change.
The merge is the result of many years of research and development from the Ethereum ecosystem. Proof-of-Stake has actually been a recurring topic since the early days of Ethereum: Vitalik Buterin spoke about it when he first published his whitepaper back in 2014. Since then, research about Proof-of-Stake has gone through a lot of different designs and iterations which eventually lead to the launch of the Beacon Chain on Dec 1st 2020.
The Beacon Chain has been the Proof-of-Stake network that has lived alongside the Proof-of-Work network and currently has over 10 million ethereum staked and more than 300,000 validators.
When the merge occurs, we will see the current Ethereum Mainnet “merging” with the Beacon Chain Proof-of-Stake system. This will mark the end of Proof-of-Work for Ethereum, and the full transition to Proof-of-Stake.
The merge to PoS might be one of the most bullish catalysts the Ethereum network has ever seen. This is the biggest upgrade in Ethereum history and will probably be the biggest upgrade that will ever happen to the network, especially in terms of its implications.
Reduction of the network issuance: going from PoW to PoS will reduce the issuance of new ETH by about 80%-90%. This means that new ETH being issued per block will be reduced by 80%-90% which coupled with EIP-1559 from August 2021 will make Ethereum net deflationary from the first day of the merge — there will be more ETH being burnt than being issued.
The energy usage of the network will collapse. Some calculations have highlighted that the energy usage will go down by 99.95% from what the Ethereum network is currently using and that will happen instantly from day 1 as well.
The yield from staking will increase. With EIP-1559, about 70–80% of the mining fees are being burnt and the rest currently goes to the miners. Post-merge that will go to the stakers the validators and that will increase the yield from staking. This represents a risk-free strategy for anyone staking ethereum which is offered directly by the protocol. However, I don’t expect this high APY to be sustained for a long period of time given its inverse relationship with the number of staked ethereum: the merge is going to encourage many more users to participate in staking which in turns locks up more ethereum which could lead to an appreciation of the price of ethereum (because there’s less available supply on the market and a higher demand for ethereum to stake).
The reduction of the energy footprint will lead to positive press for Ethereum, which will drive more attention to the network and create some tailwind effect.
The Ethereum network will become more secure with PoS because of the fact that more stakers will join the network.
The merge will layout the critical groundwork for various future upgrades such as sharding.
Finally, there is currently about 10 million staked ethereum which will not be unlocked at the merge and will actually not be unlocked until at least six months after the merge.
They will not get unlocked all at once: a concept of validators queue will be introduced where there will be a limited number of validators allowed to release their ethereum per day. For example, if the queue is capped at 1000 validators, that would be 1000 validators x 32 ETH = 32 000 ETH being released maximum per day.
So there is going to be a period of 6 months when no new ethereum will be coming to the market and ethereum will become deflationary — what do you think will happen to the price of ETH … only time will tell!
Source:
The Ethereum Merge is only a couple of months away.
Over the last few weeks, I have read and heard a lot of misconceptions about the merge: some people believe it is going to reduce gas fees, some people believe it is going to unlock all the staked ethereum all at once … but none of these things are going to happen.
So I decided to write this article to describe what exactly is going to happen and what effects it will have on the Ethereum protocol.
The merge is the change of consensus mechanism for the Ethereum protocol: it is going to move from Proof-of-Work to Proof-of-Stake.
But let’s dive a little deeper to understand what exactly is going to happen and the implications of such a change.
The merge is the result of many years of research and development from the Ethereum ecosystem. Proof-of-Stake has actually been a recurring topic since the early days of Ethereum: Vitalik Buterin spoke about it when he first published his whitepaper back in 2014. Since then, research about Proof-of-Stake has gone through a lot of different designs and iterations which eventually lead to the launch of the Beacon Chain on Dec 1st 2020.
The Beacon Chain has been the Proof-of-Stake network that has lived alongside the Proof-of-Work network and currently has over 10 million ethereum staked and more than 300,000 validators.
When the merge occurs, we will see the current Ethereum Mainnet “merging” with the Beacon Chain Proof-of-Stake system. This will mark the end of Proof-of-Work for Ethereum, and the full transition to Proof-of-Stake.
The merge to PoS might be one of the most bullish catalysts the Ethereum network has ever seen. This is the biggest upgrade in Ethereum history and will probably be the biggest upgrade that will ever happen to the network, especially in terms of its implications.
Reduction of the network issuance: going from PoW to PoS will reduce the issuance of new ETH by about 80%-90%. This means that new ETH being issued per block will be reduced by 80%-90% which coupled with EIP-1559 from August 2021 will make Ethereum net deflationary from the first day of the merge — there will be more ETH being burnt than being issued.
The energy usage of the network will collapse. Some calculations have highlighted that the energy usage will go down by 99.95% from what the Ethereum network is currently using and that will happen instantly from day 1 as well.
The yield from staking will increase. With EIP-1559, about 70–80% of the mining fees are being burnt and the rest currently goes to the miners. Post-merge that will go to the stakers the validators and that will increase the yield from staking. This represents a risk-free strategy for anyone staking ethereum which is offered directly by the protocol. However, I don’t expect this high APY to be sustained for a long period of time given its inverse relationship with the number of staked ethereum: the merge is going to encourage many more users to participate in staking which in turns locks up more ethereum which could lead to an appreciation of the price of ethereum (because there’s less available supply on the market and a higher demand for ethereum to stake).
The reduction of the energy footprint will lead to positive press for Ethereum, which will drive more attention to the network and create some tailwind effect.
The Ethereum network will become more secure with PoS because of the fact that more stakers will join the network.
The merge will layout the critical groundwork for various future upgrades such as sharding.
Finally, there is currently about 10 million staked ethereum which will not be unlocked at the merge and will actually not be unlocked until at least six months after the merge.
They will not get unlocked all at once: a concept of validators queue will be introduced where there will be a limited number of validators allowed to release their ethereum per day. For example, if the queue is capped at 1000 validators, that would be 1000 validators x 32 ETH = 32 000 ETH being released maximum per day.
So there is going to be a period of 6 months when no new ethereum will be coming to the market and ethereum will become deflationary — what do you think will happen to the price of ETH … only time will tell!
Source:
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