Whether you are new to blockchain or a veteran of the space, you have undoubtedly heard at least something about what Ethereum has called “The Merge.” After years of delays, the highly touted upgrade is finally coming this week. But is it truly the landmark event poised to revolutionize Ethereum and perhaps the future of crypto?
What is the Merge?
The Ethereum Foundation used the following analogy to describe the Merge:
“Imagine Ethereum is a spaceship that isn't quite ready for an interstellar voyage. With the Beacon Chain, the community has built a new engine and a hardened hull. After significant testing, it's almost time to hot-swap the new engine for the old mid-flight. This will merge the new, more efficient engine into the existing ship, ready to put in some serious light years and take on the universe.”
While that conjures up exciting images of interstellar travel, the new hot-swapped engine and hardened hull in this case is the merging of the current Ethereum Proof-of-Work main-net with their new Proof-of-Stake consensus layer, the beacon chain. This will immediately result in a 99.95% reduction in Ethereum’s energy consumption as the Proof-of-Work consensus mechanism is energy-intensive, requiring thousands of computers to verify transactions.
In comparison, Proof-of-Stake is where cryptocurrency owners operate as “validators,” verifying and recording the transactions onto a new block, a process that involves fewer people and computers. Therefore reducing Ethereum’s energy consumption, which was said to release 53 metric tons of harmful carbon emissions annually, roughly the same amount that Singapore produces in a year.
Wider Impacts of the Merge
Beyond the obvious public image win for Ethereum that will come with such a large reduction in energy consumption - a frequent criticism of cryptocurrencies that both outsiders and insiders often cite - the Merge also takes away one of the purported selling points for the so-called “Ethereum Killers” such as Polkadot, Solana, Cardano and Avalanche, competing Layers 1s that often marketed themselves as an eco-friendly alternative.
Post merge, Proof-of-Stake removes the necessity of mining nodes to compete for block rewards, replacing it with node operators, who have (individually or collectively via a staking pool) staked 32 ETH as collateral and, becoming network validators. They are then making them eligible to earn rewards based on Ethereum’s lottery model. This will have a massive impact on the amount of ETH issued as block rewards, dropping from a current number of about 13,000 ETH mined per day to about 1,600 ETH rewarded per day post merge, slowing the inflationary growth of ETH and making it more of an deflationary asset given the burned fees based on EIP-1559 .
Potential Risks of the Merge
As the Ethereum Merge is by far the biggest update to date to any cryptocurrency blockchain network, there are undoubtedly potential risks involved even if Ethereum devs insist nothing major could go wrong.
The most obvious of which is newcomers to the space being taken advantage of by scammers jumping at the opportunity caused by the confusion and uncertainty of many referring to the soon to be upgraded Ethereum network as “ETH 2,” leading some to believe that there will be a new cryptocurrency by the same name. Scammers will likely take advantage of this by offering to swap holders current ETH for “ETH 2.”
Moving to Proof-of-Stake will require network proposers to be known in advance, making them susceptible to a potential Denial-of-Service (DoS) attack. However this is a known risk where solutions are already being made to counter.
The merge is set to take about 12 minutes to finish and many major crypto exchanges have announced plans to pause deposits and withdrawals during that time frame for ETH and Ethereum-based tokens. With this in mind, to be on the safe side, it might be prudent to minimize your transactions in the first few days post merge to allow for any potential issues to be worked out.