The Ethereum merge is a major upgrade of the Ethereum network when it comes to the transition from Proof-of-Work (POW) to Proof-of-Stake (POS) consensus. Once the upgrade is completed, miners will no longer be able to mine ETH, but instead, if they want to receive ETH, they will have to stake ETH into validators.

However, there has been a lot of confusion surrounding Ethereum’s The Merge event: Where did The Merge come from, and what will happen after The Merge?

In this article, Coincu will provide everyone with a before-after-and-after background of The Merge, in addition to the significant impacts of The Merge on Ethereum and its ecosystem.

Some problems with Ethereum

We know Ethereum as the most popular public blockchain network for developing decentralized applications (DApps) and smart contracts. ETH demonstrated how blockchain technology can achieve real-world adoption by both individuals and businesses. It can be seen how demand for DeFi and NFTs has exploded in popularity in 2021 with the number of transactions already skyrocketing.

However, this also causes some negative side effects as follows:

• High Gas Fees: The chain’s popularity comes with a downside. Fees usually increase as network congestion increases, so transaction processing becomes more difficult.
• Network congestion: Communication between nodes is not optimal. As a result, smart contract execution is slowed down.
• Energy Usage: The PoW consensus mechanism is not as eco-friendly as the upcoming PoS option.
• Disk Space: It becomes more difficult to run a node because the network is so large.
• GPU Price: To mine ETH, you need an expensive video card (GPU). This leads to a scarcity of GPU units and an increase in prices. With PoS, there is no need to use the GPU anymore.

Why is The Merge important?

Ethereum’s TPS is currently 30 TPS and can reach a terrible number of 100,000 TPS after the upgrade which will help increase the throughput of the Ethereum network.
While the authorities still expressed concern about the energy consumption and environmental pollution that POW brings, if The Merge is successful, it will reduce energy consumption by 99.95% and this will be a huge push and breakthrough that opens up a great opportunity for the entire crypto market to be easily accepted and widely applied because Defi on Ethereum is currently the biggest.

This upgrade of Ethereum can be said to be the turning point of the leading smart contract blockchain in the crypto world. All data is completely synchronized smoothly and still ensures the user experience.

This upgrade will partly reduce the dependency on Layer 2 on Ethereum as the risk of being hacked through bridges becomes increasingly high.

The General Circumstances Around The Merge of Ethereum

Ethereum’s Expansion Plan From 2018

Ethereum is a relatively decentralized network. Since 2017, the developers of Ethereum have recognized the problems with Ethereum and many independent development teams have been working on their reasoning.

By 2018, a general scaling roadmap for Ethereum was adopted and is still being applied to this day, it is commonly referred to as Ethereum 2.0 by people. In that plan, Ethereum will switch from PoW to PoS, combined with data sharding to allow Ethereum to process up to hundreds of 100,000 TPS while ensuring a highly secure and decentralized network.

Change-related terminology

Four years on, the Ethereum community has seen the launch of a viable scalability solution for Ethereum based on a common goal: increasing throughput while ensuring a highly secure and decentralized network.

• On the application level (off-chain scaling): L2 & Rollup – permissionless, continues to grow very fast, without anyone’s permission.
  
• At the protocol level (on-chain scaling): PoS & Data sharing – permission transition, the speed is slow, and any changes to the protocol need to be approved by the majority of core developers.

In that context, Ethereum 1.0 & Ethereum 2.0 no longer seem relevant when it comes to Ethereum’s overall development vision. The big problem with Ethereum 1.0 & Ethereum 2.0 branding is that it’s easy to confuse Ethereum newbies.

For example, common thoughts when first hearing the terms Ethereum 1.0 & Ethereum 2.0:

• Ethereum 1.0 came first and Ethereum 2.0 came later.
• Or Ethereum 1.0 will cease to exist after Ethereum 2.0 goes live.

Both of the above thoughts are somewhat incorrect. By removing the terms Ethereum 1.0 & Ethereum 2.0, Ethereum helps users get rid of the common but somewhat erroneous thinking above.

As of late 2021, the core developers of Ethereum have stopped using the above two terms and replaced the terms below to refer to the core protocol layer (PoS & Data sharding) scaling plan:

• Ethereum 1.0 → Execution layer.
• Ethereum 2.0 → Consensus layer.
• Execution layer + Consensus layer = Ethereum.

Execution Layer, Consensus Layer, The Merge and beyond Data Sharding

Ethereum PoW blockchain (Execution Layer) also known as Ethereum mainnet: Ethereum that we are using, running PoW consensus where thousands of DeFis & NFTs related applications are working.

Beacon PoS blockchain (Consensus Layer): This is a separate blockchain launched in December 2020, operating as a completely independent PoS consensus layer and running in parallel with the Ethereum mainnet. The blockchain beacon was launched in preparation for Ethereum’s migration from PoW to PoS.

At the time, they were very close to when The Merge took place. The Merge (aka Ethereum Merge) is the place where the Ethereum PoW blockchain (Execution Layer) and Beacon PoS blockchain (Consensus Layer) merge so that the Ethereum Mainnet (where all operations are currently taking place) also begins to use. Using Proof of Stake consensus.

The difference between before and after The Merge will look like this.

Although The Merge is the most complex and important update of Ethereum ever, as is one of the two big steps in Ethereum’s “PoS & Data sharding” vision. However, at the user level, you won’t need to do anything.

After The Merge, Ethereum developers can focus more on implementing Data Sharding, which is scheduled to take place in 2023 – 2025. The below infographic can help you better understand the context and timeline of related events. mandarin.

4 Common Misconceptions About Ethereum’s The Merge

Here are some common misconceptions about The Merge:

After The merge, there will be a “new” ETH, users need to Migrate “old ETH” to “new ETH”

A common misconception is that Ethereum will have a “new” ETH token after The Merge. Users have to migrate “old” ETH to “new” ETH like other large projects (eg, Bitcoin Cash hard fork to Bitcoin Cash ABC & Bitcoin SV).

This is not true at all, Ethereum states have not changed, no “new” ETH has been issued and users do not need to do anything. This is also the main reason for the Ethereum foundation to change related terms like Eth 1.0, and Eth 2.0 to the execution layer, and consensus layer to avoid confusion like this.

After The Merge, Ethereum operating fees will decrease

Another misconception is that after The Merge will reduce the “gas fee” or transaction fee of Ethereum.

This is also incorrect, The Merge will only move the Ethereum mainnet from the PoW consensus model to the PoS consensus model, it does not affect the gas fee. Fees to operate on Ethereum after The Merge will still be relatively expensive as they are today, they tend to increase or decrease depending on the Market Sentiment of the market.

After The Merge, to run an Ethereum node need 32 ETH

This is partly true. You will need 32 ETH to activate your validator, but you can staking less than 32 ETH. Here are 4 options that you can consider, Options that target a wide variety of users.

They have different risks, rewards, and trust & security assumptions. Please do thorough research and choose a solution that suits your conditions before staking ETH.

Will 12M staked ETH be unlocked after The Merge?

Currently, the amount of ETH staked on the Beacon chain is close to 12M ETH, with a price of $2,900 for one ETH, this figure is worth nearly $35B.

Before The Merge event, ETH staking was one-way staking. Investors cannot withdraw their ETH and rewards. Many believe that, after The Merge takes place, 12M ETH and staking rewards will be unlocked and create great selling pressure on ETH.

This is not true! After The Merge takes place, the Withdraw ETH feature has been staked and the reward will be activated about 6 months later. In addition, when the Withdraw feature is activated, only 30,000 ETH can be withdrawn per day.

Effects of The Merge

PoS Consensus Will Reduce 99.95% Energy to Run Ethereum

The current Ethereum mainnet uses Proof of Work (PoW) consensus to validate transactions taking place in the network. According to some estimates posted on the Ethereum Foundation Blog, the energy consumption of the Ethereum mainnet is comparable to that of a medium-sized country.

But after The Merge, Ethereum’s power consumption will drop a lot, according to the estimates of a few industry experts. After The Merge, the power consumption used to operate the Ethereum network will decrease by 99.95%, equivalent to a decrease of 2000 times. The infographic below is an interesting comparison that can highlight the variation in power consumption of ETH PoW & ETH PoS.

Although not very popular, PoW blockchains consume a large amount of energy to operate and are often criticized for being unfriendly to the environment. A greener Ethereum could be a more sustainable approach as widespread climate change concerns become more prevalent.

No more selling pressure from Miners

In PoW blockchains, miners are not necessarily bullish on the project and coin, as, in Ethereum PoW, ETH mining is extremely expensive because of the hardware and electricity costs. There is always a sale from the miners to cover the costs involved. Sometimes miners mine ETH simply because they are investing in hardware and electricity, not for investing in ETH.

In contrast to Ethereum PoS, ETH stakers do not need to cost much to deploy, they are only forced to stake ETH. So, on this basis, ETH stakers have no pressure to sell ETH to cover large operating costs like ETH miners on Ethereum PoW.

ETH supply will be slightly deflationary or have low inflation

Let’s first determine where the new supply of ETH is coming from. At present, the new supply of Ethereum includes:

• On Execution Layer (Ethereum mainnet): Since Constantinople, the update took place on February 28, 2019. Ethereum block reward is reduced from 3 ETH/block to 2ETH/block, with a block time of about 13 – 13.5s, every day there will be about 13,000 – 13,500 new ETH released on the Ethereum mainnet.
• Consensus Layer (Beacon chain): Besides, a new amount of ETH was released on the Beacon chain to serve as a staking reward for the ETH staker. This number depends on the amount of ETH staking, the more staking, the more ETH is issued. With 12M ETH being staked on the Beacon chain, about 1,600 new ETH are being issued every day.

A total of 14,500 – 15,000 new ETH will be released every day in total, of which:

• More than 90% are issued on the Execution Layer (Ethereum mainnet).
• Approximately 10% are issued consensus Layer (Beacon chain).

Starting on August 5, 2021, EIP-1559 was approved and applied to the Ethereum network, in which a burn base fee mechanism was adopted. The base fee is the minimum fee quoted by the protocol to include a transaction in a block on Ethereum.

Simply put, if the user summit gas fee is below the base fee, the transaction will fail. To have priority in making transactions, users often submit a fee that includes a base fee + priority fees (Priority fees, also known as Tip fees). The base fee is burned from the network and the priority fee is the “extra income” of the minner on the Execution Layer (Ethereum mainnet).

According to the data provided by the block, the base fee/total fee ratio falls between 80 – 85%. That is, if a user pays 1 ETH to put transactions in a new block, then 0.8 – 0.85 ETH is the base fee and this number is burned from the system. There is an interesting metric provided by ultrasound money, since Ethereum applied EIP-1559 was cleared and applied to the network, Ethereum has burned more than 2.1M ETH.

At present, the total amount of newly issued ETH in the market will be calculated as:

New ETH issued on Execution Layer (Ethereum mainnet) + New ETH issued on Consensus Layer (Beacon chain) – total fee burn

After The Merge, no more block rewards will be generated on the Execution Layer (Ethereum mainnet). In other words, the supply of new ETH will immediately decrease from 14,500 – 14,000 ETH/day to 1,500 – 1,600 ETH/day (calculated based on the amount of ETH staking in the beacon chain at the moment).

Then, the total amount of newly issued ETH in the market will be calculated by:

New ETH issued on Ethereum PoS Chain – total fee burn.

Based on data since ETH-1559 was approved and applied to the Ethereum network and some other data. We have simulated the supply growth of ETH after The Merge event. There is a high probability that the ETH supply will fall into mild inflation or deflation (in my opinion, they will fluctuate between -3% or 3% per year).

Staking APR increased x1.5 – x3 times

Before The Merge, the source of income for ETH staker was only the block reward on the Consensus Layer (Beacon chain). It depends on the amount of ETH staked. Currently, with about 12M ETH staked, the APR of ETH staker is around 4.5%.

ETH staker APR = APR (basic)

This APR depends solely on the amount of ETH staked on the network, the larger the number of staked ETH the base APR will decrease.

After The Merge takes place, the income of ETH staker will increase. Because then, the income of ETH stake in addition to the block reward from Ethereum PoS Chain, is also supplemented by Tip fees (Priority fees) from transaction fees.

ETH staker APR = APR (basic) + APR (Tip fees)

If Tip fees increase sharply, Staker’s overall APR will increase sharply to double digits. Overall, it depends on 3 factors:

• Amount of ETH Staked.
• Gas fees on the Ethereum network.
• Rate of Base burn / Total fee.

As I mentioned earlier:

• The larger the amount of ETH staked, the basic APR will decrease, the basic APR can range from 4.5 – 3% while the amount of ETH staked ranges from 12M – 30M.
• Base burn / Total fee rate falls in the range of 80 – 85% from the time EIP-1559 is applied to the network.
• The total gas fee on the Ethereum network depends on the performance of the network.

So if the Ethereum network continues to be “crowded & bustling” like when trending DeFi & NFT and users are willing to pay more tip fees to put their transactions on the front line, we will most likely witness ETH Staker’s APR ranging from 10-15%.

In a more realistic perspective, based on the market performance in the last 30 days (March 26 – April 26, 2022) and the number of ETH staked in the network is 12M, Staker’s APR after The Merge may be possible. reaching 6 – 7%.

Mixed opinions about The Merge & Ethereum’s development direction

Although, the vast majority of people are bullish on the future of Ethereum & ETH after The Merge event. However, there are still a few developers who are concerned about Ethereum’s long-term development direction, saying that Ethereum is developing in an “unclean” direction.

They argue that Ethereum is becoming more and more complex because every major change (1559, The Merge, sharding, Merkle, stateless, L2,…) is stacked, and Ethereum’s development difficulty will increase. increase exponentially. If the protocol does not become thinner, it will be very difficult to succeed.

Find more information about Ethereum:

Website: https://https://ethereum.org/en/

Reddit: https://www.reddit.com/r/ethereum

Twitter: https://twitter.com/ethereum

If you have any questions, comments, suggestions, or ideas about the project, please email ventures@coincu.com.

DISCLAIMER: The Information on this website is provided as general market commentary, and does not constitute investment advice. We encourage you to do your own research before investing.

Lucian

Coincu Ventures