What is The Merge?

Introduction

On July 15, 2022, Tim Beiko, an Ethereum core developer, proposed that The Merge (Ethereum Mainnet Merge) is scheduled to happen on September 19, 2022. What will this long-awaited change bring to the crypto world? Let’s have an overview of the background of the Ethereum upgrade before answering this question.

As a place that incubates innovation, Ethereum cannot fully meet the rapidly growing demand

During the 7 years since its genesis, Ethereum has nurtured countless innovations, from ICO in 2017 to the DeFi summer in 2020 and to the NFT in 2021. Time witnessed the blooming, thriving popularity of Ethereum.
With the increase of applications and exponential growth of users, Ethereum is faced with severe problems on user experience, such as high transaction fees, low speed, network congestion, higher threshold to run a node, as well as high energy consumption under PoW.
Ethereum’s vision is to be more scalable and secure while remaining decentralized. In order to solve the above-mentioned problems, the Ethereum core team initiated the network upgrade.

Ethereum Foundation initiated an upgrade proposal to solve the imminent scaling challenge

A solution to the surge in demand caused by the increased network usage is imperative. The PoS mechanism has been proposed as early as 2014 and the Ethereum Foundation also announced in the blog post The Ethereum Launch Process in 2015 that Ethereum will transition from PoW to PoS in its step 4 - Serenity.
In December 2020, Ethereum launched the Beacon Chain, and a detailed upgrade roadmap was proposed in 2021. To ensure that the merge with Mainnet goes smoothly, several testnets merge and EIP proposals were implemented before The Merge.

What is The Merge

The Beacon Chain merges with Mainnet . The consensus mechanism transitions from PoW to PoS

The Merge means that Ethereum will switch from the long-criticized PoW to the more energy-efficient PoS. It represents the joining of the Ethereum Mainnet with the Beacon Chain that has already been running PoS, which will replace the energy-intensive mining with staking. This enables Ethereum to keep sustainability while ensuring security and paves the way for future scalability upgrades.

The sole purpose of the Beacon Chain is to become a PoS blockchain.

When the Beacon Chain shipped on December 1, 2020, it did not process transactions nor had tokens or DeFi applications. It is only a blockchain that runs PoS in order to stake ETH.
Because of this, Beacon Chain can be merged with the Ethereum Mainnet and then replace the original PoW without worrying about any uncertainty.

After The Merge, the staked ETH on the Beacon Chain will be unlocked periodically

According to the Beaconchain website, the Beacon Chain, a pilot project to PoS, has staked a total of 13.21 million ETH. If the price of ETH is $1,800, then the value of ETH on the Beacon Chain will be $23.7 billion.
The ETH staked in the Beacon Chain accounts for 10% of its total market value of about 200 billion. The staked ETH on the Beacon Chain will be unlocked in batches within 6-12 months after The Merge.

By Ethereum 2.0 Beacon Chain Explorer

The Merge will be the most significant event in crypto since the creation of Bitcoin

In the short but glorious history of cryptocurrency, there has never been any other blockchain than Ethereum with such a well-developed ecosystem and community that is able to take a major step in changing the consensus.
Ethereum owns the most powerful mechanisms and the most dynamic ecosystem running a wide variety of DeFi applications, NFT projects and EVM that are worth hundreds of millions of dollars; and Ether, as the second largest cryptocurrency after Bitcoin by market cap, has a total market cap of around $200 billion currently ($550 billion at its peak), will enter a new phase after The Merge.

The Merge is a milestone in the Ethereum upgrades

The Merge is not the end, but the beginning of a new phase.
The Ethereum upgrades consist of three important phases: the launch of the Beacon Chain, The Merge with Mainnet, and the Sharding that will make Ethereum truly scalable.
The Merge is in a key position that connects the past and the future, which will greatly improve network security, reduce energy consumption, and set the stage for future scalability upgrades, including sharding.

By Ethereum

PoS will improve network security and sustainability

After The Merge, Ethereum will move to the PoS. Users need to stake ETH in the protocol as a margin. If a node commits fraud or even intends to attack the network, the staked ETH will be directly destroyed, which will cost even higher than the 51% attack under PoW. And the attacker needs to bear the risk of destroying all the ETH staked by the node, which greatly increases the cost of committing fraud and hence improves the security of the protocol.

After switching to PoS, validators jointly maintain network security by staking ETH, which eliminates the need for expensive hardware equipment and will significantly reduce energy consumption, improve sustainability, and lay a foundation for future scalability upgrades.
The energy consumption of PoW has long been criticized. Under this mechanism, nodes will need to make faster computations in order to get rewards. Therefore, they are strongly incentivized to upgrade hardware in an arms race, which leads to excessive waste of energy. It is reported that Bitcoin mining consumes about 0.6% of the world’s electricity. Digiconomist estimated that, as of early August, Ethereum’s total energy consumption under PoW is around 112TWh per year, which is comparable to that of the Netherlands, and its carbon emission equals to that of Singapore of a whole year (53 metric tons/year).
After adopting PoS, Ethereum will no longer rely on extensive computing power. The scaling solutions, such as sharding, will reduce Ethereum’s total energy use by ~99.95% and make PoS ~2,000x more energy efficient than PoW. After The Merge, the electricity consumption will be reduced from the scale of a medium-sized country to that of a small town, the cost to run a node will roughly be equivalent to a laptop, and the amount of energy consumption will drop to less than 0.05% before The Merge.

By Ethereum Ethereum

Ethereum’s blueprint and why the term “ETH 2.0” is outdated

The ultimate goal of ETH2.0 is to switch to PoS and shard chains, two aspects that make it distinct from ETH1.0.

The essence of the upgrade is to change the consensus mechanism. ETH2 is a confusing term and will no longer be used.

ETH1.0 has encountered some bottlenecks, such as high energy consumption and slow transaction speed due to excessive usage. Therefore, it is urgent to increase the number of transactions it can handle per second. As the first upgrade of Ethereum, ETH2.0 is intended to improve scalability, security, and sustainability to meet the increased global demand. In order to avoid any confusions, Ethereum stops using the terms of ETH 1.0 and ETH 2.0, while instead uses execution layer and consensus layer.
ETH1, the “execution layer”, and ETH2, the “consensus layer” will be merged while preserving the consensus mechanism of ETH2. The transition of Ethereum from PoW to PoS is only a part of the entire upgrade roadmap, but what remains unchanged is Ethereum’s continued plan of scaling Ethereum in a decentralized manner.

The upgrade roadmap was generally referred to as ETH 2.0 as the details remain unclear in the early stage.

In its earlier scheduled roadmap, researchers have been working hard on scaling the Ethereum network in a decentralized way and transitioning to the proof-of-stake. In 2018, this roadmap was added to the ETH2.0 development plan.
In this merged roadmap, the existing PoW, or ETH1.0, will eventually stop mining due to the difficulty bomb.Its users and various applications will be transferred to the newly adopted proof-of-stake chain, i.e. ETH2.0.

The upgrade is a long-term plan and will be implemented in different stages

With the launch of the Beacon Chain, the ETH 2.0 roadmap that is split into different phases might take several years.
While trying to figure out how to continue PoW, people found that the Beacon Chain had been well-prepared much earlier than other ETH2.0 plans. Under this circumstance, the early merge proposal was created. In this proposal, the existing EVM blockchain will be used as a shard of ETH2.0 but will not be enabled for transitioning to PoS faster and reducing obstacles during applications’ transition.
After the proposal, Danny Ryan, core researcher at the Ethereum Foundation, explored approaches to accomplishing this by leveraging the existing ETH1 clients in his Eth1+Eth2 client relationship post. This will significantly reduce the development workload required during the merging.

The term ETH2 is likely to cause confusions and unable to explicitly describe the scheduled roadmap.

Some users may think that ETH1 will be replaced by ETH2 as it is followed by the latter. In order to avoid misunderstanding, the term ETH2 will no longer be used as it cannot explicitly describe the future roadmap of Ethereum.
Furthermore, some scammers may use ETH2 to entice users into exchanging ETH for ETH2 tokens or migrating their ETH before the ETH2 upgrades. In order to avoid such scams , renaming is necessary.
Some stakers use ETH2 to represent the staked ETH on the Beacon Chain. However,there is actually no such token called ETH2. ETH2 is only a representation of the staked shares.

The Beacon Chain merges with Mainnet

Replacing the outdated PoW with PoS of the Beacon Chain

Since 2015, the Ethereum network has been using proof-of-work to verify transactions and smart contracts. With the increase of users and applications on Ethereum, the old PoW mechanism that processes only 15 blocks per second cannot meet the increased network demand. On December 1, 2020, the Beacon Chain was launched to solve this problem. Beacon Chain is a separate chain from Mainnet that runs in parallel using proof-of-stake, aiming to help the transition from PoW to PoS and maximizing the difficulty bomb so that all hardware and computing power will no longer be useful.

How do PoW miners migrate to PoS?

Before Ethereum’s successful transition from PoW to PoS, miners who are still using the PoW mechanism can no longer conduct mining on Ethereum. They have no other options but to migrate to the PoS system to get rewards. Under PoW, miners use computing power to compete with each other to get rewards, while PoS allows users to earn returns by staking.

Difficulty bomb that prevents miners from continuing mining

To deter miners from mining PoW after The Merge, the founder of Ethereum introduced a difficulty bomb, which will increase the mining difficulty by re-programming the blockchain. The intent behind the difficulty bomb is to exponentially increase the amount of time it takes to mine a new block when every 100,000 blocks are generated on Ethereum. Although the increased difficulty may not be easy to be noticed in the early stage, it will take longer time and become more difficult to generate a new block with the increase of block height, which will finally prevent miners from ETH mining. Therefore, difficulty bombs are also considered miners’ nightmare.

What’s the stage of the testnet merge?

With the merge of testnets, there is only one step left before Ethereum officially switches from PoW to PoS, which is, the last testnet merge into the Beacon Chain.

Ethereum’s last rehearsal before The Merge - Goerli testnet merge

At the end of July this year, Ethereum developer Tim Beiko announced the Goerli testnet merge process on Twitter. On August 11, the Goerli testnet had been successfully merged with Prater, a PoS Beacon Chain. The merged Goerli/Prater network will retain the Goerli name. Tim Beiko also reminded that this is the last chance for miners who are still using PoW to switch to validating nodes.
The Goerli merge will be different from the early testnet integration since the node operators need to update both their consensus layer and execution layer clients in tandem, rather than just one of the two. According to an update on August 12,The Merge is scheduled to happen on September 15.

Final testnet Goerli merge. By Tim Beiko on Twitter

Date Announcement
2022-05-04 The Ropsten testnet merge will happen on June 8
2022-06-09 Ethereum’s Ropsten testnet merge is complete
2022-06-11 Ethereum Merge will happen between late August and November
2022-06-26 Sepolia Testnet is expected to merge on July 6
2022-07-06 Ethereum Sepolia Testnet Merge is complete
2022-07-15 Ethereum Merge Date is set for September 19
2022-07-19 Goerli Testnet merge is scheduled to happen on August 11
2022-07-21 Ethereum Merge testing is 90% complete

Ethereum merge schedule, By ShineINFAITH, Muse Labs

Misconceptions about The Merge

1. Technically, The Merge will not significantly reduce gas fees.
   The Merge is a change of consensus mechanism. It does not significantly change any parameters that directly influence network capacity, and hence will not result in lower gas fees.

2. Transactions will not be noticeably faster after The Merge.
   On proof-of-stake, blocks will be produced ~10% more frequently than on proof-of-work. The average speed to generate new blocks increases from ~13.3 seconds to precisely every 12 seconds.

1. Withdrawal of staked ETH is not enabled right after The Merge.
   Withdrawals of Staked ETH are planned for the Shanghai upgrade, the next major upgrade following The Merge. This means that newly issued ETH, which is accumulating on the Beacon Chain, will remain locked for at least 6-12 months after The Merge.

2. Stakers will not sell their ETH immediately after The Merge
   As mentioned above, stakers cannot withdraw the staked ETH immediately after The Merge, so there is no need to worry about a dumping of ETH. And the limitations on withdrawals and deposits help secure the stability of the chain.

1. Running a node does not necessarily require staking 32 ETH
   In fact, the more ETH it requires, the more messages are transmitted between nodes, and the less ETH, the more nodes will participate. 32 is 2 to the 5th power. Nodes spread messages exponentially. If it reduces the ETH validator requirement from 32 to 16, that would increase the messaging volume for all nodes by 4x, so 32 ETH is considered the optimal staking amount.

The impact of The Merge on ETH price

Most investors are concerned about whether the price of ETH will rise after the Merge. From another perspective, does the current price already reflect the market’s expectations for ETH after The Merge?

Under the PoS consensus mechanism, the issuance of ETH and security costs will be reduced greatly.

There is no limit to the total supply of ETH. After the Merge, the annual inflation rate of ETH will be reduced from 4.3% to 0.43%.

PoS fundamentally improves the network’s efficiency. Requiring validators to stake ETH serves the goal of providing better security at the lowest hardware cost. The security of PoS is guaranteed solely by the opportunity cost of capital. It is no longer necessary to issue a large amount of ETH to maintain the security of the network. With lower security costs, PoS is more efficient than PoW.

Reduced security cost will make ETH go up.

In the future, as it is no longer necessary to pay high fees to miners as in PoW, the ETH inflation rate will be much lower. Issuance reduction is generally regarded by investors as a positive sign of the rising price.

The coming deflation will increase the proportion of burnt ETH.

On August 5, 2021, Ethereum launched the EIP-1559, which changed the payment method for gas fees. Before that, all the fees paid would be given to the miners. After the introduction of the burn mechanism, when the fees increase, more ETH will be burnt.

The issuance of ETH will be reduced by 90% after The Merge, which means that the burn rate of each block generated after The Merge will increase accordingly. Theoretically, as long as gas is higher than 7 gwei, burning will be faster than the issuance. In a bull market, the gas fee is usually around 200 gwei or even higher.

An eco-friendly and efficient blockchain will bring a stronger community.

In fact, the annual energy consumption of an Ethereum node is only about 2.6 MWh, which is less than 1/1,300 of that of the US game industry.

In the world of crypto, Ethereum is the most used blockchain. The Merge will reduce Ethereum’s energy consumption by about 99.95%. In contrast, traditional finance still consumes so much energy without plans for a change. In this year as the world is faced with an energy crisis, OPEC production capacity is at the lowest point in two decades. Ethereum will actually be the most environmentally friendly financial system in the world. Perhaps Wall Street should also go green by using Ethereum.

After the Merge brings more sustainability, enterprises and institutional investors are more likely to be attracted by Ethereum.

Vitalik Buterin: The Merge is not priced-in, not only in market terms but also in psychological and narrative terms.

Vitalik was interviewed by Bankless founder David Hoffman during this year’s Ethereum Community Conference (EthCC) in Paris a few days ago.

When asked about how he would illustrate the morale around the developers at the moment, Vitalik Buterin replied, in 2018 and 2019 at the time around the DAO fork and the DAO attack, people definitely had been disappointed. Now The Merge is looking more and more in the front view mirror. Once it actually happens, he expects the morale to go way up.

Vitalik Buterin thinks The Merge is not going to be priced-in until it actually happens, not only in market terms but also in psychological and narrative terms.

Why do miners oppose The Merge? What impact will the PoW fork bring?

Hardwares are losing value. Is the PoW fork the last chance?

Miners are important participants in the early Ethereum ecosystem, solving math problems and assembling transactions into blocks. They get rewarded for maintaining the network. Up until now, miners have spent about 15 billion US dollars on the GPU. After the Merge, Their hardwares and other related facilities will be sunk costs. The Merge expected to happen in mid-September has prompted miners to fork Ethereum in order to protect their interests.

Source: CION METRICS

A PoW fork is initiated by ETH miners to preserve PoW .

Instead of turning to other blockchains that adopt PoW, a group of miners have chosen to hard fork Ethereum to preserve its PoW consensus mechanism. After the DAO hack, the divisions within the Ethereum community resulted in Ethereum getting forked into ETC and ETH. At the end of July, Hongcai Guo (Bao Erye), an early Bitcoin supporter, and the aWSB community initiated the ETH hard fork project called ETH.A, which is expected to launch in September. This PoW fork is endorsed by the majority of miners and Justin Sun, founder of TRON.
However, it is not favored by the majority of the market. The public charity fund ETC Cooperative sent an open letter to Bao Erye on August 8, saying that forking Ethereum is too difficult and that he will not succeed. Bao Erye will also release an open letter in response soon.

Source: Bao Erye & ETC Cooperative Twitter

What could possibly happen?

The Merge is coming. In order to maintain a PoW version of the Ethereum, a new hard fork, which is called ETHPoW, will be built. However, this is extremely difficult on the technical side, and its financial prospects are uncertain. The first challenge for ETHPoW is to create a hard fork that permanently disables the difficulty bomb. ETHPoW cannot claim to be the main chain. Secondly, the new community of ETHPoW needs to be managed by a developer team and its new users need to reach consensus. ETHPoW also needs to establish new partnerships with exchanges, custodians, etc.
However, BitMEX points out that when there is a controversial fork in Ethereum, it is the stablecoin issuer who has the most power, not the team or the fork initiator. The stablecoin issuer decides which chain will become the main chain based on their acceptance and DeFi relevance. Perhaps it is the USDC issuer and Circle founder Jeremy Allaire who has the last say. Circle, Tether, Binance, etc., have already claimed to support Ethereum 2.0 with PoS. If ETHPoW cannot get the support from the stablecoin in the end, all efforts would be in vain.
If the fork is successful, BitMEX predicts that some ETH maximalists will take the opportunity and sell ETHPoW to buy more ETH.
It is estimated that if the ETHPoW fork is successful, the hype it brings will make mainstream exchanges list its tokens. Then it is possible that ETH/ETHPOW may become one of the hottest trading pairs.

Market’s expectations for the fork

There are already ETHPOW financial products on the market for people to invest in. For example, the futures contract recently launched by Bitmex allows investors to predict the future price trend of ETHPOW tokens. The current price is about $60.

Source: BitMEX Twitter

Source: BitMEX Fork

What does the fork mean for most people?

If the hard fork is successful, you can expect snapshot airdrops and receive ETHPOW tokens. Exchanges will rush to launch ETHPOW. Currently, 1 ETH can be exchanged for 1 ETHS (PoS chain) and 1 ETHW (PoW chain). ETH can be exchanged in both directions before the fork goes official. If the fork is successful, ETHS can be directly exchanged for ETH, while ETHW can still be traded, and then ETHS exits the market; if the fork fails, ETHS can still be exchanged for ETH, and both ETHW and ETHS will then exit the market.
However, it should be noted that both ETHS and ETHW are credit assets on the exchange with no on-chain reserve, thus they cannot be withdrawn or traded across exchanges. Please carefully analyze the risks before making any investments.

What’s next for Ethereum after The Merge?

Ethereum’s roadmap will focus on Rollups in the short term.

The Merge is just one milestone on the roadmap of Ethereum. The ultimate goal is scalability, which is achieved through sharding and rollups.
The transition from sharding to rollups is a critical step for Ethereum in attracting the next 1 billion users. The scalability problem was originally tackled by splitting Ethereum Mainnet into 64 shards and assigning transactions to certain shards based on their throughput. However, due to the continuous development of rollups and the difficulty of executing sharding, achieving scalability solely through sharding is no longer the best idea.
Therefore, the Ethereum team has turned to data sharding while making rollups the main theme of the roadmap.

Arbitrum and Optimism to lower gas fees and reduce traffic

The Ethereum execution layer can only process 15 transactions per second. Considering Ethereum’s huge user base, high demand, low speed and high gas fees, scalability is the problem that needs an urgent solution. Arbitrum and Optimism, Ethereum’s Layer 2 scaling solutions utilizing Rollup technologies, have been built to lower gas fees and reduce network congestion. How they work is that when the Ethereum network is congested, the smart contract will connect layer 1 to the layer 2 Arbitrum and Optimism blockchains and hand over the workload to layer 2.

After Ethereum completes the 5 key phases, it will be able to process 100,000 transactions per second.

Ethereum’s roadmap also includes The Surge, The Verge, The Purge and The Splurge. These 4 stages are still in the early stages of planning. The Surge is about importing shards to improve the scalability of the network. The Verge will introduce Verkle trees to optimize storage on Ethereum. The Purge is to delete historical data and technical debts. The final stage - The Splurge is a series of miscellaneous but important upgrades, aiming to make sure that the network runs smoothly after all previous stages.

In addition to the 5 stages of the new roadmap, Vitalik Buterin also shared his views on the current problems and future plans.

1. Short term pain, long term gain
   The above history headers, texts and receipts, and switching to the Verkle tree means storing more data in less space.
   Examples: Ban SELFDESTRUCT, EIP-4444, switch to Verkle trees etc.

2. Lighter client and hardware. Smaller-scale staking pools
   The current development focus is to make it easier to use clients. Decentralized staking pools should be made smaller. Users should be able to stake in Ethereum at low costs. Hardwares will be light but still able to run full nodes.
   

3. It takes decades to develop quantum-resistant upgrades
   Once quantum computers come, Ethereum has to upgrade to different cryptography to be quantum-resistant, so that no one can use quantum computers to steal other’s private keys. Next, ZK-EVM could be applied in the base layer to reduce the cost of rollups.
   

Summary & future development

This article provides a comprehensive overview of the important phases of the Ethereum upgrade. The Merge is only one milestone on the roadmap, but the change in the blockchain’s consensus mechanism - the transition from PoW to PoS, is definitely an notable event in the history of cryptocurrency, given the fact that Ethereum carries hundreds of billions of dollars and dApps.
The Merge will unfold a new narrative and the ETH prices fluctuate accordingly. Some Ethereum miners decide to fork in order to preserve PoW. Many exchanges have opened futures markets, allowing investors to hedge risks in advance.
However, it is important for investors to understand a few common misconceptions. The first is that the Merge will not greatly increase the speed of transactions, nor will it lower gas fees. However, after switching to PoS, ETH will face a big deflation because less ETH will be paid to miners. In the future, the ETH generated by each block will decrease. The narrative of supply reduction is one of the main reasons for the markets being bullish on ETH.
Once the PoS consensus mechanism is adopted, validators who secure the network have to stake ETH, and expensive hardware is no longer required. The reduction of energy consumption will make Ethereum more eco-friendly and sustainable, which will fit Ethereum more into the ESG narrative.
Ethereum’s upgrade plan and the Merge have not been all smooth sailing. We have seen many news coverage of the Merge in the past year. On August 11, the final test was finally completed successfully. So far, everything is going as planned and the Merge is almost certain to happen in mid-September.
However, many people are still skeptical about whether the Merge can really take place as scheduled. The Ethereum Foundation’s estimates always tend to be conservative. And after such a long period of planning and multiple tests, there are enough reasons to believe that Ethereum is fully prepared.
User experience will not change immediately after the Merge, but the important thing is that we are moving towards a more secure, decentralized, sustainable and scalable future, which enables Ethereum to incubate more innovations. The Merge is a key event on Ethereum’s roadmap, linking the past and the future.

Despite the risks, Ethereum has brought us many layer 2 applications and made the DeFi Summer and NFTs possible. Ethereum is always making progress and bringing us surprises and has never stopped to improve. After this milestone - the Merge, is reached, we shall see if Ethereum is going to remain as the leader of public blockchains, and if the Ethereum ecosystem will continue to flourish in the context of Web 3.0 and Metaverse.