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Ethereum Merge Incoming: When Is It, and Why Is It So Important?

The price of Ethereum has risen sharply in the last few weeks, as excitement builds up amongst bullish investors due to an upcoming event years in the making called the Ethereum Merge. But what is it and why is it so important for the future of arguably the world’s biggest smart contract-powered blockchain?

The Ethereum blockchain protocol currently relies on the Proof-of-Work (PoW) consensus mechanism to validate transactions on the network. This requires a lot of computing power and electrical energy, prompting critics to argue that PoW has environmental consequences. 

The criticism doesn’t stop there. Ethereum suffers from the blockchain trilemma, a theory that a blockchain network cannot achieve decentralization, scalability, and security at the same time without sacrificing one of the three.

Ethereum is planning to kill more than two birds with one stone by switching to the Proof-of-Stake (PoS) consensus mechanism to maintain the network. This attempt to move away from PoW to PoS is what’s called the Ethereum Merge and has been in progress for many years. This fundamental shift in Ethereum’s architecture will also change the network’s economics and make it very attractive to institutions looking to comply with eco-friendly ESG requirements.

What is the Ethereum Merge?

The Ethereum Merge is simply a way for the Ethereum network to change the way it validates transactions. It will do this by transitioning from PoW to PoS. This means that the Ethereum mainnet will be “merging” with the Beacon Chain, a new proof-of-stake blockchain at the center of Ethereum 2.0. 

This upgrade to the Ethereum network is aimed at improving speed, scalability, and efficiency. It is tipped to help the network process more transactions per second. 

It’s not done by a single upgrade, but by the implementation of a series of upgrades that eventually lead to a PoS-based Ethereum blockchain. The Beacon Chain was launched on 1 December 2020, marking the first phase. The Merge is the second major phase.

The Ethereum Merge is coming

When is the Merge happening?

It was initially believed that the Ethereum Merge would come in June 2022, but like previous upgrades, it has been shifted to a tentative date. Ethereum’s core developer Tim Beiko shared that the switch to PoS would likely come a few months after. Now in July 2022, the latest prediction by developers is for early September 2022.

The new timeline came after Ethereum successfully launched its shadow fork on 11 April 2022. The shadow fork is a test-run for Ethereum’s assumptions on its transition to Ethereum 2.0. It now seems Merge may ship in Q3/Q4 2022.

Introducing a new consensus system adds new layers of complexity and challenges. Ethereum will also add a new economic model and this requires laser precision as there is a lot of money at stake. It is clear that with so much on the line, Ethereum would rather delay the “Merge” than deliver a half-baked product that harms the whole ecosystem. 

How will the Merge solve Ethereum’s big problems?

The Merge is important from Ethereum’s technical and economic points of view. Ethereum has its own set of challenges, and it is actively working to overcome the blockchain trilemma (how to create scalability, security and decentralization simultaneously without compromising one aspect). The Merge does not take Ethereum out of the woods, but it goes a long way.

Decentralization & security

Instead of miners who secure the network in a PoW system, Ethereum will count on validators to maintain the network. Validators stake a required amount of Ether to mint new blocks on the network.

Validators stake their financial resources to maintain the network. This is similar to how miners spend electrical energy and computing power to mine new blocks in a PoW system. Ethereum will remain secure as nefarious actors will need to stake their financial resources to effect a 51% attack.

The Merge also makes it easy to run nodes, making the network more decentralized as there is a lower barrier to entry. A total of 32 ETH is the minimum requirement to run a node.

Sustainability

Blockchains such as Bitcoin have been under attack for the large amount of electricity they use. It is one thing whether PoW miners use green, renewable, or other sources of energy harmful to the environment. 

However, PoS consumes about 99% less energy than proof-of-work. 

Scalability

The Merge makes sharding possible on Ethereum. Sharding is the use of side chains to spread the load, increase the transaction throughput, and minimize network congestion. Apart from the obvious scalability benefit, sharding also helps in the following ways:

  • Makes it easy for people/entities to run nodes
  • Promotes network participation as more people will be able to run Ethereum on everyday devices such as laptops or smartphones.

Why is the Ethereum Merge important?

The Merge is important because it brings a new dimension to the Ethereum network. It will allow the network to support shard chains as sharding is based on staking. This makes the merge the necessary step before staking can take place on Ethereum. 

The Merge is not a fork, but rather, a continuation of the existing chain. This maintains the security of the network, and more importantly, users can still view their transactions using the block explorers they are used to. The architecture update will not affect end-users. 

After the shift to PoS, mining will no longer be supported. Ethereum’s carbon footprint on the environment will be greatly reduced. 

The transition to Ethereum 2.0 is expected to make the network cheaper and faster. However, the transaction fees won’t fall almost immediately. The merge only sets the foundation for a network with lowers gas fees.

Ethereum is gearing up to become a deflationary asset when it switches to PoS. This will likely be bullish for Ether, Ethereum’s native currency. On the other side, some stakeholders such as miners will not be entirely pleased with the Ethereum Merge.

What will be Ethereum Merge’s impact on ETH miners?

ETH miners had a bumper year during the bull run, collecting record fees as Ether’s price soared to nearly $5000. Ethereum 2.0 will make mining obsolete due to the move to proof-of-stake. Miners will stop receiving mining rewards and will be faced with a new reality. The miners will either use their equipment to mine other altcoins, or they can sell the equipment to raise capital for Ethereum staking. Most likely they will simply stake their stockpiled ETH to collect an APR of up to 15%.

Some miners will likely ditch the Ethereum network and new players will sense an opportunity to stake Ether.

What to expect post-Merge

When the Ethereum merge is complete, miner rewards will go to validators (or stakers). The staking rewards may be increased to attract more validators to improve the network’s security and decentralization. 

Apart from miners feeling the pinch of the transition, dApps and casual users are not expected to notice any changes. The network will continue to work as before, although the transaction fees and speed will remain unchanged until sharding kicks in. Sharding is ultimately the game changer that will take Ethereum in to its final iteration and explosive growth. Milestones like the Beacon Chain, EIP-1559‘s deflationary mechanism and Ethereum Merge are vital boxes to tick though before we get there.

Will the Merge make Ethereum cheaper and faster?

The answer is no. And here is why.

The Merge is not the final update in the journey to Ethereum 2.0. The first phase, as highlighted earlier, is the Beacon Chain, and this has already proved successful. This is followed by the Merge, which will see the network adopt a proof-of-stake consensus mechanism. The final stage of the update, sharding, will introduce side chains to make Ethereum more effective and scalable. It is in this final stage that Ethereum transactions will be cheaper and faster.

The Ethereum phases are as follows:

  1. Beacon Chain
  2. The Merge
  3. Sharding

Final thoughts

The Ethereum Merge is a transitional phase in which Ethereum migrates from PoW to PoS. The change will make Ether deflationary. Miners will be impacted by the switch as their source of income will be rendered obsolete. Even with the Merge in place, Ethereum’s transactions will not get cheaper or faster until sharding. However, with its sudden eco-friendly and ESG credentials, deflationary qualities, and higher staking rewards, Ethereum will be very attractive to institutional investors. As Bitcoin’s bull run in 2020 on the book of institutional investment showed, the sky could be the limit if this happens. However, if  Ethereum fails to implement a successful Merge, all bets are off. 

Looking to HODL your ETH in a safe hardware wallet? Look no further than CoolWallet S and CoolWallet Pro: secure and easy-to-use cold storage anywhere, anytime with military-grade encrypted Bluetooth and a secure element of up to EAL6+.


This article is not financial advice, but written for educational and entertainment purposes only for the CoolWallet community. Please do your own research.

Source: Wikimedia Commons

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