Ethereum (ETH) The Merge

We are getting closer to an event that the community has been moving toward for more than seven years — Ethereum is switching to a proof of stake (PoS) consensus.

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The Road So Far: Ethereum (ETH) The Merge Upgrade in Details

Energy consumption and sustainability are two sides of the same coin. Digital currencies have long been in the crosshairs of countless environmental agencies and individuals, and rightfully so. While Bitcoin may be one of the most well-known cryptocurrencies in the world, it’s not without fault (its estimated energy consumption per transaction is approximately 707 kWh). Ethereum has faced similar criticism, thanks in no small part to its estimated (but equally considerable) energy consumption per transaction (about 62.5 kWh).

ETH is expected to switch from its current proof of work (PoW) consensus mechanism to proof of stake (PoS) sometime between September 10 and September 20, 2022. Following this event aptly named “The Merge”, the network is expected to consume 99.95% less energy. Join us below to learn more about this revolutionary event and what it means for both ETH enthusiasts and holders/owners. Let’s begin.

Why is Ethereum switching from PoW to PoS?

Ethereum developers have been exploring PoS since 2014, a relatively new and untested model at the time. Ethereum was launched in 2015 using a PoW-based model. Back then, the developers outlined an ambitious roadmap of four stages, with the last one envisaging the transition from PoW to a reliable PoS-based model.

A difficulty bomb

In 2015, Ethereum experienced a hard fork that added a “difficulty bomb” to help encourage the transition to PoS within 16 months of launch.

This difficulty bomb would gradually make finding new blocks almost impossible to incentivize network participants to move from mining to staking. But since this hard fork, developers have delayed activating the difficulty bomb multiple times, hinting that the network was not ready for the transition.

Scalability issue

A transition to PoS has economical and technical implications for Ethereum. As a major smart contract platform, the Ethereum blockchain has experienced dramatic growth.

As more and more decentralized apps (dApps) are being built on the network, more transactions will need to be processed, which requires more space in Ethereum blocks. This led to the Ethereum block space wars, and situations when Ethereum transactions have required huge and disproportionate gas fees to be processed.

Scalability has also become a major issue, especially as competitors like Avalanche, Polkadot, and Algorand are all vying for Ethereum’s position. These networks all use different variations of PoS models. In addition, they are considered faster and cheaper than Ethereum in terms of transaction processing, while offering the potential for higher throughput and scalability.

Power consumption

Although Ethereum has made numerous updates with the aim of increasing scalability, a transition to PoS may be seen as a base for adding features that drastically improve power consumption. In turn, this switch should not only help retain the network effect that Ethereum enjoyed for years of operation, but also open gates for new opportunities.

Power consumption is another reason Ethereum chose to move away from PoW. It is expected that energy usage for the Ethereum network will decrease by more than 99.95% due to the abandonment of PoW mining. If all goes as planned, this could make Ethereum more energy efficient and affordable for users to participate in consensus.

What is the Ethereum team going to Merge?

On December 1, 2020, the Ethereum community and developers launched the Beacon chain, which uses PoS at its core. It has since existed as a separate blockchain, running in parallel with Ethereum’s mainnet. While the Beacon chain has not been processing mainnet transactions, it has been reaching consensus on its own state.

The Merge update will essentially merge the current Ethereum blockchain and the Beacon chain, bringing the two systems together. PoW will be replaced by proof of stake as a result of a software update and difficulty bomb activation.

Let’s consider an analogy. Assume Ethereum is an airplane that currently uses PoW as its engine. With the Beacon chain, the community built a new engine based on PoS. When the Merge update takes place, the new engine will be swapped in for the old one in mid-air.

Ethereum developers see this update as one of the most difficult for the network at the moment. But they made a lot of developments to prepare for this phase. Developers have been stress-testing the new network by running data and transactions on various Ethereum testnets.

According to Vitalik Buterin, one of the co-founders of Ethereum, the full specification for the Merge update has been recently completed, and the team is getting ready for full implementation. After that, there will be a hard fork of the Ethereum blockchain.

What is the current state of the upgrade and when the Ethereum Merge will happen?

During a conference call on July 14, 2022, Ethereum developers picked mid-September as a potential date when the Merge update may finally take place. Although this is not a hard deadline and only serves as an unofficial roadmap, the Ethereum price moved from $1,100 to $1,700 soon after this announcement. A week later, Vitalik Buterin, Ethereum’s co-founder, confirmed the pending release of the Merge update at the annual Ethereum Community Conference (EthCC) in Paris.

The final steps of the Ethereum Merge are expected to take place between September 10 and 20, 2022.

Follow our Ethereum (ETH) The Merge countdown placed on this page to know the time when the upgrade is going to take place. Keep in mind that the ETH merge timeline depends on numerous factors such as miners' performance, the hash rate, and the network workload.

How to prepare for the Merge?

The Merge is one of the most anticipated events of 2022 in the cryptocurrency industry. As such, there is a high likelihood that nefarious actors will attempt to exploit it and scam innocent individuals out of their crypto assets.

Important: please note that ETH holders and users are not required to take any action with their wallets or funds in preparation for the Merge.

CEX.IO strives to keep our customers informed on how to recognize and avoid such scams. Check out the modules on the CEX.IO blog.

Following the transition to PoS, Ethereum’s entire history will remain intact and unaltered. There are no warnings about the actions necessary to take by Ethereum holders before the upgrade. However, holders and users aren’t the only elements that exist in the Ethereum ecosystem.

Additional critical elements also include:

  • DApp and smart contract developers
  • Staking node providers and operators
  • Infrastructure providers and node operators

DApp and smart contract developers

Ethereum will undergo severe structural changes during the Merge. Consequently, developers may be spending time thinking about the piece How The Merge Impacts Ethereum’s Application Layer by Tim Beiko, an Ethereum Foundation member.

Staking node providers and operators

If you operate a staking node, your first order of business could be to run a consensus layer client, followed by an execution layer. To ensure that they can communicate securely, Ethereum’s team recommends authenticating both of these layers with a shared JWT secret.

Infrastructure providers and node operators

We have observed that installing a consensus layer client in addition to the execution layer client is an important measure for node operators and providers. Similar to the previous element, the team behind Ethereum recommends ensuring the two can communicate with each other with a layer of security that requires authenticating both clients with a shared JWT secret.

Analytics: the Merge’s potential impact on ETH supply and price

It’s unclear what influence the Merge may have on the price of ETH prior to or post-merge. However, the upgrade’s influence on the supply composition of ETH adds color to its price predictions after the merge and how the ETH value may ebb and flow given the market volatility. This impact may be observed using near term and longer term lenses, as a number of features and functionalities of post-merge Ethereum will roll out over time.

Near term

A notable near-term impact rests on the replacement of miners with stakers, or passive holders, who can’t redeem their ETH locked in staking contracts until withdrawals are enabled. Although it is speculative, withdrawals are expected to be enabled within 12 months of the merge date.

This means new supply (the rewards earned from staking) can’t be sold into the market, effectively reducing structural sell pressure from ETH’s supply inflation. Stamping out this sell pressure is expected to shrink the burden of supply inflation on the price of ETH. That may mean a smaller percentage of new issuance will initially find its way into accessible circulating supply.

For those who are unfamiliar with the process, staking works by locking coins into special accounts that allow them to earn rewards. Typically, but not in all cases, the rewards earned are paid out in the asset being staked (i.e. a user staking Coin X will receive rewards in Coin X). The coins placed in the special account are locked up and users are free to do what they wish with the rewards (e.g. stake them, sell them, hodl them, etc.).

In the case of post-merge Ethereum, the ETH rewards earned by those staking are locked up alongside the coins in special accounts. So, users aren’t free to use them until withdrawals from staking contracts are enabled. While this may be a burden for those who are staking, it means the rewards earned can’t be sold. In this event, the magnitude of sell pressure from staking rewards is dampened, which is potentially beneficial for the price of ETH.

Under PoW, miners are the only natural net sellers of ETH. Every day they mine for new supply which is then sold off to cover their operating costs (typically, energy costs and costs related to hardware). Thus, there may be some amount of sell pressure on ETH from new supply issuance each day.

Under PoS this looks a bit different because stakers don’t expend any input costs to capture new supply; instead, they passively hold ETH at no cost. Sell pressure from the new supply will probably be naturally mitigated for this reason under PoS. The inability to access rewards until withdrawals are enabled almost entirely eliminates it.

Long-term impact

The long-term impact of the merge relative to supply is connected to issuance (new ETH being created) and inflation (the impact of new ETH being pushed into circulation). New supply issuance, and by extension, the network’s inflation rate is expected to be positively impacted by the Merge. The chart below highlights roughly what ETH’s new supply schedule could look like post-merge. Note that issuance will be at the discretion of the amount of ETH validating on the network, or the amount of ETH staked.

ETH StakedMaximum Yearly
Issuance (ETH)
Maximum Yearly
Network Issuance (%)
Maximum Annual Return
for Validators (%)
1,000,000181,0190.17%18.10%
3,000,000313,5340.30%10.45%
10,000,000572,4330.54%5.72%
30,000,000991,4830.94%3.30%
100,000,0001,810,1931.71%1.81%
Source

ETH’s supply inflation under PoW has remained between 3.55% to roughly 4.4% over the last two plus years; meaning each year ETH’s supply has expanded by a magnitude of 3.55% to 4.4%. This is between 184 and 269 basis points higher than the maximum projected inflation rate under PoS, meaning ETH’s supply inflation may come down significantly. In turn, the creation of new ETH will have less of an impact on the value of the units already in circulation. The chart below shows the trend in ETH inflation under PoW since January 2020.

Ethereum: Inflation Rate

Source: Glassnode


Adding to the inflation cut is the burning of supply initiated by the Ethereum improvement proposal 1559 (EIP-1559). This combination could give ETH a negative inflation rate depending on how much supply is burned over time. ETH will probably have a negative inflation rate if more units are burned than are rewarded from staking. Projected burnt supply is abstract in that several moving factors go into it (e.g. overall network use, relationship, and use of layer 2, etc.), so it is difficult to measure the actual impact it will have. Nonetheless, it will likely contribute to the reduction in inflation to some extent.

The takeaway

While it is impossible to know what the price will do after a transition to PoS, several factors are expected to benefit the tokenomic landscape of ETH in the near and long term. The combination of these benefits means that value is expected to better accrue to ETH if new demand comes into the market, and leaves room to lessen the burden of value exiting the market. This may be beneficial for holders of ETH as the refreshed tokenomics post-merge is expected to favorably insulate the price of ETH from market behavior.

How will the Merge update affect gas fees?

We have observed that many users hold certain assumptions and guesses about how Ethereum will change after the Merge. One of these assumptions is that the Merge may make gas fees lower. But gas fees will probably remain stable, at least for now.

Essentially, the Merge update will change Ethereum’s consensus mechanism to PoS. But this change has not been engineered to significantly change any parameters that directly influence network capacity or throughput. Gas fees depend on demand, not consensus mechanisms, and blocks will still exist in the Ethereum network after the transition to PoS.

Originally, Ethereum developers planned to introduce scaling solutions with the Merge, which can potentially decrease gas fees. However, with the boom of L2 solutions like Optimism and Artbitrum, the priority has shifted to just swapping PoW to PoS via Merge. We expect that after Merge, developers will try to find an optimal way to implement new scaling solutions and expand the capabilities of L2. These features are expected to be introduced in the Surge update, meaning it may take some time before users see a significant drop in gas fees.

The role of Layer 2 blockchains

Because of its scalability issues, Ethereum may experience high gas fees when activity within the network increases. This has appeared to be a major reason why layer 2 (L2) solutions like Optimism and Arbitrum have become one of the most popular ways to lower Ethereum's gas fees.

As a result, Optimism and Arbitrum were consistently taking up a greater portion of activity relative to mainnet, as shown in the chart below. Furthermore, as the utility of Ethereum’s L2 solutions expands, the mainnet activity may continue to diminish.

Originally, Ethereum developers planned to introduce scaling solutions with the Merge, which can potentially decrease gas fees. However, with the boom of L2 solutions like Optimism and Artbitrum, the priority has shifted to just swapping PoW to PoS via Merge. We expect that after Merge, developers will try to find an optimal way to implement new scaling solutions and expand the capabilities of L2. These features are expected to be introduced in the Surge update, meaning it may take some time before users see a significant drop in gas fees.

ETH Activity Share

Activity share of the two largest L2s is growing as activity on L1 is declining.


At the same time, the cumulative transaction count on Optimism and Arbitrum appears to be continuously rising as the transaction count on the mainnet is declining. It could indicate that users are vacating Ethereum’s base layer to use L2.

Transaction Count (Arbitrum + Optimism against Mainnet)

We observed that the rise of L2 solutions helped decrease gas fees within the Ethereum mainnet. At the moment, mainnet gas fees are near historically low levels. Additionally, it may also be related to the lower network activity that Ethereum is currently experiencing because of the bear market.

Ethereum: Mean Transaction Gas Price [Gwei]

How the Merge will affect Ethereum users?

There are many participants in the Ethereum ecosystem, from ordinary traders to decentralized applications (dApps) developers. Below you can find a short list of some important changes and how they might affect different members of the network.

Those who trade and hold ETH

If you currently obtain some ETH on a cold wallet or online account, in theory, you don’t need to do anything with your coins. When the Merge upgrade takes place, funds will still be accessible. All ETH holdings, as well as balances in other tokens issued on the Ethereum blockchain, will be upgraded to PoS consensus.

The development team stated on the official Ethereum website that the transaction history remains intact and unchanged after the transition to PoS. However, the team behind Ethereum also reported possible scam events.

Be on the lookout and remember: there is no "ETH2" or any other new token appearing on the network instead of the original ETH coin. We have not identified any need to send your ETH somewhere to upgrade it to “ETH2” or exchange them for “new” tokens in return.

Keep in mind that some crypto platforms issue ETH-backed stablecoins to offer you an ETH staking option. In this scenario, you should receive these wrapped tokens as your staking reward. For example, Coinbase appears to offer ETH2 stablecoins to those participating in ETH staking on their platform and Binance has BETH tokens created for the same purpose.

Node operators

After the Merge, the third-party endpoints will be unavailable to obtain execution data. So, staking and non-validating node operators, as well as providers, need to run and authenticate both a consensus layer client and an execution layer with a shared JWT secret before the Merge. This way they'll be able to communicate securely.

Additionally, staking node operators need to set a fee tips/MEV recipient address. Otherwise, the node validator will work as usual, but stakers will miss out on potential rewards.

Developers

The Merge is expected to have minimal impact on smart contract and dApp developers. However, we recommend checking Tim Beiko's post on How The Merge Impacts Ethereum’s Application Layer.

What will happen with Ethereum miners?

The PoW consensus used by Ethereum before the Merge upgrade requires mining to use their computing power and validate network transactions. In exchange, they are rewarded with Ethereum tokens.

However, as soon as the Merge takes place, Ethereum will become a PoS blockchain, a consensus where stakers perform the transaction validation. So, in this scenario, miners will no longer be required. Still, they could sell their mining rigs and become validators on the new PoS Ethereum blockchain.

After the Merge, the network will be in demand for participants called validators that will have to deposit considerable amounts of ETH tokens to start validating blocks, create extra tokens, and reap potential staking rewards. In addition, the PoS protocol will reduce issuing new ETH and will issue staking rewards in smaller blocks.

What choice do Ethereum miners have?

Individuals who used to mine ETH for profit — either by sending computer power to mining pools or by managing farms of mining equipment independently — may now find themselves in an unenviable position. They possess resources they don’t need (pricey mining hardware which can’t be used for staking) but they lack human capital, a resource necessary for staking.

To qualify for the staking rewards that would replace profit from mining, users will need to contribute a minimum of 32 ETH. This is a must for those going to run a solo staking node.

To start earning significant rewards, a network validator would be expected to stake way more than just 32 ETH. At the time of writing, this amount equals approximately $50,000.

To supersede the mining revenue, staking would need independent miners to develop and maintain their staking pools, which is a feat far more convoluted than overseeing a stack of computer hardware.

In case miners are not capable or willing to build their staking pool, they may look at other options. They could, for example, sell their equipment or take part in an organized staking pool. Similarly, they could keep their mining rigs, as long as they are composed of more generalized graphics processing units (GPUs), unlike specialized application-specific integrated circuits (ASICs), which may at the time become redundant, and employ them to mine other cryptos compatible with their processors.

The drawback of these options is that, whichever the miners opt for, they will probably earn much less compared to the amount they used to make from ETH mining.

The fate of mining pools

The Merge should not be much of a problem for mining pools, as they don't expect to be greatly impacted. Resource-pooling organizations never used to generate computer power, nor did they invest colossal amounts of money in mining hardware that will rapidly become obsolete. What these organizations possess is human capital, i.e., the infrastructure required to coordinate resource pooling, get new clients, and make sure existing clients remain happy.

For the reasons above, prominent Ethereum mining pools may benefit from shifting to staking pools. These are organizations who are supposed to coordinate and combine ETH delegated by numerous individual “stakers” — clients who have deposited ETH and get rewards in return — get rewarded in ETH.

According to Daniel Hwang , the head of protocol at Stakefish, a leading staking pool, the transition from mining to staking demands business development, communications with core developers, client teams, customer support, software, and redundancy. Stakefish, together with its sister company f2pool, reports it has been preparing for the transition for a while. EtherMine, the largest Ethereum mining pool, is reportedly prepared for the transition. The business has launched a beta version of its staking pool service dubbed EtherMine Staking.

However, individual miners that comprise these pools, as well as independent ETH miners, may face a much harsher reality.

Is it possible to reap the same returns?

Miners who don’t want to get rid of their equipment but would rather keep it and employ it for mining other crypto have at least two alternatives:

  1. mine other GPU-compatible tokens such as Ethereum Classic (ETC)
  2. mine a proposed Ethereum fork (ETHPoW) which will keep running on the proof of work protocol.

ETC Mining

Ethereum Classic (ETC) is a splinter network that resulted from the 2016 hard fork, following the hack where $60 million was stolen from one of the youngest decentralized autonomous organizations (DAOs) on the Ethereum network. At that moment, Ethereum was divided into two chains. The new one that reworked history as if the hack had never happened was named Ethereum. The original one went on under the name Ethereum Classic (ETC).

Throughout its existence, ETC has been working under its namesake’s shadow. In July 2022, the network's native token ETC skyrocketed by 150%, so its market cap as of August 30, 2022, amounted to more than $4.3 billion. However, that figure remains dwarfed by Ethereum's cap of nearly $190 billion.

ETHPoW

A group of Chinese ETH miners have suggested a hard fork that would keep ETH as a proof of work chain. Its ticker symbol is referred to as ETHW or ETHPoW. The fork is scheduled to occur around September 8, 2022, almost a week before the Merge. Oddly enough, a leader of this fork is Chandler Guo who was one of the chief architects of the Ethereum Classic fork several years ago.

The hard fork will replicate everything from Ethereum, starting from NFTs to DeFi liquidity pools. All the tokens will also be copied on the new chain. This is expected to create new opportunities for both miners and tech-savvy traders who can make a profit from the fork.

Still, the jury is out on if ETC will manage to rise in the post-Merge world. However, as strange as it may sound, network participants want Ethereum to succeed in the Merge, no matter what protocol they use. Yet, they appear to prefer it to stay on the good old PoW consensus mechanism.

What to know about Ethereum 2.0 staking

The staking model is attractive to a wide range of crypto users and developers as it is easier on the resources compared to POW and does not require specialist skills. There is no need for expensive equipment or special technical skills to participate in crypto staking. Users can support the network processes and earn potential crypto rewards by simply putting stakeable assets in their wallets. Let’s find out how the staking model will be implemented in the Ethereum network and what you’ll need to start staking ETH.

The vision of the staking process in Ethereum 2.0

After the Merge the network will officially switch to using the Beacon Chain as its block production mechanism. So here's what the staking and validation process will look like.

  1. During the verification phase, the Beacon Chain aggregates validators randomly into "committees" of 128. After that, each committee is assigned to a specific shard block.
  2. Each committee has a limited time to add a new block and verify the transactions in it.
  3. One random member of the committee has the exclusive right to propose a new block, while the remaining 127 members vote on the proposal and approve the transactions.
  4. When a majority of the chosen committee approves a block, it is added to the network. At the same time, a "cross-linking" is created to verify the addition of a new block.

Cross-linking is a kind of extra security layer, matching the states of individual segments to the Beacon Chain. The end state of each shard must be reflected in the main chain.

What do users need to start staking ETH?

Crypto staking doesn’t require special equipment for users to participate in the network processes and receive their potential earnings. It’s enough to have a device with an internet connection and some ETH on a wallet that supports staking options.

However, there are some additional requirements for those directly participating in transaction validation.

Running own node

Users who want to receive the maximum possible network rewards can run their staking node using a home computer. Yet, they must follow these requirements:

  • Deposit no less than 32 ETH
  • Keep a stable network connection 24/7
  • Maintain hardware that runs an Ethereum execution client and a consensus client at the same time

Using third-party hardware

If you're not sure about your equipment or internet connection, you may choose to use staking-as-a-service (SaaS) platforms. They are designed to run the hardware operations on your behalf, and you need to lend a minimum of 32 ETH to participate in staking.

Choosing a third-party SaaS provider brings trust issues into the equation. Remember to perform your due diligence, for example, using thorough research, and keep your wallet's private keys secret.

Joining a staking pool

This option allows users to participate in ETH staking without worrying about the technical side and with almost any amount of ETH in their balance.

Staking pools are third-party platforms designed to combine users’ assets and efforts to increase their chances to earn a staking fee. There’s no need to have 32 ETH to join a staking pool. Some of them allow you to enter with as little as $1 in ETH.

Important: Staking pools are not a native option for staking the Ethereum network and are provided by third parties under their terms and conditions. Most of these third parties provide "liquid staking" options, which usually include an ERC-20 liquidity token that represents your staked ETH.

Staking on centralized exchanges

Centralized platforms that support ETH staking may be better suited for holders who are uncomfortable with directly running a validator node. They are designed to allow their customers to earn some profit (platform dependent) from their ETH holdings with minimal effort.

Misconceptions about the Merge

All groundbreaking and highly-anticipated events in any industry come with their fair share of myths and misconceptions. When it comes to the Ethereum Merge, below are the most common ones (debunked).

  1. The Merge can result in downtime.
    We believe this is false because the very design of the Merge upgrade ensures zero downtime while transitioning to PoS.
  2. All stakers will exit at once when withdrawals are enabled.
    We also considered it false because validator exits are rate-limited due to security reasons.
  3. Transactions will be much faster after the Merge.
    Transaction speed will likely remain the same on layer 1 (although some slight changes may occur).
  4. Gas fees will be lower after the Merge.
    The Merge is not an expansion of network capacity. Instead, it is a change of consensus mechanism.
  5. Staking 32 ETH is required to run a node.
    No ETH is required for this action. Anyone is free to run a node (sync their self-verified copy of Ethereum).
  6. Ethereum 2.0 (ETH2) is a new coin.
    ETH 2.0 is not a new coin, nor will it change the amount of ETH users hold. It is simply a name of the upgrade that will improve the Ethereum blockchain.
  7. Staking APR will triple after the Merge.
    We believe this is false since up-to-date estimates indicate an approximate 50% increase in APR post-merge.
  8. Validators will not receive liquid ETH rewards until the Shanghai phase.
    False, as MEV/fee tips should be credited to a Mainnet account in the control of the validator. This would mean they will be available immediately.
  9. Once the Merge occurs, you can withdraw staked ETH.
    False, staked will will remain locked and illiquid for at least 6-12 months following The Merge.

What are the potential risks the Merge can bring?

Although developers made numerous preparations and simulated the Merge update in various testnets, there is always a risk that something could go wrong. With thousands of apps running on Ethereum, any issue could seriously impact the Ethereum reputation and trust of its community. Here are some of the potential risks that may appear when the Merge update goes live:

Update issues and bugs

If part of the network fails to update its software, it could lead to potential technical glitches in the Ethereum network. To prevent such an outcome and quickly fix potential issues, the Ethereum Foundation significantly expanded its bug bounty program, providing up to $1 million in rewards on the most critical bugs.

Hacker attack

The Merge update is likely one of the most notable events in the crypto industry to date and some hackers may use it to make themselves famous. Hackers didn’t have any financial incentives to attack testnets where Ethereum developers prepared for the Merge. But with merging the live Ethereum network which has over $30 billion in total value locked (TVL), hackers may try to find potential vulnerabilities and exploit them to their advantage.

New Ethereum fork

The Merge will likely make mining redundant in the updated Ethereum network, so a certain part of the network may not accept a transition to PoS. In retaliation, miners could duplicate the old network, creating a new competing blockchain. The projects within the Ethereum ecosystem will eventually decide then which network to support.

ETH Merge Delay

This is a reputational risk. The crypto community is keeping an eye on Ethereum, expecting the Merge update to be finally released in September 2022. But before the Merge takes place, there is always a risk that Ethereum developers may find a new bug and delay the update.

Legal issues

Some industry experts claim that after moving to PoS, ETH could be classified as a security according to the Supreme Court of The United States. Should ETH qualify as an investment contract, it would be subject to a different level of regulatory scrutiny in countries like the U.S.

Centralization issues

The network may face centralization issues and become more vulnerable to attack if the transition is supported by a relatively low number of network participants. In addition, PoS is sometimes viewed as a less secure alternative to PoW in terms of centralization. However, potential attacks on the PoS network could be even riskier for the attacker than in the PoW network.

What updates can we expect from Post-Merge Ethereum?

Not so long ago, the Merge update was considered a grand finale for the network. But recently, Buterin has revealed future stages of development for the Ethereum Network. According to Buterin, after the Merge update, Ethereum will experience “Surge, Verge, Purge, and Splurge” updates (don’t worry: it’s not a magic spell).

Ethereum’s new roadmap is highly technical and complex, but we’ll try to explain it in simple terms.

Ethereum's roadmap

Hint: roadmap is not top-to-bottom, but a simultaneous left-to-right. Source: Coindesk

The Surge phase

The Surge update is focused on increasing Ethereum’s scalability by introducing sharding and rollups.

Sharding

Sharding would split Ethereum’s blockchain into smaller pieces known as shards. Creating these mini-blockchains is a lot easier when the network uses a proof of stake consensus mechanism. Zilliqa is an example of a network that uses sharding. Ethereum's sharding approach aims to create a blockchain with 64 linked shards.

Sharded version of Ethereum

One of many variations of the sharded version of Ethereum. Source: Ethereum


In order to better understand sharding and how it improves scalability, let’s take the following example.

Imagine a seminar room where 500 students are examined by 10 professors. Here, passing an exam means conducting transactions, while professors represent nodes. The current Ethereum principle assumes that every student must pass an exam to every professor. It makes the process reliable but relatively slow and less scalable.

Sharding offers a way where each professor can be responsible for examining 50 students. If a professor is not sure about a grade, they can consult with other professors (linked shards). As a result, the examining process may speed up significantly.

Instead of standard sharding, Ethereum may potentially utilize danksharding. It applies the same concept of splitting the network into shards but has a few key differences. Danksharding is focused on making network data more available to rollups (layer 2) rather than increasing throughput on the base layer (layer 1).

Rollups

Rollups assume the secure execution of transactions outside of Ethereum’s base layer, and then post the transaction data onto the layer 1 blockchain. As a result, using rollups decreases the load on the base layer, while increasing its potential for scalability.

Rollups have been an integral part of the Ethereum scalability roadmap since 2020. An entire layer 2 industry has popped up to increase Ethereum’s capacity with leading products such as Arbitrum, Optimism, and Loopring.

Ethereum developers are looking to expand the protocol’s scaling potential by making rollups more powerful and allowing them to process more data. There are several major ways to achieve this (EIP 4844 and EIP 4488) but it is currently unclear which one will eventually be implemented.

Getting back to our “Ethereum Airlines” analogy. If the Merge update changes the engine of the “airplane,” then the Surge update reshapes its hull with lightweight materials (sharding) and upgrades tools that can make the “airplane” more agile (rollups). As a result, it may increase its potential max speed.

However, even introducing sharding and rollup upgrades will not make Ethereum a supersonic jet overnight. It may take some time for network participants to adapt to and take advantage of new features. Sharding implementation was postponed to “sometime in 2023” (although Ethereum timelines are known for stretching out).

The Verge phase

The Verge update will introduce Verkle trees, and is also related to resolving Ethereum’s scalability issues. Verkle trees can be considered “upgraded Merkle trees.”

At the moment, Ethereum uses Merkle trees which are databases where all the data on the Ethereum blockchain is stored. Merkle trees enable effective data validation and structuring by converting blocks of information into long strands of code. These blocks are grouped together to form branches that can be traced from root to tree. This system is also used in Bitcoin.

Merkle tree

Merkle tree Source: Hackernoon


In very basic terms, Verkle trees are wider and need less information to validate information than Merkle trees. These Verkle trees require more complex cryptography to implement but offer simpler validation on the blockchain. As a result, validation can be faster and nodes can store less data. For a deeper dive into Verkle trees, check out this article.

It is worth noting that Verkle trees were only recently introduced in 2018, and are still in their early stages. This could mean that it may take a while before their full-scale implementation in the Ethereum network.

The Purge phase

The Purge update is focused on reducing, or “purging,” historical data stored in the nodes. At the moment, the full Ethereum blockchain contains over 800 gigabytes of data, and the client has to download all historical blocks to join the Ethereum network.

With the Purge update, every node will no longer have to permanently store all the network’s historical blocks. Instead, clients will stop storing history older than one year. This should see decreased hardware requirements for nodes, and reduced strain on the network that could make the process of validating the blockchain more efficient.

According to Buterin, Ethereum will be able to process 100,000 transactions per second by the end of this phase.

Considering there is a huge ecosystem of apps that rely on this on-chain data, this poses a valid question and highlights a potential problem. If data older than a year isn’t on chain, where is it being stored and how can the network trust this alternative?

Ethereum developers have suggested several options to resolve this issue, including shifting responsibility for storing Ethereum data to other protocols. Some of the ideas were described in EIP-4444, while the roadmap mentions the Portal Network. At the moment, it is unclear what solution will be implemented for storing older data on the Ethereum network.

Post-Merge: the Splurge

The Splurge phase contains a set of different upgrades that should help ensure the network continues running smoothly post-Merge. From adding new features aimed at improving the user experience, to seamlessly integrating prior updates to configure with the new protocol, the Splurge phase is designed to help make the network more accessible to the average user.

Let’s take the account abstraction mentioned in the roadmap as an example.

To put it simply, there are currently two types of accounts in the Ethereum network: external and contract ones. External accounts are wallets from which cryptocurrency is transacted, while contract accounts represent smart contracts.

Ethereum account abstraction has the goal of reducing these two account types down to one: a contract account with both transaction and smart contract capabilities. Thus, Ethereum’s smart contracts would discard certain limitations they currently have and become more like first-class citizens with a more prosperous environment.

At the same time, average users would be able to create accounts adapted to their needs. Note that this stage is still in the distant future.

Conclusion

Ethereum appears to be at a critical moment in its journey. The network is facing a lot of challenges in terms of scalability due to its blockchain size and bandwidth. In turn, there are a lot of competitors who want to take Ethereum's status as a major smart contract platform. However, Ethereum developers see these updates not only as a way to survive but even thrive going into the long term.

At the latest EthCC, Buterin claimed that Ethereum will be 55% complete once developers finish the Merge update. The above-mentioned roadmap is not final and many new changes may appear along the way. But if developers implement features mentioned in the current roadmap as expected, this could already push Ethereum to the next level.


Ethereum Merge FAQ

1. What is the Ethereum Merge?

The Merge is an update of the Ethereum network that aims to complete Ethereum’s transition to a proof of stake consensus mechanism. This update implies merging the current Ethereum blockchain, which utilizes a proof of work model, and the Beacon chain, a parallel Ethereum blockchain that uses a proof of stake in its core.

After the Merge, the network will begin incentivizing staking on the network while discouraging mining by retooling the rewards structure. Staking will replace mining as the main economic engine on the blockchain, thus urging more users to adopt the new PoS consensus mechanism.

2. When will the Ethereum Merge happen?

The Merge update is expected to be released between September 10 and 20, 2022. Find out more about technical circumstances that will trigger the Merge update here.

3. Are my funds safe?

Ethereum developers successfully simulated the Merge update in various test networks and made necessary preparations for its release on the mainnet. However, there are some risks that the Merge update could bring. Check above the block about potential risks to find out.

4. Why is Ethereum going to proof of stake?

Moving from proof of work to proof of stake is expected to help developers prepare a foundation for new features that should improve the network’s scalability and throughput. In addition, proof of stake will significantly decrease power consumption for the Ethereum network, making the network more energy efficient and affordable for users.

5. What should I do to upgrade my Ethereum wallet and assets?

ETH holders are not required to do anything with their coins before Merge. Any funds held in your wallet before the Merge will still be accessible after the Merge. No action is required to upgrade on your part.

6. Are there any downtimes expected during the Merge?

No, the very design of the Merge upgrade ensures zero downtime while transitioning to PoS.

7. Will the Ethereum network become faster and cheaper to use?

Transaction speed and gas fees are expected to remain the same after the Merge release. However, the Merge is a foundation for further upgrades that are expected to improve the scalability of the Ethereum network.

8. How can the Merge solve scalability issues?

By itself, the Merge update is not aimed at solving the scalability issues that the Ethereum blockchain is facing. However, updates that should follow the Merge are expected to bring solutions that can provide higher scalability and network throughput.

9. Will Ethereum be renamed?

The Merge update doesn’t imply the rebranding of Ethereum or its native token.

10. Will ETH holders receive ETH2.0 tokens after the Merge?

ETH 2.0 is another popular name for the Merge update. The Merge update doesn’t come with a new token by default. However, the Merge update may lead to the potential fork of new tokens that will rely on other network rules. Find out more about it in the block about potential risks.