ETH Merge
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What is it?
In simple terms, the merge is a swap from Proof of Work consensus to Proof of Stake consensus. When ETH originally launched back in 2015, the creator decided to follow BTC and use a Proof of Work validation method on the blockchain.
This essentially means that you’re running physical hardware, using electricity and running a server that does a series of equations to validate transactions and blocks on the blockchain. The validator (node) that solves the block and proves it is valid gets a reward ( gas fees) for solving it.
From the start, Vitalik had plans to move to POS in the road map and has been testing it since the beginning. In 2020, he launched his first POS test chain called the Beacon Chain to begin the transition to POS.
The goal of the chain was to :
- Test the PoS consensus
- Start slowly bringing in stakers to make sure the chain was secure for the eventual merge
- Not disrupt the current PoW while running any of these tests
In that time the chain accumulated 425k validators and 13.5 million ETH staked. When the ETH block difficulty hits 58750000, estimated September 15th, 2022 6 AM UTC, transactions will immediately begin being mined on the Beacon Chain (PoS) instead of the current PoW chain.
As long as nothing goes wrong, all block state will be seamlessly transitioned over. If you owned a token before, you will still own it. If you had ETH before, you’ll still have it.
What’s the point?
There’s really 3 main reasons for switching to PoS and those are Sustainability, Scalability/Speed and Deflation.
Sustainability
With regulations looming on crypto currency and global focus on increased sustainability and eco friendly options, it makes sense that the ETH network would want to get ahead of it and move to a more sustainable option. By switching to PoS they’re able to cut down on 99.95% of the electricity costs associated with running the blockchain.
Scalability/Speed
While these changes may not be seen or felt right away, a big reason for the merge is to prepare the chain for scalability. Currently, the chain can only process around 20–30 tx per second. As many of you have probably seen, as volume increases, the chain starts to run slow and expensive.
This will be significantly increased but won’t be immediately fixed with the merge, but the merge allows for future upgrades including sharding (splitting the block chain into multiple shard chains) which will have huge impact on the speed and cost of transactions.
The speed of blocks is also going to be a bit more stable and faster, but not enough to be noticeable for daily use. Currently, ETH blocks average around 13–14 seconds, but in high volume times can be much longer. After the merge, you can expect just about every block to be a stable 12–13 seconds even in high volume.
Deflation
One of the lesser talked about points about the eth merge is the fact that it could actually help ETH become a deflationary asset. With a prior update to ETH (EIP-1559), the block chain started burning a small amount of ETH on transactions, but with the high gas fees being paid to miners it didn’t do much to cause deflation. It was more of a way to fight inflation.
Pre-Merge an average of 13,500 ETH are being paid out per day to validators. Post merge they’re estimating around 1,300 ETH will be paid out daily. This is more than 90% decrease in the amount of ETH being paid out daily and if you pair that with the burn, if there’s enough volume, the supply of ETH could easily start to decrease.
Many people are calling this a Triple Halvening, because it would take 3 BTC halvenings to have the same affect.
ETH Hard Fork
Since many miners have been running their ETH nodes and been making a profit for many months / years, they’re not exactly thrilled about losing out on the chance to make this profit. There’s a group of them that have been working on an ETH hard fork to deploy after the merge.
This essentially means there would be 2 identical versions of ETH. The “real” one would have the ticker $ETH and would be running on PoS and have the majority of volume / support. But there would be a secondary chain with the ticker $ETHW which will be running and all your assets will be duplicated there.
No one can say for sure what this means for users who wish to participate in the ETHW chain, but I would imagine they won’t have much support / volume. We don’t know if ETHW will have any intrinsic value, since it’s essentially a whole different coin and we can’t be sure there will be any activity there.
Many projects have come out and stated they won’t support the new chain including Uniswap, because of the security risks involved. If you do decide to participate 1 thing you need to be wary of is something called a Replay Attack.
A Replay Attack essentially means if you do something on the ETHW chain, for example sell an NFT, a malicious attacker could be waiting and duplicate the transaction on the ETH chain causing you to send a transaction you didn’t mean to send.
How do I prepare?
First thing to mention is that if you own NFTs, I would recommend delisting all of them pre-merge. With so many changes happening, the threat of Replay Attacks and everything else, I wouldn’t want to have any open listings waiting to be exploited.
Besides that, if you don’t plan on touching the ETHW chain you don’t need to do anything to prepare. Wait for the merge to happen. Once it happens go about your business as you usually do.
If you do plan on playing on the ETHW chain as well as ETH chain there are some precautions you should take to make sure you’re not vulnerable to Replay Attacks.
- Before the merge make 2 fresh wallets. (Wallets B and C)
- Transfer all your assets to wallet B
- After the merge send all your assets to wallet A on PoS
- After the merge send all your assets to wallet C on PoW
This may be some extra work and gas fees, but it’s well worth it to keep your assets safe if you do want to risk it and trade on the ETHW chain.
Risks:
- With any technology, things can go wrong. There have been plenty of tests, so I don’t expect anything major to happen, but if something major were to happen, it could cause widespread panic and ETH could go down for a period of time.
- Large staking pools could be come a security risk. It would be very hard for a single person to obtain enough ETH to pose a huge security risk, but bigger companies who have staking pools could be susceptible to security risks
Misconceptions:
The merge will immediately reduce gas fees
While this may be the case in the future, the main point of the merge is to change the consensus mechanism. It won’t directly lower gas fees
Transaction speeds will be reduced drastically after the merge
Transactions will be slightly faster, but the main difference will be the stability. Blocks should always be 12–13 seconds independent of volume
Staked ETH will be available for withdraw once The Merge happens and cause huge sell pressure
Staking will not immediately be available after the merge. Only after the Shanghai upgrade will you be able to withdraw’
Once staking is enabled, validators will withdraw all their eth and dump at once
Even after the Shanghai upgrade, validators will have withdrawal limits to reduce this
The merge will cause massive downtime of the ETH chain
As long as everything goes smoothly, the merge will be seamless and will cause zero downtime
TLDR
- Shouldn’t be any down time caused by the merge
- Will cut down energy costs by 99.5%
- Will make the chain more stable, slightly increase speed, which will help handle more volume
- Prepares the chain for future upgrades to increase speed and lower transaction costs
- Decreases the ETH being paid out to validators by 90% (Triple Halvening)
- When the merge happens, current miners will hard fork the chain to create a 2nd block chain called ETHW
- All of your assets will be duplicated and exist on ETH and ETHW
- You will be able to trade your assets on the ETHW chain as normal, but there are big risks involved (Relay Attacks explained above)
- Also keep in mind ETHW most likely won’t have much support or intrinsic value
- If you don’t plan on interacting with ETHW, there are no steps to prepare for the merge
- If you plan on interacting with ETHW, you should take precautions to prevent yourself from Replay Attacks
