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  • Writer's pictureAspen Digital

Ethereum 2.0: The Merge — Aspen Digital

Updated: Apr 7, 2022

There has long been talk of Ethereum’s Merge, which refers to the shift from a proof-of-work (PoW) to proof-of-stake (PoS) algorithm. The much anticipated Merge is expected to take place in Q2 2022, and shines light on the potential for Ethereum’s new consensus layer to resolve the execution layer’s scalability issue.

In terms of Ethereum’s roadmap overall, we are currently in Phase 0, the Beacon Chain. This phase was effective from December 1, 2020. The aforementioned Merge refers to when Ethereum’s mainnet will merge with the Beacon chain proof-of-stake- system. A proof-of-stake mechanism would enable nodes run by “stakers” to validate transactions. In contrast, Ethereum currently uses proof-of-work to validate transactions, which relies on centralized entities called miners to validate transactions on the blockchain. The full, multistage transition to proof-of-stake will be followed by the rollout of shard chains.

This next stage in Ethereum’s roadmap, the shard chains stage, is expected to reduce network congestion and increase transactions per second by creating new chains. These chains are known as “shards.” At the moment, the shard chains stage is set to launch sometime in 2023.

Current Stage: Beacon Chain and Kiln Testnet for the Merge

Taking a deeper look into the Beacon Chain, its main difference from the Ethereum mainnet is that it cannot handle accounts or smart contracts. The Beacon Chain’s features also include introducing staking to the Ethereum ecosystem. More specifically, it includes staking ETH to activate validator software. This is important, since validators process transactions and create new blocks on the Ethereum blockchain. Moreover, staking is less energy intensive than proof-of-work, the mechanism originally used by Ethereum to validate transactions. The Beacon Chain will thus serve as a first step to introducing shard chains to a proof-of-stake network. The “shards” will increase the capacity of the network and improve transaction speed by extending the network to 64 blockchains. Beacon chains will also be responsible for randomly assigning stakers to validate shard chains. This will make it difficult for stakers to collude, and hence maintain security. It is additionally significant to note that during the Beacon Chain stage, both the mainnet and Beacon Chain will run in parallel, with the mainnet using proof-of-work and the Beacon Chain using Proof of Stake. Ethereum’s Merge on the Kiln testnet took place in March 2022. The Ethereum Foundation announced that Kiln is the final public testnet before Ethereum’s transition to a proof-of-stake network, where existing public testnets will be upgraded.

What’s Next: The Merge

The Merge refers to deploying Ethereum’s execution layer — the term for the current Ethereum network — to the “consensus layer” of the Beacon chain, the term for Ethereum’s upcoming proof-of-stake blockchain. Previously, the consensus layer was referred to as ‘Eth2.’ This, however, has been deprecated as we approach the Merge.

Originally, the plan was to work on shard chains before the Merge to address scalability issues. However, with the boom of Layer 2 scaling solutions, developers reprioritised swapping from proof-of-work to proof-of-stake via the Merge.

During the Merge, the mainnet will be able to run smart contracts into the proof-of-stake system, plus the full history and current state of Ethereum, to ensure that the transition is smooth for all ETH holders and users. Once completed, the PoW consensus layer in Ethereum will be removed and the consensus on all future blocks on the Ethereum blockchain will be achieved by the new PoS consensus layer. None of the transactions done on the Ethereum network will be lost in this transition. As a result, the Merge will have no effect on the data layer of the Ethereum network and is not the launch of a new Ethereum version. Rather, the Merge is an exciting upgrade to the consensus layer, bringing Ethereum in line with the original vision laid out at its genesis.

At its core, the Merge to PoS reduces network energy usage by at least 99.95%. Currently, the network has about the same carbon footprint as the entire nation of Finland and the ecosystem knows we need to do better. The Merge will also allow participation in the network to be more attainable for a larger portion of users — not just large miners — and more equal distribution of network rewards to incentivise good behaviours, since yield will be opened up to many more users. This will occur despite a decreased issuance rate of ETH and smaller block rewards.

Common Questions Regarding the Merge

Does “The Merge” solve high gas prices (network fees)?

No. “The Merge” is limited in scope to upgrading Ethereum’s consensus mechanism. In practice, it will not have any effect on the current user experience of Ethereum today. Future updates on the Ethereum roadmap, such as sharding, will directly help to improve gas prices. At this time, however, sharding is considered to be a lower priority than the Merge. Instead, Ethereum is prioritising the elimination of proof-of-work energy inefficiency by a majority of the Ethereum community.

Can I stay on the proof-of-work version of Ethereum after the Merge?

No, because there is only one Ethereum and the entire network will switch to the new proof-of-stake consensus engine. When the Merge occurs, the entire Ethereum proof-of-work chain becomes the Ethereum PoS chain.

If any nodes were to continue mining a PoW version of Ethereum, they would be on their own minority fork and the economic value of their block rewards would be far below their cost of operation. Because miners are incentivised to operate at a profit, it is expected that all PoW participants will immediately begin to mine with their hardware on other non-Ethereum PoW blockchains.

What is the Triple Halving?

The Triple Halving is a community name given to the large drop in ETH issuance that will occur once the Merge takes place, and Ethereum is fully upgraded to a proof-of-stake consensus algorithm. The Triple Halving is a play on Bitcoin’s “Halving”. While Bitcoin halves its issuance rate every 4 years, Ethereum will see its issuance rate reduced by roughly 90% at the time of the Merge — that is equivalent to three Bitcoin “Halvings” happening at once! Ethereum will experience the same issuance reduction in an instant that would take an additional 12 years on Bitcoin’s network.

Under the current PoW model, Ethereum issues roughly 13,500 ETH per day — an annual issuance of about 4.3% of the total ETH supply. However, the PoS issuance model is determined based on how much ETH is actively being staked on the network. Current projections predict a drop to between a 0.3% to 0.4% issuance rate when the Merge occurs. For comparison, Bitcoin currently issues 900 BTC per day — an annual issuance of about 1.7% of the total BTC supply. The next two “Halvings” will reduce Bitcoin’s issuance to approximately 0.8% in 2024 and 0.4% in 2028 as scheduled. With Ethereum’s expected drop in issuance after the Merge to be between 0.3% — 0.4%, it will not be until 2028 that Bitcoin’s issuance is within range of Ethereum’s again.

When “The Triple Halving” is combined with the BASEFEE burn mechanism of EIP-1559 (live as of August 2021), it is projected that Ethereum’s issuance will actually become deflationary during periods of high user activity.

Looking Forward

The Ethereum Merge is expected to happen in Q2 2022. Once complete, stakers will be assigned to validate the Ethereum Mainnet. Mining will no longer be required, and miners will likely invest their earnings into staking in the new PoS system. What’s more is that immediately following the Merge, some features, such as withdrawing staked ETH, will not yet be supported — these are planned for a separate upgrade shortly after the Merge. As mentioned previously, shard chains will be the next step after the Merge. This should occur sometime in 2023, depending on how quickly work progresses after the Merge. All in all, these upcoming changes are important to keep in mind when observing the market and how Ethereum’s Merge will play out in full this coming quarter.

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