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Ethereum – The Merge (EIP-3675)
What is The Merge?
Simply stated, The Merge is Ethereum’s transition from a Proof of Work (PoW) blockchain to a Proof of Stake (PoS) blockchain.
Why the change?
The benefits of The Merge will mostly be realized with future upgrades that will provide higher throughput, lower fees, and increased development. The Merge will immediately result in a lower energy consumption footprint as the power required to process a block will drop by over 99%!
What has happened to date and what’s the status?
Launched in December 2020, the Beacon Chain was the first “testnet” to use PoS consensus to validate transactions in parallel with the mainnet, although without smart contract functionality. A one-way bridge allowed for ETH staking in support of the Beacon Chain. Staked ETH is locked until after the Merge has been successful for a period of time (TBD).
Ethereum has several testnets currently in operation. The Goerli testnet is the most recent one to implement the merge with the Beacon chain. The Ropsen and Sepolia testnets have been running the Merge client for several weeks as of the writing of this article (Aug. 2022)
What will happen after The Merge?
After The Merge, the Beacon Chain will be the consensus engine for all network data, including execution layer transactions and account balances. This also reduces Ethereum’s energy consumption by ~99.95%!
Existing Ethereum miners will be reacting to the Merge implementation. Some will start mining other Proof of Work cryptocurrencies while others will shut down operations. Since Graphic Processing Unit (GPU) cards are used by Ethereum miners, used cards may flood the market resulting in lower prices for GPU cards (gamers rejoice!).
After the Merge, Ethereum becomes an ESG-compliant blockchain, allowing corporations and entities with an ESG mandate to participate in the ecosystem.
Is there a risk of a Hard Fork?
The blockchain oracle provider, ChainLink, has announced they will only support the new PoS Ethereum chain. I suspect other major “blue chip” blockchain entities to make similar announcements. There are 100s of developers that have supported The Merge. Once The Merge is successfully implemented, these developers will be available to launch new projects on the new blockchain.
While there is always a risk of a hard fork, I do not foresee this occurring. Time will tell!
Future EIPs announced
Future enhancements have already been named. Post-Merge, the roadmap for Ethereum’s PoS blockchain is to add 64 discrete shards in what is being named “The Surge”. Sharding is the process of splitting transaction data to increase throughput (scaling) while not sacrificing security nor decentralization of the blockchain. To date, very few blockchains implement sharding, and those that do only support four shards.
Subsequent major enhancement phases have been named The Purge, The Verge, and The Splurge.
Effect on the ETH price?
The Merge used to be called ETH 2.0 and the impatience of most have caused them to lose faith in a successful transition to PoS. As a result, the ETH price has suffered more than bitcoin during the “crypto winter” we find ourselves in.
As each testnet migration was announced a success, the ETH price appears to have found a bottom and is starting to trend up. Another factor contributing to the firming of the ETH price is the reduction in the issuance rate of new ETH.
- Issuance of new ETH for miners averages about 13,000 new ETH per day. Staking rewards from stakers on the Beacon chain add another 1,600 per day approximately.
- Big picture; the inflation rate (new ETH issuance) is currently about 4.14%.
- After the Merge, the issuance rate of Ethereum will drop by ~90% as the 13K ETH / Day mining reward issuance rate ceases with Proof of Stake.
- Big Picture; the post-Merge inflation rate will drop from 4.13% to just under 0.50%.
- This decrease in the issuance rate has been named the “triple-halvening”.
One key point to remember; those that staked their ETH to the Beacon Chain may have significant unrealized gains (or losses) and could sell a significant portion once their stakes are released. This will likely happen 6 months after The Merge is successful.
Effect on other crypto?
As Ethereum miners rotate to other cryptocurrencies, like Ethereum Classic, those cryptocurrencies could see a lift in price as their GPU-enabled PoW blockchains become more secure from the increased hash power protecting them against attacks.
What actions do I need to take?
For Sanctuary Dex wallet users or gift card holders, no action needs to be taken. Your crypto wallet will work the same way. If you hold your crypto on an exchange, you may want to check their FAQs on The Merge. For more information on the Sanctuary™ Dex wallet or gift cards, please visit sanctuarydex.com/products.
Terms introduced in this article:
EIP: Ethererum Improvement Proposal; An EIP is a design document providing information to the Ethereum community or describing a new feature for Ethereum or its processes or environment. The EIP should provide a concise technical specification of the feature and a rationale for the feature. The EIP author is responsible for building consensus within the community and documenting dissenting opinions. Source: https://eips.ethereum.org/EIPS/eip-1
Proof of Work (PoW): This is the consensus mechanism that validates a significant amount of energy that has been expended to create a valid hash of a block of transactions. Most of the energy expended is to ensure that the mining pool will be the one to receive the mining reward.
Proof of Stake (PoS): This is the consensus mechanism that validates a mining pool has correctly solved the hash for the next block of transactions. Most of the energy expended is used to create a valid hash. Since no energy is expended to “be first”, PoS blockchains operate in a more energy-efficient manner.
MainNet: The blockchain that is in production and updates transactions in real-time. Coins on the mainnet can be traded and converted to fiat using fiat off-ramps.
TestNet: Ethereum blockchains are used for testing the implementation of scheduled EIPs to the mainnet. Coins can be traded but no value can be extracted using an off-ramp. Testnets are for testing purposes only and can be private (devs only) or public networks.
Consensus Layer: The process used to verify transactions are valid and can be added to the blockchain.
Issuance: The process of generating new coins (inflation). Inflation is calculated by taking the count of new coins issued and dividing by the previous circulating supply, then adjusting for an annualized rate.
Burning: The process of permanently removing coins from circulation.
Halvening: Term used to describe the event when the issuance rate of new bitcoin is cut in half.
Triple-halvening: Term used to describe the significant decrease in the issuance rate of new Ether after The Merge.
Hard Fork: A new chain that branches off from the main chain.
Oracle: Simply stated, a blockchain oracle provides a “truth engine” as to the value of real-world or “off-chain” asset data in near real-time. Ex: Oracles like ChainLink are used to provide data feeds of stock or commodity prices to the blockchain. Oracles are extremely valuable to smart contracts that require off-chain data feeds.
Gas Fees: The cost charged by miners to process transactions on a blockchain. Typically, gas fees are paid in the native coin. For the Ethereum blockchain, gas fees are paid in ether. The smallest fraction of ether is called Gwei. Etherscan.io/gastracker shows the current gas fees on the Ethereum network.
Client: Software run by a node that supports a blockchain. All nodes must run compatible client versions to avoid a fork of the blockchain. If a significant percentage of nodes run out-of-date or incompatible client software, this could result in a hard fork of the blockchain, resulting in two or more separate chains. NOTE: This occurred after the DAO hack in which Ethereum and Ethereum Classic became two separate chains.