Everything you need to know about the most important Blockchain update of the year
So what is the Merge
Since the beginning, Ethereum has been protected by the Proof-of-Work (PoW) consensus mechanism requiring hardware computing power to solve complex mathematical equations in a competitive process to mine the next block on the Ethereum blockchain. The transition to Proof-of-Stake (PoS) will remove the need for mining nodes to compete for block rewards and instead require node operators to deposit 32 ETH as a collateral to become network validators to receive rewards.
There are several drivers for moving towards the Proof-of-Stake consensus mechanism, including:
Decentralization improvement by reducing hardware requirements for node operators;
Faster transaction confirmations (although the overall speed will be just the same);
99%+ energy savings with node validators;
Ability to add additional scaling solutions (such as slicing);
Increased security through client diversity;
Making ETH a more deflationary asset.
The issuance of Ethereum as a block reward will also be significantly reduced. Currently, about 13,000 ETH are mined on a daily basis. After the Merge, this number will drop to around 1600 ETH per day. This is a 90% reduction in the issuance of Ethereum that slows down the inflationary growth of this currency.
After many years of delays, the Ethereum Merge should starts on September 15, 2022.
More about Ether Staking
To be eligible for block rewards after the Ethereum Merge, node validators will need to stake (or lock) 32 ETH in a smart contract as collateral. This ETH will be blocked until a future network upgrade allows withdrawals.
While some PoS Blockchains give a better chance of rewarding users who stake a larger amount of cryptocurrency, Ethereum processes its rewards with a random lottery to choose who will propose a new block to be added to the Blockchain.
Those who do not own 32 ETH or do not want to run a validator node but want to stake Ethereum can do so by joining a staking pool. The staking pool runs deposits from multiple individuals to stake the required 32 ETH for an Ethereum validator node. The block rewards from that node are then distributed among the staking pool in proportion to the deposited ETH for each individual account.
Cryptocurrency exchanges also offer such a version, allowing users to wager small amounts in exchange for a fixed amount of the reward.
What might the Merge mean to you
According to the Ethereum Foundation, if you hold Ethereum — the native cryptocurrency of the Ethereum blockchain and the second most popular cryptocurrency after Bitcoin — you don’t have to do anything. Yet, you should be beware of scams. If an app, crypto exchange, or crypto wallet sends you instructions or recommendations, be sure to check that the notifications are actually coming from these platforms.
If you are a socially conscious investor who doubts the environmental impact of cryptocurrencies, the Merge might be good news for you as mining ETH becomes now a way less polluting process.
And what about the ETH price after the Merge
This year, cryptocurrency prices are going through an important crisis. After an impressive few years of record high prices last November, cryptocurrencies such as Bitcoin and Ethereum have recently fallen significantly along with other financial assets such as stocks. Bitcoin is down about 55% since the start of the year, the same for Ethereum.
Yet, this Merge could shake up the price of ETH that outperformed BTC during much of the recent cryptocurrency recovery periods.
Crypto investors are very familiar with volatility and they should be prepared for new ups and downs. Fans of crypto — and especially the Ethereum network — are hoping the move will help boost the price of Ethereum. A successful Merge is supposed to have a strong impact on the price of ETH and help it resume its uptrend.
Thus, while the Merge is likely to be a positive thing for Ethereum and its supporters in general, investors may have to stick around instead of capitalizing immediately on the price spike. (This is what financial advisors actually recommend — investing for the long term, rather than speculating and trying to get rich quick.)
The Merge will change the overall consensus algorithm and will not expand network capacity — so it will not lead to lower gas fees. However, there are scaling solutions in development designed to do just that, and most of them are Tier 2 oriented.
The speed of transactions on the main network will remain relatively unchanged even after the merger, although there are small changes.
The Merge update is designed to have zero downtime. The network must always work as intended.
And what’s next?
After the Merge, Ethereum’s core developers will continue to work on the open source network as before, with further improvements regarding the network fees, speeds, and the security planned for months and years ahead.
One of the main development focuses after the Merge will be sharding to increase the throughput of Ethereum transactions and reduce fees by distributing network activity across several “shards” — almost like lanes on a highway.
According to the current roadmap, among further key changes also stands the Proposing Faucet Separation (PBS) that will separate “builders” who add transactions to blocks from “proposers” who push them for approval from the wider network. PBS is stated to help solving the Ethereum maximum extractable value (MEV) problem.
Overall, the Merge is without a doubt one of the most significant moments in the history of cryptocurrencies, as one of the largest protocols will undergo a monumental change.
And don’t worry: there is no risk whatsoever to your assets stored in the Quppy Wallet during The Merge!