What is the Merge?

Introduction

Imagine a plane flying with hundreds of thousands of passengers, and its crew is tasked with replacing the engine in midair — all without any of the passengers noticing. Welcome to the Merge, which is just under 36 hours away. This is one of the most significant innovations in the blockchain ecosystem, and it has been long-awaited since 2018. Multiple test Merges have occurred to ensure we get it right, and now we’re ready for the real deal. In this article, I’ll give a quick introduction as to what the Merge is, a high-level explanation on the differences between Proof of Work and Proof of Stake, and what this means for the Ethereum ecosystem and its future.

The Merge

The Merge is the event in which Ethereum transitions its consensus mechanism (or engine) from Proof of Work to Proof of Stake. It is called the Merge is because it represents the “merging” of Ethereum Mainnet (the current Proof of Work chain) and the Beacon Chain (the Proof of Stake chain). The Proof of Work chain is what Ethereum has been using to execute and store transactions since its genesis in July of 2015. The Beacon Chain was launched on December 1st, 2020, to introduce staking into the Ethereum ecosystem. It coordinates Proof of Stake validators leading up to the Merge with the purpose of becoming the new “engine” for Ethereum. Since then, users have been able to deposit 32 ETH (totaling 13.7M ETH or $22.25B) into the staking contract without withdraws until about 6 months after the merge via the Shanghai upgrade. This is done to help validate the Proof of Stake chain in exchange for about 4–6% APY in ETH. If you don’t have 32 ETH and still want to earn rewards, you can stake via a centralized exchange or check out my Ethereum staking article on liquid staking protocols which allow for anyone to stake as little as 0.01 ETH with withdrawals. For the average user, there’s no need for action during or after the Merge— no updates, no change in behavior. It’s that easy.

Proof of Work vs Proof of Stake

Proof of Work

Proof of Work is the traditional consensus mechanism that most people think of when they hear about blockchain. It involves miners from all over the world racing against each other to cryptographically hash transactions together and order them in units called blocks. Once a user solves a block, it is verified by network participants and added to the chain, allowing the miner to receive a reward denominated in ETH. They operate massive mining rigs with several GPUs (graphical processing units) that eat up increasingly large amounts of energy as more miners join the network. While effective at securing a network, this consensus mechanism uses a lot of energy and limits user participation to a point where you’d need a large amount of capital to run a mining rig or facility and be able to finance the electricity costs.

Proof of Stake

Proof of Stake is an alternative consensus mechanism that changes the block-solving race to a more orderly and energy efficient queue-style system. In this consensus mechanism, miners are now referred to as validators. Each validator puts up 32 ETH as “stake”, or their incentive to act honestly. Validators are placed in a queue to solve each block, meaning everyone gets a turn to validate transactions without having to race and waste large amounts of energy to get the reward. The computing power needed to validate a block is immensely less than the power needed to mine a block. Thus, validators can run on much smaller, less expensive machines, and the power needed to secure a Proof of Stake chain is 99.5% less than a Proof of Work chain. A meme comparing a mining facility and an at-home validator is shown here. If a validator goes offline for an extended period or acts dishonestly, they receive a penalty or incur a slashing event. In these events, a portion of their 32 staked ETH is put at risk and could be taken from them as punishment. In the event of slashing, this punishment is usually much more severe, involving the validator being removed from the validator set, being forced out of the queue, as well as anywhere from 0.25 ETH to multiple ETH.

Ethereum Post-Merge

As a user of Ethereum, you most likely won’t notice any immediate changes after the Merge. You might feel a bit better about using a more environmentally conscious blockchain, but the Merge won’t decrease transaction costs, make the network quicker, or handle more transactions. The Merge will, however, decrease the issuance of ETH by almost 90%. Currently, the Proof of Work chain is issuing miners about 13,000 ETH per day (4.13% inflation), and the Beacon Chain is issuing about 1,600 ETH per day (0.49% inflation) to validators. After the Merge, the Proof of Work chain will no longer issue rewards, leaving an issuance of just 1,600 ETH per day, dropping inflation to 0.49%.

This, in combination with EIP-1559’s burning mechanism, which you can read about in my previous article, means that if gas fees stay at or above 16 gwei, ETH becomes a deflationary asset. This deflation has propagated the “ultrasound money” meme. This, along with reduced sell pressure due to miners no longer needing to cover electricity expenses, could have a positive influence on ETH’s price if all else macroeconomic or otherwise is held constant. Additionally, and probably most importantly, the Merge is an essential lead-up to EIP-4844, otherwise known as Protodanksharding (I know, that sounds like a lot, but don’t worry about it now), which will eventually decrease transaction costs on optimistic and zk-rollups (layer 2s) to fractions of a cent. This is the holy grail of scalability for Ethereum, and it is essential to Ethereum’s rollup-centric roadmap.

Conclusion

Nothing like the Merge has ever been attempted before in the blockchain space. It is a very exciting moment in Ethereum’s history and is proof that blockchains can change at their core if its users so desire. While it won’t have any immediate, noticeable effects for the average user, it will be a massive step for Ethereum’s energy usage, its economics, and its scalability in the future as users transition to rollups for cheaper and faster transactions.