The Merge is well under way as Ethereum makes the move from Proof-of-Work to Proof-of-Stake. But this milestone is not the most important upgrade.
The Merge has officially started on the Ethereum network and we are now 3 days away from its completion. The long-anticipated event has been eagerly anticipated since its confirmation 2-3 months back, and it has seen its fair share of praise and criticism. But despite the hype, the Merge is not the most important upgrade to the Ethereum ecosystem.
What is the Merge?
The upgrade event aims to migrate Ethereum from a Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus mechanism, and this achieved by merging the existing Ethereum execution layer with the proof-of-stake layer, the Beacon Chain.
Under the new consensus mechanism, Ethereum will be secured by node validators instead of miners. These validators have to stake a minimum amount of Ethereum on the network to be eligible, and they are randomly selected to validate blocks on the chain and earn the reward for doing so.
What can we expect from the Merge?
Reduced Energy Consumption
First, the energy consumption of the Ethereum network is expected to decrease significantly. According to Ethereum researcher Carl Beekhuizen, the power usage of the network will plunge by 99.95% post-Merge and a “Proof-of-Stake Ethereum therefore consumes something on the order of 2.62 megawatt”.
Carl likens this to reducing the global electrical consumption of the whole network from the size of a medium-sized country to the size of a small American town.
Deflationary Token Supply
After the Merge, the token supply of Ethereum is expected to reduce and become deflationary because of miners being removed from the network. But how does this occur?
According to the Ethereum community website Ethereum.org, the network is being inflated by rewards being issued for securing the network. Mining rewards issued to miners totalled 13k ETH a day while staking rewards totalled 1.6k ETH a day.
On the other end, the supply was being reduced at the same time due to transaction fees, also known as gas fees, are paid in ETH which are burnt and removed from the network; a total of 1.6k ETH are burnt every day in the form of gas fees.
After the Merge, only staking rewards are issued which means there is a net balance of ETH being issued and burnt every day. Adding on the fact that gas fees may fluctuate higher during peak seasons and validator’s staking may be slashed if they incur penalties, this could lead to a higher volume of tokens being burnt during certain periods and an overall net reduction in the supply of ETH tokens.
What’s after the Merge?
According to Ethereum founder Vitalik Buterin, the Merge is the first of five key upgrade phases to the Ethereum Network. The other 4 are known as The Surge, The Verge, The Purge, and The Splurge.
.@VitalikButerin claims that #Ethereum will be able to to process "100,000 transactions per second", following the completion of 5 key phases:— Miles Deutscher (@milesdeutscher) July 22, 2022
• The Merge
• The Surge
• The Verge
• The Purge
• The Splurge
A quick breakdown of what each stage means for $ETH. 👇 pic.twitter.com/FnaWww8mHZ
After the Merge comes the Surge, which aims to greatly increase the scalability of the Ethereum network. This will be done via sharding, a process which splits data in a blockchain into smaller partitions known as shards. By doing so, it reduces the burden of handling large amounts of data and reduces network congestion while increasing transactions per second.
Buterin believes that sharding is the way to go for Ethereum as it offers a solution for blockchains to be scalable, decentralised, and secure at the same time. This was previously thought to be unachievable due to the blockchain trilemma which defines that a blockchain could only attain either two of the three properties.
After implementing sharding with the Surge, the Verge will implement ‘statelessness through Verkle trees’ according to Vitalik. Without going into the technical aspects, it essentially means the Verge will replace the current Merkle proofs and allow smaller proof sizes. These proofs propagate the network faster and reduce node size while optimising storage.
Unlike the dystopian horror show, the Purge on the Ethereum network will focus on removing spare historical data and technical debt from the network. You could think of it as clearing your cache or temporary files from your browsers. While the details of the upgrade are yet unknown, it is expected to improve the transactions on-chain further and increase the efficiency of validating the blockchain.
While the upgrade for the Surge has not been defined yet, Buterin describes the last phase as “the fun stuff.” It ensures that the network continues to run smoothly and incorporates certain changes such as Proposer/Builder Separation (PBS) and Verifiable delay functions and attacks (VDFs) to make the network more resilient.
The Shanghai upgrade
In between the Merge and the Surge, the Shanghai upgrade is expected to go live. While the Ethereum community are still finalising the details, the upgrade is expected to implement a number of eagerly awaited functions. This includes withdrawals for staked ETH and highlighting Coinbase addresses for transaction executions.
The Merge is not the most important upgrade
The Merge is a momentous event, but it is not the most impactful one from an investor or user’s standpoint. The reduced energy consumption from the change in consensus mechanism does not affect users directly, and the reduced ETH supply will only happen over time.
There would be no change to the user experience of current wallets and decentralised apps (dApps) on the Ethereum, and it does not resolve the outstanding issue with the Ethereum network – high gas fees. Gas fees are typically transaction fees paid to complete a transaction on the network, but these fees are expensive for the average user and can reach up to thousands of dollars during peak periods.
Communities and active users are the lifeblood of any network, and the most impactful changes are the ones that benefits them. Since there are no tangible benefits to Ethereum users, we could well say that the Merge is not the most impactful upgrade. In fact, investor and users should look out for the next two events instead – The Shanghai upgrade and the Surge.
The Shanghai Upgrade
The Shanghai upgrade is expected to enable withdrawals for staked ETH (stETH), which is one that asset holders have been looking forward to. Unfortunately, stETH has not been receiving a favourable rap in the past few months thanks to the crypto contagion that started with the collapse of Terra, which ended in stETH’s price being de-pegged from Ethereum’s price.
Nevertheless with the impending withdrawal function being implemented for staked ETH in the near future, we can expect more hype and trading volatility from the crypto community as they prepare to swap stETH back to ETH.
Another more impactful event than the Merge is the Surge. With sharding on the Ethereum network becoming a reality after the Surge, we can expect the network to scale up easily and handle much more transactions on-chain than it can do so at the moment.
This ties in to resolving high gas fees on the network; currently Ethereum gas fees are calculated with the following formula:
Total Fee = Gas unit (limits) * (Base fee + Tip)
Ridiculous gas fees can be attributed to the high base fees in the equation. If you aren’t in the know, base fees are minimum amount of fees required to include a transaction on the Ethereum blockchain and are adjusted by the demand for transaction inclusion.
With a smaller network bandwidth, users have to outbid each other by paying higher gas fees so that their transactions can be included and processed. Think of it as an auction where the highest bidder gets the prize. As scaling reduces congestion on the network and allow higher transactions per second, there is a lesser competition for a transaction to be included in the block and gas fee will naturally drop lower.
With these two upcoming upgrades having the potential to influence the community’s behaviour, it’s not far-fetched to say that both the Shanghai upgrade and the Surge are more eagerly anticipated than the Merge.
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