The Ethereum Merge: what you need to know

The Ethereum migration from Proof-of-Work (PoW) to Proof-of-Stake (PoS), also known as “The Merge”, is arguably the most significant upgrade in the history of blockchain technology.

Despite being subject to some criticism, the Merge (or Paris hard-fork) has won the support of a large majority of the Ethereum community. Various key Web3 players have publicly announced their support of the Merge, particularly stablecoin providers and DeFi application builders.

At Finoa, we view this upgrade as a positive development and an important step forward for the Ethereum community. We are committed to supporting the transition and ensuring that our customers are able to continue engaging with the Ethereum ecosystem.

When is the Ethereum merge happening?

The merge will unfold in two steps, via two hard forks. These are named “The Bellatrix Upgrade” and “The Mainnet Merge,” respectively.

As announced in a blog post by the Ethereum Foundation team, the first step kicks off on Sept. 6. The second phase is expected to happen sometime between 10–20 Sept, with the latest estimations placing it on Sept. 14, 2022.

Can the Ethereum Merge be delayed?

In short, yes.

The Merge is triggered by a specific value of the Total Terminal Difficulty (TTD) of the PoW network. The TTD is impacted by the network hash rate, which is volatile and depends on the volume of active network participants. This is why the exact date of the Merge may be delayed, or even take place earlier than anticipated.

What benefits does the Ethereum Merge bring?

This upgrade has received broad support, and deservedly so. Advocates of changing the consensus mechanism have put forward the following main benefits:

  • Issuance policy: with the end of PoW, the mining of ETH (currently the dominant source of inflation) will cease. The ETH token will therefore experience a supply shock and will increase its chances of a supply crunch (i.e. becoming deflationary).
  • Move inclusive and more secure: it’s easier to participate in a PoS protocol because operating costs are lower. It’s also technically less complex. This attracts more users, which in turn makes the chain increasingly secure, thus generating positive network effects.
  • Staking rewards: participants who want to safeguard the network can stake tokens and earn an APY (annual percentage yield) in kind as a reward. The incentive mechanism also provides a deterrent: participants who misbehave will lose their tokens through slashing. The staking reward mechanism is random, hence more equitable in rewarding the participants.
  • Carbon footprint: supporters argue that staking is less energy-intensive than mining and therefore can scale more easily without having a strong impact on the environment.

What is the impact of the Merge on the Ethereum network?

In a long-awaited talk that took place at the Ethereum Community Conference (EthCC) in Paris this year, Vitalik Buterin described the Merge as the first step in a series of upgrades that will make Ethereum a “much more robust and powerful system”.

Although its impact on transaction times and gas fees is not expected to be significant, the upgrade paves the way for future improvements. According to Buterin, in the long term, the network will become capable of handling up to 100,000 transactions per second, after the next updates are implemented (in particular, sharding and ZKrollups).

Will the Merge make Ethereum deflationary?

On the Ethereum PoW network, as much as 89.4% of the newly-minted ether was used to reward the miners. As PoW becomes obsolete, this will cause a reduction in the issuance rate of ETH. The post-merge annual issuance rate (or inflation rate) will be around 0.49% — a 89.4% reduction from the previous rate of 4.62%.

With the 2021 London fork, the Ethereum network also implemented rules for the burning of ether, with gas fees being burned during the transaction process. According to calculations made by the Ethereum Foundation, at an average gas price of at least 16 gwei, at least 1600 ETH is burned daily, “which effectively brings net ETH inflation rate to zero or less post-merge”.

How are Layer-2 protocols affected?

Post-merge it is expected that the interest for Ethererum will grow, which in turn will increase block-space demand and consequently drive up gas fees. As such, we expect scalability solutions to thrive as both investors and builders will seek out more efficient ways of deploying capital and participating in the ecosystem. According to Finoa’s Head of Strategy, Marius Smith, this will also mean increased efficiency for Layer-2 protocols:

“Over time, as gas efficiency improves and transaction speed increases on the base layer, we expect L2s to become even more efficient while continuing to have a prominent role. As a result, we will see further L2 DApp migrations and a shift in user behavior, but Ethereum will remain the main universal settlement layer.”

Ethereum staking: frequently asked questions

When will ETH staking be possible?

It has been possible to stake ETH since December 1, 2020, with the launch of the Beacon chain. Staking will continue to be possible after the Merge.

When can I unstake Ethereum?

Staking withdrawals will remain disabled even after the Merge. It will only be possible to withdraw staked ETH after the Shanghai upgrade, which is expected to take place 6–12 months after the Merge.

However, validators will receive liquid ETH rewards for their block proposals. These rewards are credited to validators using a different address than the one holding the staked amount and will be available immediately.

What will the staking reward rate be after the Merge?

In the period following the successful completion of the Merge, the staking yield will likely fall to a lower natural rate as more Ethereum is staked, thus lowering the validator reward rate. According to independent estimations made by Tom Dunleavy, Senior Research Analyst at Messari, the staking reward rate after the Merge could be between 6.8% and 13.7%.

Among the reasons that speak for a conservative reward rate are “the elimination of risk that comes with a successful Merge, and the inability to unstake until the Shanghai upgrade”, said William Lindsay, Senior Corporate Development Manager at Finoa.

Additionally, “we expect to see staking participation on Ethereum increase to levels that are in line with other PoS networks (60–80%). It remains to be seen how structural changes will impact gas tips and MEV contributions to staking yields on Ethereum, but over the long-term, there are strong arguments that these will trend downwards,” added Lindsay.

Does the Merge impact liquid staking token holders?

Staked ether (sETH2, stETH, and other types) are ETH derivatives that are issued to holders by liquid staking platforms such as StakeWise in exchange for staking. These tokens are a representation of the investors’ staked ETH and allow them to keep their investment liquid, such as by using stETH as collateral in other decentralized finance applications.

According to staking expert and Finoa Consensus Services Managing Director, Andreas Dittrich, “the deactivation of mining is great news for ETH stakers,” for two reasons:

“First, the transition to PoS brings us closer to full staking functionality and reduces the risk in staked ETH positions. Second, as rewards are expected to increase in the period following the Merge, this will also considerably improve the risk/reward ratio.”

The Merge’s impact on holders explained

How does the Merge affect ETH holders?

ETH holders will not experience a change in their day-to-day interactions with the Ethereum ecosystem. Since the upgrade is on the protocol level, there will be no impact on individual holdings.

How is Finoa preparing for the Merge?

Before the Bellatrix update goes live, Finoa users can expect a downtime as we pause all transactions on the Ethereum blockchain. During maintenance, deposits, withdrawals, and staking of ETH, SKL, and all ERC-20 tokens will not be possible.

See the list of Finoa ERC-20 supported tokens.

As we shift to the PoS chain, we plan to run tests to ensure that our system is synced and running efficiently. The process might also affect BTC holders, restricting their ability to engage with the Bitcoin chain, check balances, and view transactions.

Rest assured, we will keep you updated throughout the process.

What do I need to do if I hold ETH?

Users don’t need to take any action from their side. As soon as Finoa resumes operations after the transition, wallets, funds, and staked balances will be live on the PoS network.

We would like to advise users to be wary of scammers. No new token is launching and no steps are required from your side to initiate the upgrade. Keep in mind that Finoa employees will never ask users to send funds.

Will I be able to use my existing ETH after the upgrade?

Yes — you will be able to use your ETH as usual after the Merge.

How can I stake ETH on Ethereum 2.0?

After the transition, investors can actively participate in staking and earn rewards for helping to secure the network. Finoa’s subsidiary, Finoa Consensus Services, aims to make it easier for investors to earn returns on their investments through staking. Reach out to our team to learn more about how you can stake your ETH with us.

What happens if there is a fork?

As the upgrade is approaching, there have been speculations about the emergence of Ethereum chains based on PoW. In case meaningful forks arise and show adoption, Finoa will evaluate the possibility of supporting them. In such an event, we will sync with the PoW chain from the time of the merge.

What happens if the Merge fails or if there is a delay?

One of the biggest concerns surrounding the Merge is a failure or a delay due to technical issues. While several precautions have been taken, such as the Beacon chain and testnet runs, glitches might hinder the path. If that happens, Finoa is prepared to combat the delay and ensure that customers are protected.

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