Ethereum’s The Merge: Breaking Down the Facts and Debunking the Myths
One of the significant events in the blockchain & web3 industry for 2022 is Ethereum’s “The Merge”.
Before this merge’s rollout, there was a lot of noise and misleading information spreading. In this article, I will point out the facts and filter out the myths and misconceptions with the historical upgrade of Ethereum’s ecosystem.
What is Ethereum’s “The Merge”?
This is Ethereum’s deprecation of proof of work (POW), transitioning to a proof of stake (POS) consensus mechanism. Since one of the main concerns of the POW consensus is the longer processing time and high energy consumption, many blockchain networks consider POS an alternative.
When Did It Happen?
It was expected to happen somewhere around September 10 to 20. Now, why was the date not as is? This timeline varied on what specific block number the developers had agreed upon for the change to take effect. But that was not what happened in the case of The Merge.
Due to security concerns, the Ethereum Foundation decided that instead of rolling out the change at a specific block number, they will utilize the total terminal difficulty (TTD). TTD is the total (cumulative) difficulty threshold required for the final block mined in Ethereum POW. Now the core developers of Ethereum have agreed for The Merge to take place at TTD 58750000000000000000000. It did happen on September 15, around 2 PM Philippine time.
What are Its Impacts?
Here I mentioned three effects of The Merge.
The first and very significant impact of The Merge is on the environment. Ethereum shifting to proof of stake reduced worldwide electricity consumption to 0.2%, according to Justin Drake, an Ethereum researcher. Vitalik Buterin, the creator and founder of Ethereum, also tweeted this.
As per Crypto Carbon Ratings Institute, Ethereum’s energy use decreased by 99.988%, and its carbon-dioxide emissions decreased by 99.992%.
We can chop down ETH’s supply into two key forces which are the issuance and burn. The issuance of ETH is the process of creating ETH that did not previously exist, and the burning of ETH is when existing ETH gets removed from circulation.
Pre-merge mining rewards are around 13,000 ETH per day, and staking rewards per day is around 1,600 ETH. After The Merge, only the 1,600 ETH per day will remain, dropping total new ETH issuance by a whopping 90%.
Regarding the burn, at an average gas price of at least 16 gwei, not less than 1,600 ETH is burned every day. This burning effectively brings net ETH inflation to zero or less post-merge.
We also have the ease of securing ETH and becoming a consensus participant. It will no longer be for big institutions and established miners. This development helps further decentralize the network and makes it more secure and resistant to potential attacks.
The Transition and Process
The transition to POS was one of Ethereum’s significant milestones when you look back at its early roadmap. The developers and researchers of Ethereum had a consensus to split the process into two steps.
The initial step was the launching of the Beacon chain. December 2020 was when this was executed successfully. This system introduced POS to the Ethereum ecosystem. This launching made it possible to create a separate parallel POS chain that could be tested in production for some time without compromising the existing POW network that has billions of dollars in liquidity.
The launch of the Beacon chain also prioritized stakers, giving ample time to accumulate more ETH to secure the network for the time of The Merge.
The final step is the actual “The Merge.” The name came from its execution, which is the merging of the consensus layer of the Beacon chain with the Ethereum Virtual Machine (EVM) state of the Ethereum POW chain.
But before that, Ethereum node operators must comply with the Bellatrix upgrade to become merge-ready. This compliance is by updating its consensus layer clients before epoch 144896 on the Beacon Chain. The upgrade took place successfully on September 6, around 7:30 PM Philippine time.
Now we have reached the point about some wrong ideas connected to this merging.
Will it reduce gas fees? Definitely NO.
Bottomline, The Merge is a modification of the consensus mechanism, not an expansion of the network. Gas fees vary from the amount of network traffic, supply of validators, and demand for transaction verification. You may notice recently that gas fees are cheap. This cost is due to less traffic caused by the current bear market.
Effect on ETH Price
As for the ETH price, months before The Merge and upon rolling out its initial news, ETH soared to $2,000. But around August 26, weeks before The Merge, it plummeted to $1,500. It became the Sell-the-Fact price move in the markets.
When The Merge was finally completed on September 15, the ETH price stayed flat. With this, the historic change of Ethereum’s consensus did not signal any bull run in the crypto markets.
To summarize, The Merge was implemented for further optimization of Ethereum’s network, to make its token supply healthy, to improve its concept of being decentralized, and to address the concern with POW’s negative effects on the environment.