What The Ethereum Merge Is NOT About

The Merge is coming and it will be the most significant and substantial upgrade to the Ethereum network to date.

There has been a lot of anticipation and speculation on the changing dynamics that will come with Ethereum’s Merge. The truth is–if all goes according to plan–most network participants will notice only minimal changes on Day 1.

No, gas fees won’t drop. No, total network throughput won’t increase. However, the Merge introduces significant changes to the network’s infrastructure and economic incentives. These changes will ultimately be felt by every network participant in the Ethereum ecosystem. This includes new changes to block finality (confirmation times), new MEV-related transactional risks, and new economic incentives that could result in your wallet ultimately paying you to use it.

In this newsletter, we will cover what The Merge is, what it does and doesn’t change on Ethereum, and how these changes may impact you as a user, web3 developer, trader, or validator.

What is The Merge?

There is no doubt that Ethereum is the core of Web3 as measured by total economic activity, user growth, and developer engagement. The Merge will be an overhaul of Ethereum’s consensus mechanism, transitioning the network from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus.

Under Proof-of-Work (PoW), miners confirm blocks by solving cryptographically complex computation problems – consuming energy along the way (literally, the ‘proof-of-work’). The total security of any given PoW public blockchain network is measured in hash power, or the total amount of computation (and hence energy) devoted to securing the network. Because mining requires specialized equipment and skills, the majority of hash power on Ethereum is controlled by a small number of privately operated mining pools.

Under Proof-of-Stake (PoS), however, rather than solving cryptographic problems, PoS consensus validators stake ether into a smart contract on Ethereum. This staked ether then acts as collateral that can be destroyed if the validator behaves dishonestly or unreliably. Because anyone can operate a validator under PoS as long as they have 32 ETH to leverage, control over the network is distributed amongst many more participants than under PoW. Individuals with less than 32 ETH can also enjoy yield from staking by participating in mining pools such as Rocket Pool, Lido, or with a centralized exchange.

But what exactly is “merging” during The Merge?

“The Merge” signifies the merging of the Ethereum mainnet execution client with the Beacon Chain Proof-of-Work consensus client. Despite post-Merge Ethereum previously donning the colloquial term Eth2 or Ethereum 2.0, The Merge is really a network upgrade not the creation of a whole new token or new network as the term “Eth2” might imply. After The Merge, Ethereum nodes will comprise of both an execution client (Eth1), and a consensus client (Eth2); both are needed to run a full Ethereum node post-Merge.

Eth1 → execution layer

Eth2 → consensus layer

Execution layer + consensus layer = Ethereum

The Execution Layer will be responsible for state storage and management, state sync, virtual machine execution, transaction processing, mempools, etc. The Consensus Layer will encompass the upgrades that the Beacon Chain brings to the Ethereum blockchain, most importantly the transition from proof-of-work (PoW) to proof-of-stake (PoS). 

Because the Execution Layer relies on current Ethereum clients, it allows for a smoother transition for dapp developers during the network’s move to proof-of-stake as no migration will be necessary on their end.

Why Go From Proof-of-Work (PoW) To Proof-of-Stake (PoS)

There are three major reasons Ethereum would switch from a PoW system to a PoS system:

PoS results in a more secure, decentralized network

PoS enables scalability through sharding

PoS is more efficient, using ~99% less energy than PoW

PoS results in a more secure, decentralized network

Due to the high cost associated with mining, few participants can validate independently and most individuals participate in mining pools. Accordingly, mining pools build and propose most of the blocks. This results in a highly centralized few that control the network. For example, according to cryptocurrency analytics company Crypto Compare, 5 Ethereum mining pools accounted for 65.4% of all the ETH mined in 2021.

Under PoS Ethereum will require a minimum of 16,384 validators, making the security of the network much more decentralized and, as a result, much more secure.

PoS enables scalability through sharding

Transitioning the network to PoS was the first step to enabling sharding — an effort to split the network into “shard chains” that share the load of Ethereum, theoretically reducing network congestion and increasing transaction throughput. Instead of settling all operations on one single blockchain, these shard chains will spread operations across 64 new chains. Sharding is planned to begin in 2023 and should enable giant leaps in scalability for the network.

A newer sharding design, called Danksharding, is gaining traction in the Ethereum community. Danksharding introduces significant simplifications to previous sharding designs and introduces the concept of Proposer/Builder Separation (PBS). We will discuss the potential effects of separating block building from block proposing later in this blog.

Once implemented, sharding is expected to increase Ethereum’s transaction throughput up to 100,000 transactions per second—higher throughput than all leading credit card companies.

PoS is more efficient, using ~99% less energy than PoW

Under PoS there is no need to use massive amounts of energy on proof-of-work computations. As a result, it is estimated that Ethereum’s switch to PoS will result in a 99.9% reduction in energy used to secure the network.

What changes after The Merge?

The Merge brings several key changes to Ethereum, notably:

Miners are replaced by validators

Validators gain access to MEV via MEVBoost auctions

Block builders will emerge as a new economic actor

Increased time to block finality

New penalties add stakes to staking

Block building creates new economic actors

Block reward subsidy is reduced by ~90%

Fixed block times may influence MEV dynamics

What stays the same after The Merge?

While The Merge will cause substantial changes to the way Ethereum works under the hood, on the surface users won’t see any substantial changes in regards to gas or transaction throughput.

The Merge will not affect the current gas pricing model—Ethereum will continue to use EIP-1559.

The Merge will not lower gas fees. However, Blocknative is keeping a close eye on how fixed block times will influence transactional patterns and how these new patterns will affect the gas market.

The Merge will not increase the transaction throughput of Ethereum—at least not until the introduction of sharding in 2023.

Wen Merge?

The Ethereum Merge has been delayed a number of times, but is most recently projected to be completed by September 19 according to core Ethereum Dev Tim Beiko.

Several ETH testnets have already merged with the Beacon Chain in preparation for the final ETH Mainnet Merge.

The Merge will impact all network participants. Are you prepared?

Now is the time to begin preparing for The Merge if you haven’t already.

In addition to the transition to Proof-of-Stake, The Merge includes multiple upgrades to how the Ethereum network operates. Many of these upgrades make pre-chain data more important than ever when navigating a post-Merge world to ensure your users can transact with confidence.

Be safe and be informed!