What is Ethereum Merge all about and How does it affects crypto ecosystem?

Brief overview:

  • Mainnet– Soon, the current Ethereum Mainnet will merge with the Beacon Chain proof-of-stake system.
  • Consensus Mechanism– This will mark the end of proof-of-work for Ethereum, and the full transition to proof-of-stake.
  • Scalability– This sets the stage for future scaling upgrades including sharding.
  • Energy Consumption– The Merge will reduce Ethereum’s energy consumption by ~99.95%.

What is The Merge?

The Merge represents the joining of the existing execution layer of Ethereum (the proof-of-work Mainnet we use today) with its new proof-of-stake consensus layer, the Beacon Chain.

Now energy-intensive mining is no more needed and it instead secures the network using staked ETH.

Ethereum vision – more scalability, security, and sustainability; is about to become reality after this event. The Merge is the most significant upgrade in the history of Ethereum.

Image Illustration: The Merge- transition phase from proof-of-work to proof-of-stake

 

Since genesis, proof-of-work has secured Mainnet. This is the Ethereum blockchain we’re all used to—it contains every transaction, smart contract, and balance since it began in July 2015.

On December 1, 2020, the Beacon Chain was created, which has since existed as a separate blockchain to Mainnet, running in parallel. The Beacon Chain has not been processing Mainnet transactions. Instead, it has been reaching consensus on its own state by agreeing on active validators and their account balances. After extensive testing, the Beacon Chain’s time to reach consensus on more is rapidly approaching. After The Merge, the Beacon Chain will be the consensus engine for all network data, including execution layer transactions and account balances.

The Merge represents the official switch to using the Beacon Chain as the engine of block production. Mining will no longer be the means of producing valid blocks. Instead, the proof-of-stake validators assume this role and will be responsible for processing the validity of all transactions and proposing blocks.

No history is lost. As Mainnet gets merged with the Beacon Chain, it will also merge the entire transactional history of Ethereum. You don’t need to do anything. Your funds are safe.

What do I need to do to get ready?

The Merge is one of the most significant and anticipated upgrades in the history of Ethereum, and although in the long-term its impact will be felt by everyone, in the near-term some folks will need to take action to be fully prepared.

Users and holders


After The Merge

Blocks will instead be proposed by validating nodes that have ether staked for the right to participate in consensus. This will signal the end of proof-of-work for Ethereum and start the era of a more sustainable, eco-friendly Ethereum.

 

Misconceptions about The Merge

Misconception: “Running a node requires staking 32 ETH.”
False. Anyone is free to sync their own self-verified copy of Ethereum (i.e. run a node). No ETH is required. Not before The Merge, not after The Merge, not ever.

Misconception: “The Merge will reduce gas fees.”
False. The Merge is a change of consensus mechanism, not an expansion of network capacity, and will not result in lower gas fees.

Misconception: “Transactions will be noticeably faster after The Merge.”
False. Though some slight changes exist, transaction speed will mostly remain the same on layer 1.

Misconception: “You can withdraw staked ETH once The Merge occurs.”
False. Staking withdrawals are not yet enabled with The Merge. The following Shanghai upgrade will enable staking withdrawals.

Misconception: “Validators will not receive any liquid ETH rewards til the Shanghai upgrade when withdrawals are enabled.”
False. Fee tips/MEV will be credited to a Mainnet account controlled by the validator, available immediately.

Misconception: “When withdrawals are enabled, stakers will all exit at once.”
False. Validator exits are rate limited for security reasons.

Misconception: “Staking APR is expected to triple after The Merge.”
False. More up-to-date estimations predict closer to a 50% increase in APR post-merge, not a 200% increase.

Misconception: “The Merge will result in downtime of the chain.”
False. The Merge upgrade is designed to transition to proof-of-stake with zero downtime.

Read this Twitter Thread

 

What happened to ‘Eth2’?

The term ‘Eth2’ has been deprecated as we approach The Merge. After merging ‘Eth1’ and ‘Eth2’ into a single blockchain, there will no longer be two distinct Ethereum networks; there will only be Ethereum.

To limit confusion, the community has updated these terms:

'Eth1' is now the 'execution layer', which handles transactions and execution.
'Eth2' is now the 'consensus layer', which handles proof-of-stake consensus.

These terminology updates only change naming conventions.

 

The Merge and sharding

Originally, the plan was to work on sharding before The Merge to address scalability. However, with the boom of layer 2 scaling solutions, the priority has shifted to swapping proof-of-work to proof-of-stake via The Merge.

Plans for sharding are rapidly evolving, but given the rise and success of layer 2 technologies to scale transaction execution, sharding plans have shifted to finding the most optimal way to distribute the burden of storing compressed calldata from rollup contracts, allowing for exponential growth in network capacity. This would not be possible without first transitioning to proof-of-stake.

This concludes all the necessary information regarding The Merge Event of Ethereum. For more detailed explanation you can visit the official website and blogpost of Ethereum:

The Merge information page.
Ethereum Blogpost for all recent events.
Our Twitter Thread on “The Merge”