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The Ethereum Merge: What Do I Need To Know?

The Ethereum Merge - what to expect from the long-awaited upgrade now that it's finalized?

What is the Merge?

Similar to an operating system upgrade on your smartphone or laptop, “Ethereum 2.0” and its Consensus Layer is a series of upgrades to the Ethereum blockchain. The upgrades aim to improve the speed and capacity for transactions on the blockchain, reducing the energy consumption and increasing overall security.

The Merge is Ethereum’s long-awaited transition from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) model for the consensus mechanism.

What is a consensus mechanism?

A consensus mechanism is used by blockchains to verify transactions, add them to the blockchain and create new blocks or tokens and maintain the security of the underlying blockchain.

Consensus mechanisms are the methodologies used to determine which transactions are valid and which are not, and it’s these sets of rules (or protocols) that help to protect networks from malicious behavior and hacking attacks.

Ethereum 2.0? The Merge? Are they the same?

By the way, the Ethereum Foundation said it would stop referring to the upgrade as Ethereum 2.0, since it is not a new network but rather a network upgrade. Eth1 is now known as the “execution layer”, where transactions and smart contracts still run on Ethereum’s Mainnet; while Eth2 is referred to as the “consensus layer” - the Beacon Chain, which coordinates staked ETH and runs in parallel to Ethereum’s Mainnet. 

Ethereum 2.0 will roll out in three phases, and the Merge is the second phase that will merge the Beacon Chain with the Ethereum Mainnet.

Tweet by Vitalik Buterin, Founder of Ethereum

The name Ethereum 2.0 still pops up often (it’s just much easier to reference by that), and at the time of writing, the Merge had been finalized (without a hitch!), drastically reducing the network’s ETH and carbon emissions.

What do I need to know about the Merge now that it’s done?

  • Transaction costs: Commonly known as gas, transaction costs on Ethereum’s network are high with PoW consensus mechanism, due to the hugely energy-intensive processing power needed to solve mathematical puzzles that verify new transactions. The move from PoW to PoS won’t actually make gas fees a thing of the past for the time being, because gas is determined not by a blockchain’s consensus mechanism but rather by overall network capacity. The plan to permanently lower gas fees on its main layer after the Merge will be done in the next phase known as “The Surge”, which will be done through sharding - splitting the network into smaller pieces and distributing data settlement more efficiently. This is slated to happen sometime in 2023.
  • Transaction speeds: The Merge will also not scale the network. On the new Beacon Chain, blocks will be generated 10% more frequently than they currently are, but it’s not radically significant enough to make an impact on transaction speeds.
  • ETH tokens: Because the PoW fork starts from the Ethereum network’s pre-Merge state, all token balances and smart contracts will also be carried over. The Merge will not create any new ETH2 tokens, and no history will be lost with the switch as the entire transactional history of Ethereum will merge between the two chains, so users’ funds are safe and they do not have to do anything to keep them secure.
  • Energy consumption: The transition to a PoS consensus mechanism will result in a more sustainable blockchain, and is expected to reduce network energy consumption by over 99%. This is important for the crypto ecosystem with all the debate around the use of energy required by the Bitcoin network that has resulted in negative publicity surrounding cryptocurrencies, and improves network decentralization and security by lowering the barriers to becoming a validator, and requiring a higher minimum number of validators compared with most PoS networks - which makes for a centralized system and decreased network security.

Do I need to take any action?

Unless you’re an Ethereum miner, the Merge should have no impact on you as a user. Following the Merge, the issuance of new Ethereum will reduce by about 90% as the issuance from the execution layer via PoW will go to zero. Unlike Bitcoin's hard supply cap of 21 million BTC, Ethereum's supply is dynamic and depends on network usage and newly issued ETH, which serves as rewards for those who secure the network. Since PoW miners receive the bulk of the rewards, the Merge is expected to drastically reduce newly issued ETH, and Ethereum’s issuance could become deflationary if a lot of people use it. And if ETH stays deflationary, there’s a good chance that the asset could soar in the future.

This article has been prepared by Cabital Fintech (LT) UAB  (the “Company”) and is general background information about some of the Company’s activities at the date of this presentation.

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