What is THE MERGE?
Ethereum is like a car driving down the road. Currently it is powered by a gas engine – the proof-of-work (PoW) Mainnet. The Merge is like swapping the gas engine for an electric one – the proof-of-stake (PoS) Beacon Chain – while the car is driving down the road, i.e., network liveness (analogy borrowed from Justin Drake). The phrase ‘merge’ is used because Mainnet and the Beacon Chain will be joined, and validators will take over the responsibility of proposing blocks moving forward.
Many users won’t notice much of a change. However, the issuance of Ether will drop drastically – by about 90% – implying that the cost of security will drop significantly. At the same time, perhaps surprisingly, rewards are likely to double. Priority fees, or tips, that are currently earned by miners today, will instead go to Ethereum stakers post merge. Additionally, validators taking part in Maximal Extractable Value (MEV) by running MEV Boost, for instance, will earn additional rewards.
MEV makes estimating post-merge rewards particularly challenging. Not only are MEV rewards quite volatile but the architecture of the MEV marketplace and the actors involved will change significantly post merge. The result is that MEV could add between 0.5% and over 5% to staking rewards.
Figment is currently testing MEV Boost and has released a MEV policy statement (see here).
Ethereum Roadmap
The Ethereum roadmap, of which The Merge is just one piece, strives to achieve scalability, security and sustainability (broadly understood as the ‘Trilemma’.) The contribution of The Merge to this roadmap is almost entirely on the sustainability side. Sharding—yet to come—focuses on scalability (see here).
It was decided a while ago that instead of including all upgrades and desired features, which would have made the upgrade much more complex and delayed, the improvement would be broken into pieces meaning that the transition from PoW to PoS could happen sooner.
As a result, not only is sharding in the future pipeline, but some important post-Merge upgrades will be required following the merge.
How will withdrawals work post-Merge?
It is a misconception that both stake and staking rewards will be available for withdrawal upon the merge. Withdrawals are likely to be made available following the first post-Merge upgrades.
The execution layer upgrade called Shanghai is the one most people are focused on as this is likely to contain several upgrades including withdrawal capability. However, an upgrade called Capella on the consensus layer is also required to make withdrawals available.
EIP-4895 suggests using a new operation type for withdrawals. Broadly, a request for withdrawal would begin on the consensus layer from a validator and then be “pushed” to the EVM (on the execution layer). The collaboration of the two layers requires modifications in both of them. Full withdrawals as well as partial withdrawals above 32 ETH are contemplated in Capella.
One nuance here is that priority fees/tips as well as fees from MEV will likely be available immediately following The Merge. Broadly, the reason that this is the case (i.e., an upgrade is not required to withdraw these rewards) is that miners are currently receiving priority fees (tips) as well as MEV rewards on Mainnet. Because there are no major changes in architecture around receiving these fees, i.e., they will continue to go through the execution layer (EL), no upgrades will be required to be able to withdraw these specific rewards.
Rate limit dynamic
Because validators only earn rewards on a maximum of 32 ETH, once withdrawals are enabled, in some cases, it will likely make sense for validators to withdraw any ETH balance above 32. The majority of validators on Beacon Chain have balances over 32 ETH (see here). Whether these validators choose to withdraw balances above 32 ETH will depend on many factors, one of which will depend on whether they can spin up more validators.
An important aspect to bear in mind with respect to existing validators (i.e., a full withdrawal), is that there is a rate limit—the same limit that applies to validators on the way in, applies to validators on the way out. Currently there is a limit of six validators that can enter or exit the active validator set per epoch; this amounts to 1350 per day(1).
Predicting staking behavior is difficult. Ethereum’s staking rewards per validator are decreasing in the amount of ETH staked on the network. However, post-Merge staking rewards are likely to increase significantly. Perhaps a reasonable assumption is that there will be an increasing rate of ETH staked on Ethereum before slowly decreasing.
Helpful Links
- The Merge
- After The Merge
- An Introduction to The Merge and the ETH Staking Ecosystem
- Current Status of The Merge
- What to Expect During the Ethereum Merge
- The Beacon Chain
(1) – This number increases as the number of validators increases. The number of validators is divided by 65,536 and rounded down to the nearest integer (i.e., drop the decimal numbers from this calculation).
