What is The Merge?
The Ethereum network is undergoing a series of upgrades to help make it more scalable, secure, and sustainable. These upgrades were previously referred to as “Ethereum 2”. A few of these upgrades, culminating in ‘The Merge’, represent Ethereum’s transition from a Proof of Work (PoW) network to a Proof of Stake (PoS) network.
The Beacon Chain, launched in December 2020, is a PoS network running in parallel to Mainnet Ethereum, coming to consensus largely on its own state (i.e., transactions are still being processed through PoW Mainnet). It represents an upgrade of the consensus layer of Ethereum to PoS. The Merge, estimated to take place around September 13-15th 2022, represents the transition from PoW to PoS and the Beacon Chain taking over block proposing and consensus from Mainnet. After The Merge Ethereum will be a PoS network only.
When is The Merge happening?
Goerli, the last Ethereum testnet, successfully merged on August 11th. Currently, The Merge itself is expected to happen around September 13-15th. To follow a countdown to The Merge, we recommend the Wen Merge website.
The general timeline leading up to The Merge is shown through the graphic above. Currently, Ethereum Mainnet (Proof of Work) and the Beacon Chain (Proof of Stake) are running in parallel, although regular transactions are being processed on Mainnet while the Beacon Chain is largely coming to consensus about its own state.
Ethereum’s road to The Merge has included a number of tests, including shadow forks and testnet merges – see here. Having multiple test environments is paramount to ensure the robustness and security of the software and so far merge testing has been successful.
✅ Kiln – Passed March 2022
✅ Ropsten – Passed June 2022
✅ Sepolia – Passed July 2022
✅ Goerli – Passed August 2022
How does The Merge impact ETH?
The Merge has a massive effect on the economics of ETH with the switch from Proof of Work to Proof of Stake. It drastically changes the economics of ETH reducing its issuance and – most likely – converting it into a deflationary asset.
Currently about 15,000 ETH/day is issued to pay miners (~13,500 ETH/day) and validators (~1,500 ETH/day). On top of this, roughly 8,100 ETH is burnt every day, implying that Ethereum could become “deflationary” post-merge. In other words, stakers will still receive an estimated 7–9% staking rewards in an asset with a potentially decreasing supply.
More details on The Merge decreasing ETH issuance
The Merge will reduce yearly ETH issuance from 4.3% to almost 0% implying that the cost of security will drop significantly. At the same time, rewards are likely to double. Priority fees, or tips, that are currently earned by miners today will instead go to Ethereum stakers post merge.
This is because of the fundamental improvements to efficiency that a PoS consensus mechanism brings. PoS is designed to provide the highest level of blockchain security, for the lowest amount of cost, and these savings are passed into ETH, by reducing the amount of ETH that needs to be issued to pay for security.
PoW is expensive and requires significant resource overhead to compensate security providers (miners) for their services. To cover the costs of these resources, miners usually sell a big part of their newly mined tokens, resulting in selling pressure. With The Merge completed, this selling pressure will disappear, increasing the relative demand in Ethereum.
How does The Merge impact my rewards? And what is MEV?
Ethereum rewards will increase after The Merge because fees earned by miners today will be paid to ETH stakers after the update. Maximal Extractable Value (MEV) also has important implications.
MEV is the maximum value that can be extracted from block production above the block reward and gas fees by including, excluding and reordering transactions. On the Ethereum network, searchers currently look for profitable opportunities and pay miners to execute them. With the change to a PoS network, the majority of these MEV rewards will go to stakers.
Figment believes in MEV solutions that are neutral, secure, and open. Read our complete MEV policy here to understand how validators like Figment that run MEV-Boost would have a significantly higher (~25% – 50%) reward rate transferred to our ETH staking customers.
Does The Merge lower Ethereum’s gas fees?
No – transaction volume and costs offer the same supply & demand dynamics in a crypto network.
Does The Merge reduce Ethereum energy consumption?
Yes – that’s one of the main outcomes of The Merge and PoS. Post-Merge, Ethereum will consume ~99.95% less energy than its current usage.
When are staking rewards enabled?
Staking rewards were enabled on December 1, 2020.
How long does it take to unstake and when are transfers enabled?
Unstaking and Transfers are not expected to be enabled until after the Shanghai upgrade, sometime after ‘The Merge’, likely around mid 2023. Read more here.
If you voluntarily exit now or during the Merge “Phase”, there’s no way for you to activate your stake again, and you won’t be able to transfer or withdraw your funds. This is due to the desire of the core team to keep The Merge as simple as possible.
What are the risks of The Merge and moving to a Proof of Stake Ethereum?
The core team is working tirelessly to ensure that the number of glitches during The Merge is minimal. That said, if these kinds of problems can be limited to less than ⅓ of the network, the penalties incurred and impact on Ethereum should be relatively minor.
There are also some concerns around miner behavior leading up to The Merge. In most cases, the damage that miners can do is small, thanks in part to using Terminal Total Difficulty as well as the fork choice rule used by Beacon Chain. In the event that some attacks are successful, there are tools at the disposal of the core team to safeguard the network, such as Terminal Block Hash – a kind of community override.
Other risks will continue for some period post-merge. These are largely due to changes in the way Ethereum will operate. For example, currently no one knows who the block proposer is ahead of time, but that will change post-merge, opening the potential for DDoS attacks on proposers. Bias in the random number generation process is potentially another attack vector, and Maximal Extractable Value (MEV) could potentially motivate to attack the network.
The Ethereum roadmap involves interconnected protocol upgrades that will make the network more scalable, more secure, and more sustainable. These upgrades are built by multiple teams from across the Ethereum ecosystem.
The 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.
The next important update to ETH will be the Shanghai upgrade. The Shanghai upgrade is planned to follow The Merge, which will enable the ability for stakers to withdraw.
Where can I learn more about Ethereum Proof of Stake?
Read our previous Ethereum Articles here.