What Is the Ethereum Merge?
The Ethereum Merge is the joining of Ethereum’s proof-of-stake (PoS) Beacon Chain with the Ethereum Mainnet to transition the Ethereum blockchain off the legacy proof-of-work (PoW) system. As of mid-September 2022, Ethereum has officially switched over to a PoS model. It has given birth to Ethereum 2.0, a new version of Ethereum. This will result in a 99.95% reduction in Ethereum’s energy consumption and the ability to further scale the Ethereum ecosystem.
The switch has moved the entire blockchain over to new PoS validator nodes that require staking or locking up 32 Ether (ETH) to join. Ether tokens will remain exactly the same for investors, and there should be no change to the operations of Ethereum-based applications. During the merge, users may not be able to transfer Ethereum-based assets.
- The Ethereum Merge is a network update to transition Ethereum from proof of work (PoW) to a proof-of-stake (PoS) consensus mechanism.
- There is an expected 99% reduction in energy costs associated with processing Ethereum transactions.
- The merge has transitioned operations off the current Ethereum Mainnet to the new Ethereum Beacon Chain.
Understanding the Ethereum Merge
Since inception, Ethereum has been secured with a PoW consensus mechanism, requiring hardware processing power to solve complicated math equations in a competitive process to mine the next block in the Ethereum blockchain. The transition to PoS has removed the need for mining nodes to compete for block rewards; instead, it requires node operators to stake 32 Ether (ETH) as collateral to become network validators to earn rewards.
There are driving factors behind the move to a PoS consensus mechanism, including:
- More decentralization by lowering the hardware requirements for node operators
- Faster transaction confirmations (though overall speed will be about the same)
- 99%+ reduction in energy consumption by node validators
- Ability to add more scaling solutions (such as sharding)
- Increased security through client diversity
- Make ETH a more deflationary asset
The issuance of Ethereum as block rewards also will be significantly reduced. Currently, there are about 13,000 Ether mined per day. After the merge, that number will drop to about 1,600 Ether rewarded per day. This is a 90% reduction in Ether issues, slowing the inflationary growth of Ether. After years of delays, the Ethereum Merge is scheduled to go live around Sept. 15, 2022.
How Does Ether Staking Work?
To be eligible for block rewards after the Ethereum Merge, node validators will need to stake (or lock up) 32 ETH into a smart contract as collateral. This Ether will be locked up until a future upgrade to the network enables withdrawals.
While some PoS blockchains give a greater chance of rewards to users who stake a larger amount of crypto, Ethereum handles rewards with a random lottery to select who will propose a new block to be added to the blockchain. In fact, Ethereum has stated that “when validator withdrawals are enabled, stakers will be incentivized to remove their earnings/rewards (balance over 32 ETH) as these funds are otherwise not contributing to their stake weight (which maxes as 32).”
Those who don’t own 32 Ether or don’t wish to run a validator node but wish to stake Ether can still do so by joining a staking pool. A staking pool combines the deposits of multiple individuals to stake the required 32 ETH for an Ethereum validator node. The block rewards from that node are then shared with the staking pool in proportion to the deposited ETH per individual account. Crypto exchanges also offer a version of this, allowing users to stake small amounts in return for a fixed rewards amount.
Risks of the Ethereum Merge
There are several risks with the upcoming Ethereum Merge, as it is the biggest update to any cryptocurrency blockchain network to date. Here are a few of the risks of the Ethereum Merge:
Denial-of-Service (DoS) Attack Vulnerability
With the move to PoS, network proposers will be known ahead of time, making them vulnerable to a denial-of-service (DoS) attack. For example, if a potential attacker is in line to propose one of the next blocks in the blockchain, they can attempt a DoS (a sophisticated networking attack) of the current proposer’s node, causing them to lose their slot, and the transactions in that slot can be picked up by the attacker. There are solutions being worked on to make the proposer selection anonymous, but this is currently still a risk.
Centralization of Staked ETH
Staking pools have become very popular, as most investors don’t have the required 32 Ether to stake but can join a group of others to raise the funds needed to become a validator. This could end up concentrating the number of validator nodes under the influence of centralized entities, which introduces the risk of censorship or governance takeover.
Many crypto applications have been referring to the merged and upgraded network as “ETH 2.” This has led to confusion about whether there will be a newly formed cryptocurrency called ETH 2 (there is not), and it makes ETH holders susceptible to scams. Scammers may try to take advantage of this confusion and try to get users to swap out their current ETH for “ETH 2,” but in reality, they would be stealing the user’s Ether.
ETH Price Drop
If there are setbacks with the merge, this could cause a drop in Ether price, as well as the prices of many of the top cryptocurrencies that have built their platforms on top of the Ethereum blockchain.
What is Ethereum 2.0?
Ethereum 2.0, also known as Eth2, is an upgrade to the Ethereum blockchain. Through the upgrade, Ethereum’s network will be able to process more transactions at once and avoid bottlenecks.
What is the Beacon Chain?
The Beacon Chain is the Ethereum proof-of-stake (PoS) blockchain network that was launched in 2020. It will become fully operational as the updated Ethereum blockchain after the Ethereum Merge is completed. The Beacon Chain is the controller of the Ethereum PoS network, managing the entire process of the PoS protocol and coordinating parallel chains (shards).
With ETH 2 replace ETH?
No. ETH 2 is not a new cryptocurrency, and ETH will remain the only Ethereum native cryptocurrency. “ETH 2” simply refers to the new PoS blockchain that will go live as Ethereum’s main blockchain network after the merge. There is no new cryptocurrency called ETH 2, though some crypto exchanges (such as Coinbase and Kraken) list “Ethereum 2 (ETH2)” as an asset that can be staked.