Things you need to know about the Ethereum ‘Merge’

Since the Ethereum’s Merge is coming soon this August, let’s find out more about ‘The Merge’ – the long-awaited upgrade to the Ethereum blockchain.

What is the Ethereum “Merge” (the Merge) and Why?

Vitalik, since the beginning of Ethereum, announces that this protocol is currently an interim version and that there will be a version 2.0. This has been developed since the early days of Ethereum. However, we have really seen the beginnings of Ethereum 2.0 with the arrival of the Beacon Chain in late 2020. The Beacon Chain was the chain that will govern Ethereum during the transition to Proof-Of-Stake. From the end of 2020, it is possible to send 32 ETH within a smart-contract in order to become a validator of the ETH network in its PoS version. This Beacon Chain works today in parallel to the main chain which is used in PoW version to secure the network. 

That said, from “The Merge”, it will be this Beacon Chain that will validate the blocks of the ETH network and therefore it will be from this version that Ethereum will go into Proof-of-Stake version. Even once this is done, there will still be several steps before arriving at the “final version” of ETH 2.0 but “The Merge” is going to be a great step forward since it will sign the end of the proof-of-work based protocol on which ETH was based since its creation. 

When will this Ethereum “Merge” update arrive? 

It’s going to happen very soon. When we look at social media channels and follow influencers within the Ethereum Foundation, for example Tim Beiko who is one of the main ETH developers, we notice that he congratulates Uniswap in particular for already working on developing on the Kintsugi version (a testnet). We also saw Danny Ryan who tweeted “Yes, it’s happening, Yes it’s soon”. Then, simply Joe Lubin who is one of the co-founders of Ethereum, said at the beginning of 2022: ETH 2.0 will arrive during Q2 2022 (so very soon), or at worst, it could be delayed for Q3 2022. So this means that ETH 2.0 can arrive during the next 3 months and at most in the next 6 months. 

What will happen to ETHs that are staked in the Beacon Chain smart-contract? 

For the moment these Ethereums are blocked since the end of 2020 because Vitalik Buterin had specified that it was possible to send 32 ETH in order to secure the Beacon Chain but that they would be released only after “The Merge”. So for the earliest stakers, they have their ETH staked since late 2020, and at that time, ETH was valued less than 1,000$. They are currently sitted on a big profit and we can expect that some of them will cashout and take profits. 

This is without counting on the malice of Vitalik who has planned everything and has set up a mechanism to avoid this selling pressure. Here is a link to an article summarizing this idea. Only 4 validators will be able to unstaked their 32 ETH every 6.4 minutes (all eras). This represents about 900 validators per day. On average, this would mean that there are 28800 ETH that can be unstaked per day. Today, the trading volume of ETH is about 10 000 000 ETH/day and the maximum supply is about 116 million ETH. The number of ETH that can be unstaked per day represents 0.29% of the daily trading volume and 0.02% of the total supply. This is very small because these figures assume that validators will sell 100% of the ETHs they unstaked. This is not the most preferred scenario since among these validators, firstly, there may indeed be some who will want to exit but they may not want to sell 100% of the ETHs in their possession and secondly, this would mean that there are only exits and no entrants. There could very well be many entrants because for the moment many institutions have not taken part in the validation adventure because they were afraid of this “lock-up period”. They did not take the risk of staking without the possibility of unstaking. All miners or part of them who mine ETH via PoS may also want to participate in the validation via staking. 

The difficulty bomb is an Ethereum feature that aims to increase the difficulty level of extracting new ethers and thus encourage miners to leave the network or pivot to the new chain. If the developers manage to complete The Merge by August, they won’t have to delay the bomb, which will soon make it more difficult for ETH miners.

Ethereum developers are currently running various tests to ensure the update goes smoothly. The last of these will take place on June 8 with the merging of the Ropsten testnet and the new Proof of Stake chain.

Switching Ethereum to a new consensus algorithm is a technically complex task. It is even more complex for a network handling such a large volume of transactions, and moreover subject to increased competition from other so-called “Ethereum killer” blockchains, such as Solana or Avalanche. There is no room for error.

Conclusion

So, what does it mean for the crypto investors?

There are potentially many people who will want to sell ETH at “The Merge” but also potentially new participants. Moreover, at the moment, the staking reward in ETH 2.0 version is about 4.5 to 5.1% annual interest but once “The Merge” will be effective, validators will not only earn income via ETH inflation as a reward, they will also earn the fee. This means that we will move to a potentially higher return than today. 

It is important to note that the post-merge ETH could have negative inflation. Currently, the ETH has an inflation of 4.1%. Since the version of ETH deployed in August that brought a “burn” of ETH via the “London Hard Fork” we have experienced 1.4% inflation.

ETH inflation has a lot of probability to be significantly lower post-merge. It is therefore likely that Ethereum will gain in value post-merge when we know that deflationary character is the main strength of BTC. The layers 2 serve as a bridge until “The Merge”. These, even after the developed version of ETH, are likely to be useful. 

To conclude, ETH could have more and more use once “The Merge” is over. 

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Disclaimer: The information provided in this article is not financial advice but for educational purposes only. Please do your own due diligence or consult a financial advisor before investing in any digital assets.