Knowledge Drop #1 -Ethereum's Merge

By Ethersven | Ethereum Knowledge Drops | 15 Jul 2022

The upcoming Ethereum Merge is the biggest update yet to the Ethereum Blockchain, probably the whole crypto space.
But there appear to be a lot of misconceptions and unknowns about what it actually does.
So let's dive into the most important points about this upgrade.

The change of the consensus mechanism from proof of work (PoW) to Proof of stake (PoS)

This is the whole point of the Merge. By switching to PoS the Ethereum Blockchain reduces its energy consumption by over 99%, because there will be no more mining. The ‘Beacon Chain’ that has been up and running since December 2020 will then be merged into the regular ‘Execution Layer’. End users don’t have to do anything to migrate or upgrade.

Will the Merge reduce Gas Prices?

The Merge will not reduce the transaction fees, it will not impact Ethereum’s throughput. While in reality, the more constant block times of PoS lead to a 8% increase in throughput, this is insignificant and very unlikely to make a difference in gas prices.

What about the ETH issuance/ inflation?

Currently we have a 4.5% inflation from PoW mining, and on top of that, we have 0.5% inflation from PoS staking, which means overall we have 5%. After the Merge, the mining disappears and we only have the 0.5% from staking. This is a 90% issuance reduction! Couple that with the burn mechanism from EIP-1559, which burns the majority of the transaction fees, the Ethereum blockchain is likely to end up deflationary.

Will there be a mass selling event from all the stakers after the merge?

Well first of all, the staked ETH will NOT be unlocked until the first update after the merge, which is called the 'Shanghai Hard Fork', which is estimated to happen 6-12 months after the merge. Additionally the staking rewards are going to increase with the Merge. At the time of writing, they are around 4%, and after the merge they are estimated to be around 10%. This is again one of the effects of EIP-1559, where one part of the gas fees, the priority fee, that is currently going to the miners, is then going to the stakers, thereby increasing their rewards.

Is this ETH 2.0?

No, the term ETH2.0 or ETH2 has been deprecated by the developers. It was mostly confusing users, because it makes it sound like it is one big upgrade, when in fact it is a whole lot of upgrades spanning several years. Many people also thought that it required them to claim new eth2 tokens, which is wrong.

Do I need 32 ETH to stake?

If you want to run your own validator at home, then yes, you need 32 ETH. However there are ‘staking pools’ that allow you to trade any amount of ETH for tokens, that represent staked Ether. Examples for this would be Rocketpool’s rETH or Lido’s stETH. These liquid staking derivatives can also be used in DeFi, where you can further increase your gains, if you are up for the risk.

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Ethereum Knowledge Drops
Ethereum Knowledge Drops

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