Bankless: 10 things you need to know about the Ethereum merger

Posted by David Hoffman, Co-founder of Bankless

Merging is so confusing!

Let’s start from the beginning and tell a little bit about one of the most important events in the history of cryptocurrencies to come.

1. What is “merge”?

“Merge” is the name given to the event that the Ethereum blockchain switched from using Proof of Work (PoW) to Proof of Stake (PoS).

It’s called a “merge” because it refers to the merger of two separate blockchains currently running in parallel. The Ethereum main chain is being “merged” with a special-purpose blockchain called Beacon Connect.

Beacon Chain went live on December 1, 2020. The purpose of the beacon chain is to do one and only one thing: to be a proof-of-stake blockchain.

There are no transactions on the beacon chain. There are also no tokens or DeFi applications. It is an empty blockchain, a blockchain that is only used to run the proof-of-stake consensus mechanism.

Because the beacon chain is an “empty chain”, it can be merged with the Ethereum blockchain and replace Ethereum’s PoW mechanism without any other variables.

Once the two chains merge, Ethereum’s PoW verification mechanism will be replaced by a brand new PoS consensus mechanism.

2. Why was the merger so much fanfare?

The merger is considered one of the biggest events in the history of cryptocurrencies since the birth of Bitcoin.

The reason for this is mainly due to the following reasons:

In the history of cryptocurrencies, no blockchain has ever undergone such a major transformation. Blockchains don’t often change such a critical part of their operations, and no chain of the scale of Ethereum, which has built such a large and robust economic ecosystem, has done so.

The market cap of ETH assets is now $203 billion (was $550 billion), and there are other billions of dollars worth of assets on the Ethereum network. Ethereum is by far the largest and strongest economic ecosystem in the cryptocurrency world, and the security of all these economic activities will move from a PoW-based economy to a PoS-based economy.

Of course, there are a lot of risks associated with merging if it goes wrong, which is one of the main reasons why it took so long to merge.

There are many, many, many more tests and optimizations.

3. How will the merger affect ETH?

The merger has a huge impact on the ETH economy. For investors, this is the most important point of the merger.

The merger will revolutionize the ETH economy in two ways: reducing ETH issuance, and using ETH as a native yield asset.

Reduce ETH issuance

The merger will reduce the annual issuance of ETH from 4.3% to 0.43%.

This is because the PoS consensus mechanism will bring about fundamental improvements in efficiency. PoS aims to provide the highest level of blockchain security at the lowest cost, passing these savings on to ETH by reducing the amount of ETH issued for security needs.

PoW is expensive and requires significant resource overhead to compensate for the services of security providers (miners).

In contrast, the security cost of PoS lies only in the opportunity cost of funds and does not involve any real-world commodity or tangible cost. Unlike PoW, PoS does not require the issuance of large amounts of money to pay for security. Therefore, the lower security cost makes the PoS consensus mechanism more efficient.

Ethereum was able to reduce the annual ETH issuance from 4.3% to 0.43% due to the reduced need to pay PoW miners. The reduction in new issuance of ETH is generally considered…very optimistic.

This is because PoW miners will sell most of their earnings immediately, and over time, they will sell more than 90% of the total mining volume.

With PoS, the issuance will be reduced by more than 90%, but the indirect cost of being a PoS validator will also be basically reduced to 0.

Proponents of PoW argue that the high cost of PoW blockchains is a feature, not a bug. Such a cost model, they argue, creates volatility in assets, preventing centralization as sellers are forced to pay PoW miners. While PoW may promote asset decentralization, it also has the side effect of centralizing security.

4. Why would a merger make ETH deflationary?

Almost a year ago, on August 5, 2021, Ethereum launched the EIP-1559 protocol, an upgrade that changes the way Ethereum’s transaction fees are managed.

Much of the transaction fee will be destroyed compared to simply paying the miner the full transaction fee.

This is done for a number of reasons.

After the merger, the issuance of ETH dropped by more than 90%, increasing the proportion of ETH burned in each block.

When the gas fee of Ethereum is greater than or equal to 7gwei, the destruction rate of ETH is higher than its issuance rate, resulting in a decrease in the supply of ETH.

During the peak of the bull market, gas prices remained at 200gwei or higher for several months, making the 7gwei threshold very low. Even in a bear market right now.

5. Will the merger reduce Ethereum gas fees?

No.

This is a misunderstanding of “ETH 2.0” and “merger”.

“ETH 2.0” is the name for the future state of Ethereum that is no longer used by the Ethereum community. “ETH 2.0” refers to a future version of Ethereum that will enable PoS and sharding.

In the history of Ethereum, it was once thought that the two updates of PoS and sharding had to be done at the same time. But as development progressed, the developers realized they could separate the two updates and release them separately.

Sadly, the moniker “ETH 2.0” has always existed.

Sharding will reduce Ethereum’s gas fee on L1, but for end users, the real gas fee minimization or even elimination will eventually happen on L2, such as Optimism, Arbitrum, Polygon, StarkNet, zkSync or other L2.

When Ethereum L1 gas fees decrease, L2 fees will decrease by an order of magnitude larger. Ethereum’s gas fee solution has never been to reduce gas fees on L1, but to migrate users to L2, allowing them to enjoy the fast and low-cost transaction experience brought by L2.

6. Will the merger increase the speed of Ethereum transactions?

This is actually the same as the question of whether the above merger will reduce the gas fee, but the statement is different.

Transaction volume and transaction costs provide the same supply and demand dynamics in crypto networks.

Ethereum’s block time (how often blocks are added to the Ethereum blockchain) does get slightly faster after the merger, going from an average block time of 13.6 seconds to 12 seconds.

This means a 12% increase in transaction capacity and therefore a 12% reduction in gas costs.

But this amount is insignificant and should not be considered a “gas fee reduction”.

7. Will the merger reduce Ethereum energy consumption?

meeting. And it will be greatly reduced. This is also the main original intention of merging and PoS.

After the merger, the energy consumption of Ethereum will be reduced by 99.95% from the current level.

PoS uses capital, not energy, to secure the blockchain. So, the energy required to maintain Ethereum is only equivalent to the basic usage of a computer; that is, the energy consumed by what you are doing right now, such as reading this article, tweeting, downloading a movie to your hard drive, etc. .

With PoS enabled, Ethereum’s energy cost is only the energy cost of running a node — about 2.6 MWh per year. That’s less than the entire U.S. gaming industry spends, about 1,300 times less.

Ethereum will truly be the greenest financial system in the world.

Banking and finance still requires people to run around in internal combustion engine cars, turn on lights in brick-and-mortar buildings, or otherwise consume energy that is no longer needed in the crypto world.

Maybe Wall Street should go green by using Ethereum.

8. Will ETH stakers dump ETH after the merger?

Do not! They won’t!

After the merger, the business of withdrawing ETH from ETH staking nodes will not be enabled immediately. This is because of keeping things as simple as possible as Ethereum goes through the biggest and most complex upgrade the industry has ever seen.

The withdrawal function is expected to open 6-12 months after the merger.

So, will stakers dump their ETH when withdrawals are enabled?

Maybe, but there are still limitations. There will be a withdrawal/deposit queue, limiting how fast people can stake and withdraw. This is also a mechanism to keep the chain stable, preventing rapid fluctuations in the Ethereum application layer from affecting the security of the chain.

The deposit and withdrawal bottleneck is limited to X/ETH per day, where X =:

#validator/65536, rounded to the nearest integer.

65536 is 2 raised to the 16th power. For some reason, Ethereum developers love these squared numbers.

Currently, there are 433,916 Ethereum validators on the Beacon Chain. To know how many validators there are per epoch, divide it by 65,536 and round to the nearest integer.

433,916 (total validators)/65,536 ≈ 6 validators/epoch

So the activation/deactivation count is 6 validators per epoch. An Ethereum epoch is 6.4 minutes, and 24 hours is 225 epochs.

So, the current validator activation/deactivation rate is 1350 validators per day.

225 epochs * 6 validators/epoch = 1350 validators/day

Each validator has 32 ETH, so a maximum of 43,200 ETH is unlocked per day.

32 ETH * 1350 validators = 43,200 ETH

Additionally, the APY of ETH stakers will also increase after the merger, as ETH stakers also charge transaction fees.

This is expected to increase ETH’s yield from 4.2% to over 5%, but even higher when gas is consumed in large quantities.

9. Why 32 ETH?

Why does it take 32 ETH to run a node and not 31, 33 or other numbers?

The answer is that the more nodes there are, the greater the total amount of message passing between nodes. If the amount of ETH is lower, more nodes can come online. While this is good for decentralization, it also limits capacity.

32 ETH was chosen as the optimal balance of these two spectrums, and it is also a square number: 2 to the 5th power.

Since node messaging is exponential, reducing the number of ETH validators from 32 to 16 would increase messaging across all nodes by a factor of 4. So, 32 was chosen as the minimum amount of ETH pledged to also generate “finality” in 768 seconds or “2 epochs”.

Will it always be 32 ETH?

uncertain! With optimized consumption hardware, message compression, and better signature aggregation, 32 can of course be modified to 16 or less.

10. Proof of stake is not on-chain governance

The criticism we often hear (mostly from the Bitcoin camp) is that PoS is equivalent to the “fiat system” we are trying to get rid of.

What they’re trying to say is that those who hold the money also hold the power.

This is a big misleading. Many staunch proponents of this view may be spreading it maliciously to discredit any consensus mechanism other than Bitcoin.

The role of an ETH validator is exactly the same as that of a PoW miner. This is a 1:1 comparison.

ETH holders have no governance power over Ethereum. Like Bitcoin, this power is held by non-validating node operators (aka “communities”).

Quite ironically, these camps advertise PoS as a “rich get richer” scheme, and it’s indisputable that PoW mining facilities generate a greater return on investment for wealthier, more capitalized entities than smaller capitalized entities fact.

A little idea:

PoS Ethereum has ETH native returns and is the most democratized consensus mechanism because it provides the same reward ratio for 32,320, 3,200 ETH or 32,000 ETH.

They will both get the same interest rate of about 5%.

This is in stark contrast to PoW miners, where a $100 million investment in a mining facility would generate far more than 10 times the hashing power relative to a $10 million investment due to economies of scale brought about by PoW hardware and energy costs .

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/bankless-10-things-you-need-to-know-about-the-ethereum-merger/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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