- Ethereum's long-awaited move to proof of stake—dubbed "the merge"—is finally happening.
- A lot is going to change. But a lot is also going to stay the same.
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So, what does that mean for you, the ordinary user or investor? Whether you’re holding your life savings in the asset or just 0.01 ETH, the network’s move from a proof-of-work blockchain to a proof-of-stake one will make things different. But what exactly?
For some time, there have been rumors swirling around that this upgrade will make faster and cheaper. But this isn’t true—at least not yet, anyway, according to the Ethereum Foundation and experts who spoke to Decrypt.
What is the merge?
The merge is Ethereum’s much-publicized move to proof of stake. Right now, the cryptocurrency’s network uses the same consensus network as : proof of work. This highly energy-intensive way of keeping the network secure uses huge amounts of electricity (more than entire countries) in order to process new transactions on the network.
Proof of stake is different, though. Rather than using miners, validators are needed. Validators can be anyone with at least 32 ETH available to “stake,” or pledge, to the network. Users can also participate with smaller amounts of ETH through staking pools or cryptocurrency exchanges. Today is the day Ethereum makes the move to that consensus mechanism.
This way of doing things is a solution to proof of work’s energy consumption: the Ethereum Foundation claims it will make the network more than 99% more energy efficient.
But today’s upgrade does not solve other issues with Ethereum’s throughput and capacity (i.e. how many transactions are processed per second.) That, it is hoped, will come later.
The merge will not make Ethereum faster
Ethereum’s move to a new consensus mechanism will mean a more energy-efficient blockchain, but this doesn’t mean Ethereum transactions will be quicker.
Why? Because the move to proof of stake will only mean blocks are produced roughly 10% more frequently than they are on proof of work, according to the Ethereum Foundation.
Fast Ethereum transactions would be nice, of course: just like buying things with a credit card online, it gives you peace of mind when the transaction goes through quickly. But with this cryptocurrency network, things aren’t going to speed up that noticeably just yet.
The Merge is coming: UPGRADE YOUR CLIENTS!
• The Bellatrix upgrade is scheduled for epoch 144896 on the Beacon Chain – 11:34:47am UTC on Sept 6, 2022
• The TTD value triggering The Merge is 58750000000000000000000, expected between 10-20 Sep 2022
— Ethereum (@ethereum) August 29, 2022
“Though some slight changes exist, transaction speed will mostly remain the same on layer 1,” the foundation said. “This is a fairly insignificant change and is unlikely to be noticed by users.”
The merge will not make Ethereum transactions cheaper
Many think that the move to proof of stake will make Ethereum’s notoriously high gas fees, the costs associated with making transactions, lower. This isn’t true—although it is hoped they will go down with future upgrades.
Lots of applications and cryptocurrencies run on Ethereum’s blockchain. This means that often, to do things with such applications (think decentralized exchanges or DeFi lending protocols), you will need some Ethereum—sometimes a lot of Ethereum—to pay for the transaction.
The network’s notoriously high fees have put some people off using the blockchain altogether, looking to “Ethereum killers” like Solana, Avalanche, or Tezos to mint NFTs.
But contrary to what you might think, this week’s upgrade won’t make Ethereum cheaper to use. “The Merge is a change of consensus mechanism, not an expansion of network capacity, and will not result in lower gas fees,” the foundation said.
Ethereum is moving to proof of stake, which will make things more energy efficient—more than 99% more energy efficient, says the foundation—but not cheaper.
“There will be just less energy consumption overall,” P.J. Murphy, CEO of Artgreen, an Ethereum-based creative DAO that focuses on facilitating investments into CryptoArt, told Decrypt.
Is staking Ethereum on an exchange a good idea?
As a retail investor, you may have received emails from various exchanges telling you to stake your ETH on the exchange. You may even be doing so already. But is this a good idea?
Well, it depends who you ask. Ethereum core developer Micah Zoltu told Decrypt absolutely not. “You should not stake with an exchange,” he said. “It hurts the network rather than helping, and the return on investment at the moment probably isn't worth it.”
He recommends staking your ETH yourself, by running your own node—which anyone can do with a computer. “ It is doable by anyone with a sufficiently good computer, electricity, and internet,” he said.
Zoltu continued that this was because giving Ethereum to an exchange to stake presented security issues. “You are giving your stake to someone else, who may decide to attack with that stake,” he said.
Others aren’t so concerned, and see benefits to companies like Coinbase or Binance making it easier for ordinary users to stake ETH and passively earn rewards. “It’s been planned for a long time. It should be pretty seamless on big trusted platforms,” said Artgreen’s Murphy.
So should you be worried about staking on an exchange? Ethereum core developer Danno Ferrin said it depends on how much control you want. “My argument is I'm too much of a control freak to let the exchange out my stake at risk of slashing,” he said.
“They are probably better at it, but when they make mistakes it will be at scale.”
The merge will not make Ethereum deflationary
With this upgrade, Ethereum’s monetary policy will change. But there is a common misconception that ETH, the blockchain’s native cryptocurrency, will become deflationary—it won’t. The move to proof of stake will add deflationary pressure to the cryptocurrency. Why? Because less cryptocurrency will be rewarded to those keeping the network secure than before.
With proof of work, the total amount of miners are rewarded ~13,000 Ethereum per day. But when Ethereum makes the move to proof of stake, that number will be reduced by 90%, the Ethereum Foundation has said. So, the total amount of stakers will be rewarded with ~1,600 Ethereum per day.
At the same time, a certain amount of ETH that is paid to the network in the form of transaction fees will be burned—a change that went into effect last year through the EIP-1559 upgrade. This combined with a drop in the issuance rate will add deflationary pressure to the cryptocurrency—but it won’t automatically make it deflationary. Rather, it will reduce Ethereum’s inflation rate. Over time, it is possible that more ETH is burned than is issued on a yearly basis, but the merge alone will not make this happen.
What does the merge mean for retail investors?
So after all this, what does this mean for someone holding some Ethereum on an exchange? Or for those lucky investors who have actually used the cryptocurrency to buy something like an NFT?
Well, according to some experts, the merge shouldn’t matter at all. “To ordinary users, the merge means mostly nothing,” Ferrin said.
Zoltu agreed. “The merge should be a nothing burger if it goes well,” he said.