Discover more from FirstWatch Crypto
Why You Should Care About the Ethereum Merge
The two-week countdown begins...
The Ethereum Merge is schedule for Sept. 14th, here’s what you need to know as an investor
Ethereum is changing its block consensus method to Proof of Stake. Instead of computer chips mining blocks, consensus will be reached using virtual validators. The upgrade reduces energy consumption by ~99.5% and updates Ethereum to operate similarly to most competing Layer 1 blockchains.
This upgrade is a casual 7 years in the making.
Ethereum founder Vitalik Buterin wrote a post July 22, 2015 with the line “We may choose later on to adopt alternative consensus strategies, such as hybrid proof of stake.”
Yearly issuance is expected to drop 90% after the ethereum network merges, falling from 5.5M ETH per year to 600k ETH per year.
Pre - Merge
Because the base fee of every ETH transaction is burned, this will drop issuance down to about 0.1% per year from 4.1%, a 97% reduction in inflation!
Currently, there are over 13M ETH staked, generating a 4.5% staking yield. This comes from new Eth tokens minted to reward Stakers for securing the network. Post Merge, priority fees and extracted fees (MEV) will be paid to stakers, resulting in a new annual yield projected to be 8.8%.
The Ether token has the second largest market cap of all cryptoassets and is the leading Layer 1 asset (by far). The Merge could further separate the network from the rest of the pack of “Ethereum killers.”
DeFi and crypto have been searching for real ecomonic activity to drive growth. Post-Merge ETH will answer the call. Ethereum will provide a fundamental layer that becomes yield-generating, deflationary, and ESG friendly all at once. Since fees will be a function of demand, holding and staking ETH is a base line proxy for economic activity happening in crypto.
As more people stake ETH over time, staking yield is expected to decrease. However, as long as demand for DeFi, NFTs, and web3 continues at a breakneck pace (see below), the decreasing yield could be offset by an increase in the price of ETH.
I’m an ETH Holder, What Should I Know?
Excitement about the Merge is growing daily after a steady crescendo over the last few months, contributing to ETH’s recent gains. While sentiment is generally positive, investors cover the whole array of how to handle the event. Here are some helpful frameworks.
Why is it called, “The Merge”?
Ethereum is merging its legacy proof of work chain into the new proof of stake Beacon Chain. After the Merge, only the proof of stake chain will exist.
Do you need to do anything with your ethereum?
If you are holding, the short answer no. You should monitor what your exchange has said about their plans for the upgrade. You can also follow the timeline of the Merge in case there are any delays or last-minute developments.
How do I track the timeline of the Merge?
Bellatrix Upgrade - September 6th
This is the deadline for Stakers providers to make the final upgrade before the merge.
Paris Upgrade - est. early AM on September 14th
The Merge will happen after Bellatrix upgrade, where the execution layer transitions from POW to POS when total terminal difficulty (TTD) reaches a certain level
Here are some Merge Trackers:
Mario Havel’s bordel.wtf.
SixdegreeLab’s Dune dashboard.
What are the testnets?
The testnets were created to have validators and Stakers plan ahead for the technical requirements of the Merge. We are currently operating on the Goerli Testnet. From here, the last merge will be onto the Mainnet!
Ropsten Merge - June 8, 2022 (complete)
Sepolia Merge - July 6 2022 (complete)
Goerli Merge - August 10 2022 (complete)
There are also Mainnet shadow forks to test for any last minute issues. MSF11 went well, apart from some minor issues which are under investigation. MSF12 merged successfully on 8/31, the last shadow fork before the Merge.
How can I stake my ETH ahead of the Merge?
ETH staking has become a competitive business. Most everyday investors don’t have the technical chops or the 32 ETH to run an ETH validator themselves. Therefore, service providers have sprung up.
It is extremely important to note that staking ETH requires your initial contribution to be locked for an indefinite amount of time. While we believe the technical risks surrounding the Merge have been minimized through the testnets and the event will go smoothly, there are inherent risks and opportunity costs to staking your ETH.
If the Merge goes smoothly, another upgrade will need to be passed before Stakers can withdraw ETH from their validators. After that, there will be an exit queue, where only up to 1,350 validators per day can wind down their stake. (At current numbers, this means that it would take about a year for all Stakers to exit the queue.) Staking should always be viewed as a long-term endeavor.
If you do wish to stake, Coinbase and Kraken are the leading centralized options and Lido and Rocketpool are the leading decentralized options.
What happens if the Merge fails?
A failed Merge would affect the entire crypto market. Luckily, Ethereum works well with proof of work consensus, and a chain reset could occur to keep Ethereum functioning as it was. A Merge failure — on top of confusion, criticisms of centralization, and a bad macro environment — would push the crypto market further in a negative direction.
If the Merge was to fail, alternative L1 ecosystems could stand to benefit. Solana, Avalanche, Polkadot and Cosmos ecosystems will be mostly unaffected by the Merge.
Still, Ethereum dominates the L1 space, and bad news regarding the merge will create a fall-out zone that is unavoidable for these chains in the short term.
Vitalik Buterin discussed through the long-term future for Ethereum at EthCC conference in July. Vitalik says after the Merge will be The Surge, where Ethereum will be upgraded to process about 100,000 transactions per second "according to the math."
A successful post-Merge scenario paints a rosier picture for the technical side of crypto. Scalability and technical advancements will be able march forward at a faster pace. Scarcity for crypto’s leading L1 will peak, and Ethereum may be a force to big to ignore for Institutions and banks around the world.
What’s new in ETH2 on the Verge of the Merge?
How does ETH staking work? And the history of Ethereum.
Some Merge stats on ultrasound.money.
Dune dashboards on the Merge.
A full story on the Merge.
Divide emerges on how to play the Merge.
Vitalik Buterin on the long-term future of Ethereum.
On-chain ETH metrics.