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Five Things You Need to Know About Ethereum’s Upcoming Merge (#116 - 15 August 2022)

The Future of Money with Henri Arslanian
Five Things You Need to Know About Ethereum’s Upcoming Merge (#116 - 15 August 2022)
By Henri Arslanian • Issue #105 • View online
The Ethereum network is currently in the middle of an exciting series of upgrades including switching from a proof-of-work to a proof-of-stake consensus. The Merge will mark the end of proof-of-work (PoW) for Ethereum, and the full transition to proof-of-stake (PoS) whilst reducing Ethereum’s energy consumption by ~99.95% and setting the stage for future scaling upgrades, including sharding.
In this issue of the newsletter, I explain what the Merge is and clarify some of the common misconceptions.
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The Ethereum network is currently undergoing a massive and exciting new revamp called the Merge (originally called Ethereum 2.0), which is officially scheduled to take place on September 19.
Why are these upgrades necessary in the first place?
Launched in 2015, the Ethereum network quickly became a victim of its own success and began to suffer from a variety of scalability issues as well as from high gas (or transaction) fees. 
But the new upgrades should ultimately result in a more scalable, more secure, and more sustainable Ethereum network.
The Merge will mark the end of proof-of-work (PoW) for Ethereum, and the full transition to proof-of-stake (PoS) whilst reducing Ethereum’s energy consumption by ~99.95% and setting the stage for future scaling upgrades, including sharding.
There are three distinct phases to the Merge.
The first stage of the new network rollout started with the introduction of the Beacon Chain back in December 2020, which has since existed as a completely separate blockchain running parallel to the Ethereum mainnet. 
Source: Ethereum Foundation
Source: Ethereum Foundation
The Beacon Chain has not been processing mainnet transactions but rather reaching consensus on its own state by agreeing on active validators and their account balances.
With the Merge between the two chains rapidly approaching, the Beacon Chain is set to become the consensus engine for all network data, including execution layer transactions and account balances.
Following the merge, proof-of-work mining will no longer be the means of producing valid blocks. Instead, the proof-of-stake validators will take on this role and will be responsible for processing the validity of all transactions and proposing blocks.
And no history will be lost with the switch. For example, once the mainnet merges with the Beacon Chain, the entire transactional history of Ethereum will also merge between the two chains, meaning users’ funds will continue to be safe and secure.  
Meanwhile, all of the excitement surrounding the Merge has led to a lot of misconceptions about what these upgrades will mean for the future of the blockchain. 
Here are 5 common misconceptions that are important to clarify.
1. Anyone is free to run a node with no staked ETH required
One of the biggest misconceptions, for instance, surrounds how much ETH needs to be staked in order to become a validator and run a node.
Whilst earlier discussions on the Merge suggested that a minimum of 32 ETH was required to run a node, the Ethereum team makes clear that anyone is free to run a non-block producing node with no staked ETH required (although you still need an internet connection and about 1-2 TB of available storage). 
These nodes do not propose blocks, but they still serve a critical role in securing the network by holding all block proposers accountable by listening for new blocks and verifying their validity on arrival according to the network consensus rules.
However, users will need to stake ETH in order to run a validator node, which has the ability to occasionally propose the next block and earn protocol rewards.
2. The switch from PoW to PoS will have no significant impact on lowering transaction fees
Second, whilst some have cheered the Merge in anticipation of lower gas fees, the truth is that the switch from PoW to PoS will have no significant impact on lowering transaction fees.
That is because gas is determined not by a blockchain’s consensus mechanism but rather by overall network capacity.
Whilst this might be disappointing to some, the growing number of layer- 2 scaling solutions in the Ethereum ecosystem as well as future upgrades that the network has in store should eventually bring gas fees down. 
As the Ethereum official website says so eloquently: “With a rollup-centric roadmap, efforts are being focused on scaling user activity at layer 2 while enabling layer 1 Mainnet as a secure decentralized settlement layer optimized for rollup data storage to help make roll-up transactions exponentially cheaper.”
3. The switch from PoW to PoS will have no significant impact on transaction speeds
Transaction speeds will largely remain the same once the Merge has been completed. 
In Ethereum’s current PoW form, a new block is generally mined every 13.3 seconds.
On the new Beacon Chain, meanwhile, blocks occur roughly every 12 seconds.
Once the mainnet merges with the Beacon Chain, blocks will be generated 10% more frequently than they currently are. However, this change is not radically significant and likely will not be noticed by a majority of users. 
4. The Merge will not enable staking withdrawals 
Many have been staking ETH on the Ethereum blockchain in anticipation of the Merge (the attractive yields have helped a lot as well as easy to use offerings by many of the large centralized exchanges).
When it comes to withdrawing assets on the post-Merge Ethereum, users will have to be patient and wait for the upcoming Shanghai upgrade, the next major upgrade following the Merge, before staking (and staking rewards) withdrawals are enabled. This means that we should expect assets to remain locked and illiquid for approximately 6-12 months following the Merge. 
5. The Merge will not require any downtime of the Ethereum network
And a final misconception regarding the Merge is that all of the upgrades will require downtime of the chain (i.e. the chain going offline).
The transition from PoW to PoS will not require any downtime.
Without going into the technicalities too much, this is because the Merge is based on a concept known as Terminal Total Difficulty (TTD), which represents a cumulative measure of the total mining power that has gone into building the chain.
Once all preconditions are met, blocks will instantly switch consensus mechanisms, in this case from PoW to PoS.
This transition has been in the work for some time now with numerous testnets in recent months, including RopstenSepolia, and Goerli, which just successfully wrapped up this past week. 
And as the Merge prepares to reach the finish line, the price of ETH has begun to rebound from recent slumps, hitting a two-month high whilst outpacing the rebound in the price of Bitcoin over the same period. 
Source: Bloomberg
Source: Bloomberg
The transition from proof-of-work to proof-of-stake will also have profound effects on Ethereum’s native currency - ETH.
For example, the Merge will reduce yearly ETH issuance from 4.3% to 0.43%, which could eventually lead to the digital asset becoming deflationary (this is mainly due to EIP-1559, an upgrade that was introduced last year and, as we covered here, that burns a large portion of the transaction fee).
Another important component of Ethereum’s planned upgrades surrounds the future potential introduction of shard chains.
Sharding,” a common concept in computer science, provides secure distribution of data storage requirements, enabling rollups to be even cheaper, and making nodes easier to operate.
Not only is this important for scalability reasons, but also the introduction of “sharding” will continue to make the network as decentralized as it can be.
The new network of decentralized validators will only need to store data for the individual chain, or “shard,” that they are validating, rather than the entire network.
Speaking at last month’s Ethereum Community Conference in Paris, Ethereum founder Vitalik Buterin confirmed that the Merge is rapidly approaching whilst revealing that additional upgrades to the network are also on the way, declaring that the end of the Merge will see the beginning of the “surge,” “verge,” “purge,” and “splurge.”
The “surge” refers to the introduction of sharding that we just discussed, whilst the “verge” will implement what Vitalik refers to as Verkle trees (a type of mathematical proof) and “stateless clients.” The purge will see a mass wipe of old network history, and, as for the splurge, Vitalik merely indicated it was “on to the fun stuff.”
These technical upgrades will allow users to become network validators without having to store extensive amounts of data on their machines whilst promising to bring 100,000 transactions-per-second (TPS) capability to the blockchain. 
After all, in a proof-of-stake network, validators with locked-up or staked ETH confirm and verify transactions, making a post-verge Ethereum more decentralized than its current iteration. 
Ultimately, the end of proof-of-work will usher in the beginning of a much more sustainable, environmentally friendly Ethereum (with the blockchain slashing its energy consumption by over 99%), significantly reducing both the computing power and energy consumption needed to run the network while reaching the full scale, security, and sustainability envisioned by Ethereum.
Expect September to be an active month in the broader crypto world!
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Henri Arslanian
*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only and none of its content should be construed as investment or financial advice of any kind. 
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Henri Arslanian

Future of Finance and Money - PwC Global Crypto Leader, Best Selling Author, Keynote Speaker, University Professor, Host of Crypto Capsule™ - Views are my own

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