Just read this article about Ethereum merger

1. What is the merge?

The “merge” is the name of the event when the Ethereum blockchain changes from using Proof of Work (PoW) to Proof of Stake (PoS).

It’s called a “merge” because it’s a merger of two separate blockchains that are currently running in parallel, meaning the mainnet is being “merged” with a special-purpose blockchain called the “beacon chain.”

The beacon chain was launched on December 1, 2020, and has only done one thing so far, being a proof-of-stake (PoS) blockchain. There are no transactions, no tokens or DeFi applications on the beacon chain. It is an empty blockchain, a blockchain that only runs the proof-of-stake consensus mechanism.

Because the beacon chain is an empty chain, it can be integrated with the Ethereum blockchain and replace Ethereum's PoW mechanism without worrying about any other variables.

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

2. Why are mergers so popular?

The merger is considered one of the biggest events in crypto history since the creation of Bitcoin.

In the history of cryptocurrency, no blockchain has ever undergone such a major change. It is important to remember that blockchains do not often change key parts of their operations, and there has never been a blockchain like Ethereum that has made changes after building such a large and powerful economy.

Today, ETH has a market cap of $203 billion (previously $550 billion?), with billions more on its mainnet. Ethereum is by far the largest and most powerful economic ecosystem in crypto, and the security of all of this economic activity will shift from a PoW-based economy to a PoS-based economy.

Therefore, if something goes wrong, it will definitely bring greater risks, which is one of the main reasons why this merger took so long, because there is a lot of testing and improvement involved.

3. What impact will the merger have on Ethereum?

The merger has a huge impact on Ethereum’s economics, especially for investors. The merger will change Ethereum’s economics in two ways: reducing the issuance of Ethereum and establishing Ethereum as a native yield-earning asset.

Reducing Ethereum issuance

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

This is because the PoS consensus mechanism is fundamentally improved. PoS is designed to provide the highest level of blockchain security at the lowest cost, and by reducing the amount of Ethereum issued to maintain security, these savings are more beneficial to Ethereum.

PoW is expensive and requires a lot of resource overhead to compensate miners for their servers.

In contrast, the cost of PoS security is simply the opportunity cost of capital and does not represent any real-world goods or tangible costs. Unlike PoW, PoS does not require the issuance of a large number of tokens to maintain security. Therefore, these lower security costs make the PoS consensus mechanism more efficient.

Due to the reduced need to pay PoW miners, Ethereum was able to reduce the annual issuance of Ethereum from 4.3% to 0.43%. Reducing the issuance of new ETH is generally considered a bullish sign. This is because PoW miners sell most of the rewards they receive immediately, and over time, the portion that is sold accounts for close to 90+% of the total mined.

But PoW proponents argue that the high costs of PoW blockchains are a feature, not a bug. They argue that these costs prevent centralization by creating churn in asset holdings because it forces sellers to pay fees to PoW miners. While PoW may indeed ensure asset decentralization, it also creates security centralization.

The difference is that once PoS is adopted, Ethereum's production will be reduced by more than 90%, and the management cost of being a PoS validator will basically drop to 0.

4. Why will the merged Ethereum be deflationary?

This time last year, Ethereum introduced EIP-1559, a change in how Ethereum transaction fees are managed. Instead of simply paying all transaction fees to miners, most of the transaction fees will be destroyed.

There are many reasons for doing this:

After the merger, Ethereum production will be reduced by at least 90%, and the proportion of Ethereum destroyed in each block will also increase accordingly.

When Ethereum's gas fee is 7gwei or higher, the rate at which ETH is destroyed will be greater than the rate at which ETH is issued, reducing the total supply of ETH. At the peak of the bull market, gas prices remained at 200 gwei or higher for several months, making the 7 gwei threshold a very low threshold.

Historical Gas Fees: https://dune.com/hildobby/Gas

Simulate ETH's combined issuance: https://ultrasound.money/

5.Will the merger reduce Ethereum’s gas fees?

Won't.

This is a misunderstanding that arises between "Ethereum 2.0" and "merger".

ETH 2.0 is the name of the future state of Ethereum, which is no longer used by the Ethereum community. ETH2.0 refers to the future version of Ethereum that will enable PoS and sharding technology.

There was a time in Ethereum’s history when it was thought that both PoS and Sharding would arrive at the same time. As research and development progressed, developers realized that they could separate these updates.

Sadly, the “ETH2.0” nomenclature has persisted.

Sharding will reduce Ethereum's gas fees on L1, but for end users, the realization of truly low gas fees or even 0 gas fees will eventually occur on L2, such as Optimism, Arbitrum, Polygon, StarkNet, zkSync or other L2.

When Ethereum L1 gas fees go down, L2 fees will go down by an order of magnitude. Ethereum’s gas fee solution has never been to lower them on L1, but to migrate users to L2 and let them enjoy the fast and cheap transaction experience there.

6. Will the merger increase Ethereum’s transaction speed?

This is actually similar to the core of the previous question, but it is expressed differently.

Transaction volume and transaction costs in a crypto network will affect changes in its supply and demand.

After the merger, Ethereum’s block time (how often blocks are added to the Ethereum network) did get slightly faster, from an average block time of 13.6 seconds to 12 seconds.

This represents a 12% increase in transaction capacity while also reducing gas costs by 12%.

But this is a minuscule amount and should not be considered as “lowering gas fees”.

7.Will the merger reduce Ethereum’s energy consumption?

Yes, it will be greatly reduced, which is also one of the main achievements of The Merge and PoS.

After the merger, Ethereum will consume approximately 99.95% less energy than current usage.

PoS uses capital rather than energy to secure the blockchain. Therefore, the energy required to keep Ethereum running after the merger is comparable to basic computer usage: like what you are doing right now, such as reading this article, sending tweets, downloading movies to your hard drive, etc.

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

Ethereum will actually become the most environmentally friendly financial system in the world.

8. Will Ethereum stakers sell their Ethereum after the merger?

No! They won't.

After the Ethereum merger, the staked Ethereum cannot be withdrawn immediately. This is to make things as simple as possible. After all, this is the largest and most complex upgrade that Ethereum has ever experienced in the industry.

Withdrawal of staked Ethereum is expected to be unlocked within 6-12 months after the merger.

So will stakers sell their ETH immediately after unlocking?

Maybe, but there are still limitations. There is a withdrawal/deposit queue that limits the speed at which people can stake and unstake. This is again a mechanism to keep the chain stable and not let rapid fluctuations in the Ethereum application layer affect the security of the chain.

The deposit/withdrawal bottleneck limit is X/ETH per day, where X equals: number of validators / 65536, rounded down to the nearest integer.

The number 65536 is 2 raised to the 16th power. For some reason, Ethereum developers love these square numbers. It’s called the ChurnLimit Quotient, and you can read about it here and here.

Currently, there are 433,916 Ethereum validators on the beacon chain. To find how many validators there are per epoch, divide it by 65,536 and round down to the nearest integer.

433,916 (total number of validators) / 65,536 6 validators per epoch

So the number of activation/deactivation is 6 validators per epoch. One Ethereum epoch is 6.4 minutes, and there are 225 epochs in 24 hours.

Therefore, the current validator activation/deactivation rate is 1,350 per day.

225 epochs*6=1350/day

Each validator has 32 ETH, so the maximum unlocked per day is 43,200 ETH (32*1350).

Additionally, your APY as an Ethereum staker will increase after the merger because Ethereum staking also collects transaction fees.

This is expected to increase Ethereum yields from 4.2% to 5%+, and even higher during periods of high gas consumption.

9. Why 32 ETH?

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

The answer is that the more nodes there are, the more total messaging there is between nodes. If the number of Ethereum is smaller, more nodes can be online. While this is good for decentralization, it will limit Ethereum's scalability.

Choosing 32 ETH is the best compromise, also because it is a square number: 2 to the power of 5.

Since node messaging is exponential, reducing the ETH validator requirement from 32 to 16 will increase messaging across all nodes by a factor of 4. 32 was chosen as the minimum amount of ETH stake that also produces “finality” within 768 seconds or “2 epochs”.

Is 32 ETH permanent?

Not necessarily! It could certainly be modified to 16 or lower with improved consumer hardware, message compression, and better signature aggregation.

10. PoS is not on-chain governance

A common criticism (mostly from the Bitcoin camp) is that PoS is equivalent to the “fiat system” we are trying to move away from.

What they mean is that whoever controls capital controls power.

This is a very false position, and many of those who frequently espouse this view are probably spreading it with malicious intent to discredit any consensus mechanism outside of Bitcoin.

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

Ethereum holders have no governance power over Ethereum, just like in Bitcoin, that power is held by non-validating node operators, aka “the community”.

Ironically, these camps promote PoS as a scheme to “make the rich richer,” while the indisputable fact is that PoW mining facilities generate higher returns on investment for wealthier capital.

PoS Ethereum with ETH native returns is the most democratized consensus mechanism as it offers rewards in the same proportion as 32, 320, 3200 or 32,000 ETH.

They all earn the same yield of around 5%.

This is in stark contrast to PoW miners, where a $100 million investment in a mining facility will generate far more than 10 times the hashrate of a $10 million investment due to all the economies of scale that come with PoW hardware and energy costs.

Original author: David Hoffman, Co-founder of Bankless