The major impacts of Ethereum merger that are easily overlooked. When all the good news is gone, will it be bad news?

On July 26, Ethereum completed its tenth shadow fork, after which the Ethereum protocol support team released the Goerli/Prater merger announcement, clarifying that the subsequent merger process is divided into two steps, which are expected to take place on August 4, 2022, and between August 6 and 12, 2022 UTC time.

As Ethereum's last testnet PoS transition merger, although many people have criticized its slow progress, the Ethereum merger is indeed advancing slowly and has finally reached the final hurdle.

Will The Merge bring deflation?

As a topic related to the Ethereum merger, "ETC" has recently been hotly debated as one of the possible options for taking over Ethereum's sunken computing power , especially in the context of the heated discussion about forks.

In fact, the key impact of the merger of the Ethereum mainnet and the PoS beacon chain lies in the form of new ETH output in the future: users can participate in Ethereum PoS staking to obtain income rewards by staking at least 32 ETH.

This means that the main force in maintaining network security will no longer be miners but validators , and those who want to become validators must stake ETH into the Eth2 staking contract.

In fact, from this perspective, the act of staking at least 32 ETH to obtain rewards can be simply compared to "Ethereum graphics card mining" under the new situation - every 32 ETH can be compared to a mining machine, and the rewards generated by the pledge are the mining output.

The blockchain consists of three parts: consensus layer, execution layer and data availability layer. The merger is an upgrade to the consensus layer, but the gas fee is paid to the execution layer.

This means that The Merge will change the PoW consensus to POS. The PoW chain will not produce new Ethereum. New Ethereum will only be produced from PoS, which will reduce energy usage but will not affect Gas costs.

According to current data estimates, after Ethereum's upgrade to the PoS mechanism through The Merge, the number of new Ethereums added to PoS each year is approximately 600,000. However, based on the on-chain destruction data after Ethereum switched to the London upgrade in 2021, it is estimated that the number of Ethereum destroyed due to EIP-1559 is about 4.7 million per year.

This means that the net destruction of Ethereum will be greater than the net output, which is -4.1 million. Combined with the current number of Ethereum, which is about 120 million, not only will there be no more Ethereum issuance each year, but it will also be in a deflationary state :

(600,000 POS - 4.7 million destroyed)/about 120 million ≈ -3.5%

This will undoubtedly provide strong support for prices from the supply side. At the same time, with the advancement of Eth2 and the upcoming implementation of the London upgrade, facing the expectation of destruction, coupled with the demand for PoS, ETH will undoubtedly become more scarce, which is the most powerful boost to ETH prices at the demand level.

At the same time, although the current Eth2 staking APR (annual interest rate) is around 5%, the income will continue to decline as the total number of ETH staked increases, but even if the total network staked amount reaches 10 million ETH, the annualized income will still be around 5%, which is definitely a low-risk and safe income.

Raoul Pal, founder of RealVision, said that if Ethereum offers a 4.8% yield after the merger, then 4.8% will also become the benchmark yield for other crypto projects.

This means that the 4.8% provided by Ethereum staking will most likely be the risk-free interest rate in the Ethereum world in the future, which is equivalent to a US dollar cash deposit in the real world. The investment returns of other Ethereum protocols will most likely be higher than 4.8% (otherwise users can directly choose to stake Ethereum), and the more the returns are higher than 4.8%, the greater the risk.

What is the impact on Ethereum's expansion?

In addition to the impact on mining output, what impact will the merger have on Ethereum performance, especially expansion solutions such as sharding and Rollup?

Recently, Vitalik summarized his speech at ETH CC, saying that the merge is just a small step in the development of Ethereum, and there will be Surge, Verge, Purge and Splurge afterwards, but "Merge, Surge, Verge, Purge and Splurge are not different stages, but will occur in parallel."

As early as early December 2021, Vitalik published an article titled "Endgame", in which he put forward the view that all blockchains will eventually merge in the future, and listed tools that allow block verification to occur in a decentralized and censorship-resistant manner.

The first step is what we all know as The Merge , which refers to the full transition from proof of work to proof of stake; the second part, called The Surge , plans to improve the scalability of Ethereum and significantly increase bandwidth and throughput, especially on zk-rollup.

When the Ethereum mainnet is "merged" with the beacon chain, the mainnet will introduce the ability to run smart contracts as well as the complete history and current status into the PoS system. Ethereum 2.0 will improve the network's processing power by introducing shard chains.

The current plan is to establish 64 shard chains. Each shard has a group of validators responsible for packaging and verifying blocks. It is like a highway suddenly becoming 64 wide. The processing speed will inevitably be greatly accelerated.

Previously, on January 5, 2020, Vitalik published the latest related article about Rollup, "An Incomplete Summary Guide to Rollups". At present, Rollup has basically taken on the mission of taking over the expansion of Ethereum in the short and medium term.

Therefore, by combining Rollup with the future horizontal expansion solution of sharding, theoretically, the Ethereum network can achieve an amazing throughput of over 100,000 TPS, achieving a multiplier effect.

Will the public chain landscape change in the short term?

The current alternative advantage of EVM-compatible public chains such as Polygon and BNB Chain over Ethereum is that Gas and performance have not reached full capacity, and the congestion experience is not particularly prominent for the time being, so the user experience is better in comparison.

The impact of Ethereum after the merger is completed needs to be focused on this aspect, but in fact there will be no obvious change in terms of throughput. After PoW is converted to PoS, only the block time will be fixed, and the exchange capacity of a single block will remain the same, so there will be no obvious improvement.

In short, there will be no impact on TPS in the short term, and the task of capacity expansion will be mainly undertaken by the merged shards and L2 (Rollup).

At the same time, the recent wave of new public chains represented by Aptos and Sui has gradually come into the vision of more people, but in 2018 and 2021, there was also a "public chain fever" that surpassed Ethereum caused by competing public chains.

Facts have proved that for Ethereum, which has a complex system, rich layers, and strong self-innovation capabilities, the first-mover advantage is almost insurmountable. From EOS, Solana to today's Aptos, although new narrative protagonists have been changed, it is still difficult to say victory in the foreseeable future.