How will ETH2.0 affect users? Who will benefit?

After many delays, the exact launch date of the merger seems to be approaching.

ETH's migration from proof of work (Pow) to proof of stake (PoS), also known as the "merge," is expected to be completed on September 19, 2022. This new date has been confirmed by Ethereum developer Tim Beiko. Tim estimated in a conference call that it might be in September, but the time may also change.

The merger will move Ethereum mainnet activity to the beacon chain. The merger is not expected to reduce Ethereum’s high gas fees, but it will have a significant impact on the network’s energy usage.

The “merger” could be a significant catalyst for ETH price appreciation.

The merger will:

• Increase staking income

• Ethereum (Dapp) development activity increases

• Reduce your carbon footprint

• Reducing ETH supply

Coupled with Layer 2 (L2) solutions, Ethereum's gas fees should also drop significantly and throughput should increase. As a result, demand for ETH will increase while supply will decrease. This could drive ETH prices higher. Some speculate that the increase will be 2x or more.

Who will benefit?

• Investors holding ETH.

• Higher staking yields will drive revenue growth for staking providers such as LIDO, Aave, and Curve.

• Stakers and validators will receive higher APR.

• The increase in users should benefit L2 providers such as Optimism, Arbitrum One, and Aztec Network.

What is Ethereum 2.0?

The first version of Ethereum was launched in 2015. Ethereum 2.0. ETH2 (also known as Serenity) is an upgraded version of ETH. The main difference between the two versions is that ETH 2.0 uses different mechanisms, proof of stake, sharding, and second-layer solutions. The transition to ETH 2.0 is a very complex technical work that requires time and rigorous testing.

ETH 2.0 is a multi-stage transition of the Ethereum network from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus mechanism. Just as PoW blockchains rely on miners to verify transactions, the PoS consensus mechanism relies on “stakers” to verify transactions by running nodes.

The Ethereum ecosystem consists of holders, users, dapps, and miners, who will soon be replaced by validators and stakers.

Ethereum ecosystem developers initially introduced the Beacon Chain, a coordination mechanism responsible for creating new blocks in the chain, ensuring their validity, and rewarding validators for securing the network before the “merge” was fully implemented.

The network load will be distributed across 64 separate shards, which will process information simultaneously, making overall transaction times faster and more efficient.

In short, ETH 2.0 will be more secure, efficient, scalable, and environmentally friendly.

According to Glassnode data, the total amount of Ethereum (ETH) staked in Ethereum's ETH 2.0 has reached an all-time high of 12,789,829 ETH, which is equivalent to more than 10.73% of the circulating supply. Ethereum has a major advantage over its competitors: its huge user base attracts more DeFi developers, which will produce a strong flywheel effect.

In terms of the number of stakers, we see over 70,000 unique depositors and 329,000 validators.

As we all know, Ethereum's high gas fees and transaction speed have always been a pain point for users and developers. These have also been exploited by its competitors, such as Solana, Fantom, NEAR, Cardano and other Layer 1 protocols.

ETH 2.0 will alleviate these issues. While total gas fees recently hit a 10-month low, which is actually a positive trend, the reasons for the decline are related to the current bear market and the decline in TVL from $181.6 billion in December 2021 to $75 billion. It may also be related to the general decline in NFT sales and cheaper fees for adopting competing PoS blockchains.

Impact of the merger

The “merge” refers to the point at which Ethereum will migrate from the PoW consensus mechanism to the PoS consensus mechanism, and the beacon chain will merge with the proof-of-work chain:

Source: Ethereum Foundation

From an ETH investor’s perspective, the main takeaways from the merger are:

• Higher staking yields increase demand for ETH.

• Reduce (by 90%) the issuance of ETH (reduce supply growth).

The merger will not reduce gas fees , but it will help stabilize gas fees regardless of ETH price. Layer 2 scaling solutions like Optimism, Arbitrum One, Aztec Network, Polygon Hermez, zkSync, Loopring, Boba Network or Metis Network are competing to reduce ETH transaction fees on Ethereum, and they are expected to reduce gas fees by 5–20 times, depending on the transaction type:

ETH 2.0 will use less electricity and will receive an environmental label. This may attract more institutional investors. In addition, the PoS validator mechanism generally helps more ETH to be decentralized. The demand for Ethereum staking will grow significantly. The ETH staking yield (APR) is expected to double, which will greatly increase the demand for staking and verification.

The main reason for being able to have a higher staking APR is that the fees now paid to miners will be passed on to stakers/validators. IntoTheBlock calculated that with the addition of fee rewards, the current 3.8% annual return will rise to 7.4%:

ETH supply reduction may even lead to deflation

In July 2021, as part of the London hard fork, Ethereum Improvement Proposal (EIP) 1559 came into effect. It changed Ethereum's fee mechanism. Previously, miners received block rewards and transaction processing fees. Now, they still receive block rewards, but the fees are divided into a base fee and a tip. If a user wants to increase the priority of a transaction, he can add a tip. However, the base fee (in ETH rewards) will be destroyed, which will reduce the supply of ETH.

In addition, after the merger, when the protocol migrates from PoW to PoS, miners will stop working and will be replaced by validators. In the PoS model, validators receive much less block rewards than miners currently receive in the PoW model. In other words, the amount of new ETH will drop. This will also significantly reduce the growth of the ETH supply.

The combination of these two effects (base fee destruction and block reward reduction) could have a deflationary effect on ETH supply: ETH Net Issuance = Issuance - Destruction.

According to research by crypto service provider LuckyHash, the merger could result in an annual deflation rate of 1%: “When the number of stakes exceeds 100 million, the annual issuance rate will stabilize at 1.71%, or an average daily output of about 5,600. If the upgraded Ethereum can maintain the current destruction amount by then, 1% deflation can be achieved each year.”

What should I do with my ETH assets during the merger?

You don’t have to do anything. Our ETH will be automatically converted to ETH 2.0.

We can also stake ETH before the merger and get a 3.8% APR staking yield.

You can use:

• Staking platforms such as LIDO, Aave, Curve, Yearn Finance, or Benqi.

• DEX Platforms

• Staking-as-a-Service companies such as Staked.us, Stakefish, Bitcoin Suisse, and Figment.

• Self-stake with at least 32 ETH.

Additionally, when staking ETH through a liquidity staking provider like LIDO, we receive stETH, which we can use on various DeFi platforms before ETH is merged.

Summarize

The following table nicely summarizes the impact of the ETH merger. It also provides key metrics depending on your position in the ETH ecosystem:

Source: https://medium.com/coinmonks/the-big-merge-from-eth-to-eth2-f932c56fa510