What does the Ethereum Ropsten testnet merge mean?

On June 8, the Ethereum Ropsten testnet completed the merger. As of now, the transition date for the Ethereum mainnet Proof of Stake (PoS) has not yet been determined, and it is currently only a merger test based on the testnet. After the Ropsten transition is completed, the other two testnets (Goerli and Sepolia) will also transition to PoS before the focus will be shifted to the mainnet.

The Ropsten testnet merge was a big day for Ethereum. This marked the final testing phase before deployment on the mainnet.

Ethereum in final stages of testing merge preparations

Over the past few months, developers have been testing Kintsugi , Kiln, and other clients on shadow forks, which are new development networks created by forking a small number of nodes from an existing network.

The fork maintains the same state, history, and chain ID as the main chain. The merge is done efficiently for nodes on the fork. Txs nodes from the main chain can be replayed on the fork, allowing us to see how the node behaves under mainnet conditions.

After successfully achieving multiple goals on the shadow fork, we are now entering the final phase: testnet deployment. In preparation for the Ropsten testnet merge, the new Ropsten Beacon Chain was launched on May 30th, providing the consensus foundation to the network.

Performance before and after the merger

First, the consensus layer needs to be upgraded to merge compatible protocol rules (Bellatrix), triggered by slot height. This transition occurred on June 2 at slot 24000.

Next, we will move on to the execution layer portion of this conversion. In this step, we will determine a new “TTD” (Terminal Total Difficulty) value.

On June 3, the exact TTD for the merge was set to "50000000000000". When the chosen TTD is reached, the chains will merge.

Once the execution layer exceeds the "TTD", the next block will be produced by the Beacon Chain validators alone. Once this block is completed, the merge is considered complete. After the Ropsten testnet, other testnets (Goerli and Sepolia) will also transition to PoS in the coming weeks.

When Goerli and Sepolia have successfully transitioned and stabilized, a slot height will be chosen for the Bellatrix upgrade on the beacon chain and a TTD value will be set for the mainnet transition. Clients will then release a version that enables the merge on mainnet. The path from today's situation to a full transition to PoS is now in sight.

After completing the following operations, we can enter the main network:

• Shadow fork deployment is problem-free (completed)

• The client passes various test suites (completed)

• Smooth deployment across testnets (work in progress)

The shift to PoS will mark the end of PoW Ethereum and usher in a more sustainable and environmentally friendly blockchain era. In fact, it is estimated that PoS will use 99.5% less energy than PoW.

Mergers lead to changes in ETH supply and demand forces

Immediately afterwards, the issuance will be reduced by more than 90%, and the selling pressure of millions of coins per day will be replaced by buying pressure. This is equivalent to 3 BTC halving.

"Consolidation" is a major change in supply/demand that most people underestimate. ETH's daily selling pressure will be replaced by buying pressure. We need new sellers every day to "hold back" the price from rising.

If the merger were to happen today, the roughly $10 million of daily selling pressure on ETH would be replaced by roughly $8 million of buying pressure. While we now need roughly $10 million of new money per day to keep the price stable, we need roughly $8 million of existing holders to sell their ETH to keep the price from rising.

Before we get into these calculations, let’s clarify where we are now and how we’re getting there.

Purpose: We want to see the impact of the merger after it happens.

parameter:

fact:

• F1. Issuing ETH in PoW

• F2. Issuing ETH in PoS

• F3. Ethereum daily fee income

• F4. Percentage of fee revenue consumed due to EIP-1559

Assumptions:

• A1. Percentage of daily issuance by miners (PoW)

• A2. Percentage of daily issuance by stakers (PoS)

F1. Issuing ETH in PoW

Every day, about 13,200 ETH are issued to miners on the PoW chain, and about 1,590 ETH are issued to stakers on the PoS chain. The annual issuance rate for about 14,790 new ETH is 4.5%.

At the merge block, the two chains “merged” into one, and the PoS era began.

F2. Issuing ETH in PoS

After the merger, the issuance rate was significantly reduced due to the removal of PoW from Ethereum, and only stakeholders who produced blocks were rewarded. The drop from about 14,790 ETH to about 1590 ETH represents a 90% reduction in issuance. Equivalent to 3 BTC halvings.

F3. Ethereum daily fee income

All Ethereum users pay transaction fees - they represent revenue for the Ethereum protocol. Daily fee revenue varies depending on activity on Ethereum (expressed as gas fees). Based on the past 7 days, the average daily revenue is approximately $10 million.

F4. Percentage of fee income burned

Part of the total fees paid by users goes to the nodes, and the other part is burned (EIP-1559). Regardless of the time period analyzed, the percentage burned is fairly consistent, accounting for about 85% of the total fees.

A1. Percentage of daily issuance by miners (PoW)

Miners are usually looking to profit from their operations, not to accumulate more cryptocurrency. They also have high fixed costs like electricity, rent, and hardware, so they are often forced to sell. They may sell about 80%.

A2. Percentage of daily issuance by stakers (PoS)

Stakers don't have any substantial fees to pay. They are also required to stake ETH, which means they are likely to have confidence in the asset. Their motivation is usually to accumulate more ETH. They may sell about 10%. Now that the facts and assumptions are covered, let's discuss how they affect the price of ETH.

In short, it’s all about the recurring forces of supply and demand. @NorthRockLP calls them “structural” forces and argues they drive prices over the long term.

What is the structural supply and demand of ETH?

Supply: Selling pressure from miners/stakers.

It’s simple, they take newly issued ETH and keep selling some of it.

Demand: Fee income is burned.

This is more complicated. Why do burn fees represent structural demand?

The fees paid on Ethereum come from users who need to periodically buy back tokens to maintain their allocation to ETH and/or continue to use Ethereum. If we assume the current state of Ethereum investors and Ethereum usage, total fees = total buybacks.

But total costs do not represent structural demand.

A portion of the fees goes to the miners/stakers, who sell on the open market. In this case, the user's buyback simply changes hands: user => block producer => user.

With the burning of fees, the story changes dramatically. The burned fees are deducted from the supply. Buybacks by users are no longer changing hands, because the burned ETH cannot be bought back. Therefore, a portion of the total fees is burned, which is equivalent to new funds flowing into a system.

Burn costs = structural demand.

Let's take a look at daily structural supply and structural demand.

PoW:

• Daily selling pressure: $19 million

• Daily buying pressure: $8.5 million

• Net profit: $10.5 million in selling pressure per day

PoS:

• Daily selling pressure: $300,000

• Daily buying pressure: $8.5 million

• Net Profit: $8.2 million of buying pressure per day

I calculated other percentages as well. The combined result is always net buying pressure , even if stakers decide to sell 100% of the issuance.

Summarize

The merge is one of Ethereum’s most complex events to date, and arguably one of the largest events ever. After years of testing, development, and delays, we are finally entering the final sprint before the merge.

The merger has a dramatic effect on structural demand and supply forces. Daily selling pressure is replaced by buying pressure. Over the long term, this fundamental shift drives prices higher even without an influx of new buyers.

This entire analysis focuses solely on fundamentals. Some will respond that this doesn’t matter because narratives drive prices more than fundamentals. But remember, there has been net buying pressure on Ethereum every day for as long as Ethereum has been in use. That’s a great narrative.