Ethereum Merger Is Coming: Five of Your Most Important Questions and Answers

As the Ethereum Merge approaches, the community is increasingly discussing the impact of the merger and the future roadmap of Ethereum. In this article, we have summarized five common questions around this theme to highlight the key points for you.

When will the merger take place?

There is no confirmed official announcement date yet, but the community generally believes it will be between June and August, as the difficulty bomb is expected to explode at the end of June.

Is it possible to postpone it?

Tim Beiko, community manager of the Ethereum Foundation, recently said that in mid-April, he will discuss with the community whether it is necessary to postpone the difficulty bomb again. The priority of a safe and stable merger is bound to be higher than a quick merger. In addition, he also said that although the difficulty bomb has been postponed for about 6 months in the past, as long as all aspects are suitable, a postponement of one or two months is also acceptable.

Why do we say: After the merger, the ETH inflation rate dropped by 90%, and the price went to the moon?

The Ethereum merger is actually a transition from PoW to PoS.

Ethereum under PoW issues ETH in the form of block rewards, and the current annual inflation rate is about 4.3%;

Ethereum under PoS will issue additional ETH in the form of staking rewards, but the staking rewards are dynamically adjusted according to the total amount of staking. Assuming the staking amount is 10 million ETH, the annual inflation rate is about 0.43%; (Note: the inflation rate increases with the increase in the staking amount, so the specific annual inflation rate will change)

Under this assumption, ETH's inflation rate will drop by 90%, equivalent to completing three halvings.

In addition, with the cooperation of EIP1559, the ETH destroyed by transaction fees may exceed the newly issued ETH, realizing the deflation of ETH, which is a long-term positive for the price.

On the contrary, ETH will face a huge sell-off after the merger. Why?

Those who hold this view mainly believe that the cost of staking a large amount of ETH into the beacon chain deposit contract in the early stage is extremely low, and there is a multiple of profit. There is a high possibility of withdrawing the funds for profit and dumping the market after the merger.

This possibility does exist, but we can consider it in combination with the following factors:

• The withdrawal activation function is currently being incorporated into the Shanghai upgrade, which will be the first hard fork after the merger. Given the uncertainty of the current time and the possible bearishness of the market (even if it rebounds in the near future), investors who are eager to take profits can hedge through derivatives and over-the-counter transactions.

• Similar to the deposit queue, withdrawals also require queuing, and approximately only 1,125 validators can withdraw at most (a total of 38,000 ETH) per day.

• There are already many liquidity staking solutions similar to Lido on the market, and some pledgers can actually withdraw at any time.

• When there are a large number of withdrawals, the staking yield will increase, thereby attracting investors to deposit money.

After the merger, the staking income is expected to be close to 10%? How is it calculated?

It is possible. You should know that after the merger, there will be three sources of staking income:

• Staking Inflation Rewards

• Commission income

• MEV

  
  

For specific data, we refer to the calculation model of Ethereum researcher Justin Ðrake, and we can calculate an annualized return of 9.6%.

However, it is worth noting that this is only our ideal rate of return in the early stages of the merger. In the long run, the rate of return may fluctuate between 3.3% and 5.4%.

What is Ethereum’s latest future roadmap?

In general, the roadmap for ETH2.0 (in fact, the foundation has already cancelled this term) has actually changed twice.

At the beginning, the ETH2.0 roadmap was a classic three-stage process:

• Phase 0: Beacon Chain with PoS consensus mechanism

• Phase 1: Data sharding, but not computational sharding

• Phase 2: Add execution capabilities to all shards (compute shards)

  
  

However, on November 18, 2020, in the fifth AMA event of the Ethereum Foundation's ETH2.0 research team, V God has made it clear that the ETH2.0 roadmap has changed and will promote the implementation of ETH2.0 with Rollup as the center:

• For the time being, we will no longer emphasize the importance of Phase 2, and will mainly promote Phase 1 to achieve data sharding in order to realize sharded Rollup. The current TPS of Ethereum is about 15~45. Using Rollup can increase the throughput by 100 times. At the same time, the throughput of the 64-shard Ethereum network can be increased by 64 times. The combination of the two, that is, sharded Rollup can achieve a 6400-fold expansion.

• The beacon chain will have execution functionality, which means that after the PoS merger, the beacon chain blocks will directly include transactions.

  
  

Recently, there have been some updates on the sharding scheme. In the future, Ethereum is more likely to adopt a sharding scheme called Danksharding, which can effectively optimize the cross-domain MEV problem and is more conducive to the implementation of sharding Rollup.

But before that, let’s first take a look at the PBS (proposer-builder separation) solution proposed by Vitalik Buterin to the cross-domain MEV problem.

In the previous model, miners were responsible for block creation. They selected transactions from the memory pool, sorted them and included them in blocks. They also had the right to censor certain transactions.

In the design of PBS, this responsibility is divided into two roles: block proposer and block builder.

The block proposer is responsible for collecting transactions from the memory pool and creating a list crList containing block transaction information and passing it to the block builders. The block builders reorder the transactions in crList and build blocks with the purpose of maximizing MEV, and then submit their bids to the block proposer, and the block proposer will select the one with the highest bid as the valid block.

After understanding PBS, it will be easier for us to understand Danksharding.

Our previous sharding scheme was a parallel data sharding mode, that is, each shard and beacon chain had independent validators. Although independent validators are more conducive to decentralization, in the current context of the prevalence of MEV, driven by profit, it is bound to lead to the centralization of block producers (for example, a large number of verification nodes are running under the same entity, which is beneficial to MEV). In addition to adopting the PBS architecture mentioned above, Danksharding has also made a change, that is, all beacon blocks and shard data will be uniformly verified by a committee composed of validators.

This design is strictly a simplification of sharding. There is no complicated data access synchronization problem between shards, which has many advantages:

• Can effectively reduce network workload (nearly 100 times);

• Data synchronization between L1 and L2 is accelerated;

• crList enables instant transaction confirmation on L1;

• MEV marketization solves potential validator centralization issues

  
  

Therefore, for now, Ethereum's latest roadmap can be summarized as Rollup-centric + Danksharding. However, Danksharding is still in the theoretical stage, and the overall route may change in the future.