What happens after the Ethereum merger?

This merger, Ethereum’s transition from Proof of Work to Proof of Stake, is one of the most anticipated events in crypto history. Some even say it will enable Ethereum to reach 100,000 transactions per second and a price of $10,000. Let’s see what exactly this milestone means for Ethereum, the king of smart contracts.

Ethereum has been a proof-of-work blockchain since its launch in 2015. While this consensus mechanism is time-tested and secure, it is energy-inefficient, environmentally unfriendly, and has been relentlessly criticized by politicians and corporations.

Proof of Stake is the solution to all of the problems with Proof of Work. Instead of using powerful hardware, Proof of Stake requires validators to use their Ethereum as collateral. For example, a validator "stakes" 32 ETH, which means it is locked up while they validate. If they approve all valid transactions and reject all illegal transactions, they will receive a share of the transaction fees. However, if they act maliciously, some of their Ethereum will be burned and not returned. This method is estimated to be 99.95% more energy efficient than Proof of Work, a 2,000x improvement.

Since December 2020, Ethereum has had a proof-of-stake blockchain called the Beacon Chain to ensure that proof-of-stake is viable and detect issues before Ethereum fully switches to the new consensus mechanism. Prior to this, validators have been able to stake 32 ETH in batches and could not withdraw them until some point after the merge.

The merger is when the Ethereum main chain merges with the Proof of Stake chain, and Proof of Work is completely deprecated. When this happens, it may lead to some unintended consequences. Other Proof of Work cryptocurrencies that use similar algorithms to Ethereum may become more popular. Additionally, the demand for hardware such as graphics cards will decrease.

Since proof of stake is more efficient than proof of work, the Ethereum protocol will be able to significantly reduce its block rewards and still properly incentivize validators. Currently, about 13,000 ETH are minted per day. With proof of stake, that number will drop to around 2,000. This lower issuance, combined with the consumption of some transaction fees brought about by EIP-1559, means that Ethereum could become a deflationary currency. When supply decreases and demand remains the same or increases, the price will rise accordingly.

Additionally, at the time of the merger, the staking reward rate will nearly double from its current level to between 9-12%. This will give Ethereum stakers the opportunity to earn huge returns on a volatile asset. Even if more people start staking, it will increase demand for ETH and reduce supply, causing the price to rise anyway.

Contrary to popular belief, the merger itself will not lead to a significant improvement in transactions per second or transaction fees. Initially, the sharding scaling solution was planned to be released at the same time as the merger, but due to the number of available layer 2 rollup solutions, it was decided to postpone the release.

This merger could be the biggest cryptocurrency-related event of the year, as it will finally allow ESG-conscious companies and organizations to participate in Ethereum. Ethereum becoming deflationary will also lead to huge price potential, with prices likely to go above $10,000.