What changes will the Ethereum merger bring to coin production?

Recently, I have read a lot of news about the Ethereum merger. The more accurate source is that Danny Ryan of the Ethereum Foundation said that there is no need to delay the difficulty bomb. The planned "difficulty bomb" will arrive in mid-June. And seeing that the Kiln test network test is going smoothly, the main network merger preparation list is about to be completed. The merger is imperative.

So what changes will the merger bring?

I have seen more news that after the Ethereum merger, the production of ETH has decreased. Coupled with the current destruction of ETH by EIP1559, the growth of Ethereum may lead to deflation.

This part may be closely related to price and revenue and will attract more attention. Let's take a look at the data in this regard.

Since Ethereum is going to stop the POW chain, the computing power is useless. The computing power can only be migrated to other networks with the same algorithm. The main data is the amount of ETH generated.

The current ETH supply output is as follows:

After the merger, the miner rewards will be reduced to zero. Currently, miners pack about 6,500 blocks every day, and the average reward is as high as tens of thousands of ETH.

In the current hybrid stage, both eth1 and eth2 are contributing to the issuance of Ethereum. After the end of POW, only eth validators are responsible for block generation. In addition to gas fee income, only eth2 block generation rewards are available. The block generation rewards are as follows:

So it is very intuitive that the daily output of ETH tokens has been reduced by 90% from the original 14,000. Of course, this is a comparison figure without taking into account gas fee rewards.

Judging from the total supply in the above figure, 2 million ETH have been destroyed since the activation of EIP1559. If POS is enabled, will this continue? This is related to two data, namely the GWEI price of POS and the network transaction processing volume.

With the launch of POS, both the basic fee and the floating fee in the gas fee will be reduced. Unless the network is in a very special congestion environment, it is possible that the gas fee of Ethereum transaction processing will be in the "off-season".

Assuming that the gas of the POS chain is 10 times lower than that of the POW chain, after the merger, it is possible that the network transaction volume will increase by at least 10 times in order for Ethereum POS validators to receive rewards of thousands of ETH.

For example, let's assume that, under the PoW chain, on January 5, 2022, 13,000 ETH will be destroyed, leaving 6,600 gas fees. If the gas consumption is so high, the beacon chain validator can increase the daily reward by 500-1,000 on the basic block reward. Then the annualized rate of return of all validators will increase by about double, and is expected to be around 10%.

In addition to these benefits, Ethereum may become more interesting technically after the merger.

Ethereum calls eth1 the execution layer and eth2 the settlement layer. This name directly indicates that eth1 is one of the execution shards.

This is one of the biggest expectations for the future. Eth2 will be a larger homogeneous sharding structure. So we need to understand the next step of Ethereum: sharding chain.

After the PoS consensus began to take on network packaging, it did not realize Ethereum's ultimate vision, because the huge transaction data will still cause congestion and increase gas fees. Therefore, the development route centered on rollup will require Ethereum to achieve the successful operation of the shard chain under the PoS consensus.

Sharding is the process of splitting a database horizontally to distribute the load. In the context of Ethereum, sharding will reduce network congestion and increase transactions per second by creating new chains called “shards.”

The sharding process of Ethereum will be a multi-stage upgrade process, and the final sharding chain will distribute the network load to 64 new chains. The hardware requirements will be kept low to regulate the local running nodes.

The sharding upgrade is planned to be carried out after the merger of Mainnet and Beacon Chain. The time is expected to be 2023, depending on the progress of the work after the merger. Sharding will provide Ethereum with more ability to store and access data, and it is currently believed that it will not affect the execution of code.

Sharding is a way to scale while maintaining decentralization. With sharded chains, validators only need to store/run data for the shard they are validating, rather than for the entire network. This speeds things up and greatly reduces hardware requirements.

Sharding will eventually make it possible to run Ethereum on a personal laptop or phone. More people will be able to participate or run clients in the sharded Ethereum. This will improve security, the more decentralized the network, the smaller the scope for attack.

To maintain data availability, when the first shard chain is running, it will only provide additional data to the network. It will not process transactions or smart contracts. But when combined with rollups, they will process a large number of transactions.

Rollups are a "layer 2" technology. They allow dapps to bundle or "roll up" transactions into a single transaction off-chain, generate a cryptographic proof, and then submit it to the chain. This reduces the data required for a transaction. Rollups combined with all the extra data availability provided by sharding can get to 100,000 transactions per second.

However, under the processing capacity of a single shard or an initial shard scale, we need to consider the process of applying shards to processing execution. The part that needs to be discussed is more complicated.

vitalik has written an article about the progress of sharding work, which includes some of the difficulties in the roadmap.

1. Currently existing rollups use transaction calldata. Therefore, if you want to increase rollup capacity and reduce costs in the short term without doing any additional work, you need to only reduce the cost of transaction calldata. The current average block size is far from a size that threatens network stability, so this can be done safely, although some additional logic may be needed to prevent very unsafe edge cases.

EIP 4488 should increase the data space available for rollups per slot to a theoretical maximum of about 1 MB and reduce the cost of rollups by about 5 times.

2. The full sharding implementation takes a long time, so you can implement part of it first, such as implementing the "business logic" of the sharding specification with a smaller number. It is easier to implement the sharding specification, but each shard will be broadcast in the subnet. By default, validators will trust the committee's verification, but they can also accept the beacon block when they see the complete body of the shard block.

In the case of shard communication, in order for the sharded data to actually be available through rollup, the rollup needs to be able to attest to the sharded data. This will increase the rollup data space per slot to about 2MB (250kb per shard * 4 shards, plus the calldata expanded in step 1).

3. If the number of active shards increases from 4 to 64. After the shard data enters the subnet, the P2P layer must be strong enough to divide the shard into a larger number of subnets. At this time, data availability will rely on the committee. This will increase the aggregate data space per slot by about 16 MB (250 kB per shard * 64 shards)

Finally, it is worth mentioning that for the data availability of the sharding process, DAS, or data availability sampling, was born to ensure a higher level of security. Data availability sampling will be carried out in stages, first on certain clients. When data availability sampling is fully introduced, sharding is complete.