A Closer Look: The Merge pt. 1— Ethereum’s Transition to Proof-of-Stake

6 min readSep 8, 2022

The Merge is coming soon. Ethereum will move off of Proof-of-Work to Proof-of-Stake, improving the security, scalability, and sustainability of the network. Still, questions linger about what the Merge actually does and why it’s an epochal shift.

WhaleFin fully supports the Merge as it aligns with our long-term vision to achieve a future of maximized sustainability, security, and responsibility in the digital industry.

Learn more about WhaleFin here.
Download the WhaleFin app for Android and iOS to buy, sell, trade digital assets.

What is the Merge?

The Merge represents the Ethereum Mainnet (the network’s execution layer) joining with the Beacon Chain (the consensus layer introduced in Dec 2020), which will lead to Ethereum’s transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus mechanism.

PoW and PoS are arguably two of the most popular consensus mechanisms to verify the honesty of the users and the transactions on the blockchain. They both aim to incentivize good actors and make it extremely difficult and expensive for bad actors to tamper blocks.

In PoW, verifying crypto transactions is done through mining. In PoS, blocks are created by validators who stake capital in the form of ether (ETH) into a smart contract. In other words, users can stake ETH on the blockchain and, depending on how much they commit to lock up, they may have a chance to be chosen as a validator, and thus earn rewards.

Ethereum is currently rewarding both miners (at a rate of 2 ETH per block) and validators on the Beacon Chain. After the Merge, validators will need to stake 32 ETH to validate blocks and get rewarded, while rewards to miners will cease.

The Merge is a two-step process, the first one being the Bellatrix upgrade on the consensus layer, which happened on Tuesday, September 6. This prepares the Beacon Chain to merge with Ethereum’s execution layer.

The second step, called Paris, will officially mark the transition of the execution layer from Proof-of-Work to Proof-of-Stake. The transition is triggered by a specific Total Difficulty threshold called the Terminal Total Difficulty (TTD), expected between September 10 and September 20, 2022.

How will it change Ethereum?

More sustainability

PoW relies on an energy-intensive process (mining), while, after the Merge, validators will stake collateral to secure the network. The transition to PoS could reduce the network’s power consumption by more than 99.9%.

More security

PoS will make the Ethereum network more decentralized and secure. Under PoW, the vast majority of miners participate in centralized mining pools. On the other hand, the Ethereum PoS system will require a high number of validators and, therefore, the decentralization of participation and validation will increase.

Moreover, slashing penalties will aim to discourage validator misbehavior. Network attackers will not only require a greater amount of ETH to attack, thus making it expensive to attack the network, but they will also lose their assets as the slashing mechanism of PoS will automatically execute slashing penalties.

These measures will ensure a higher degree of security.

More scalability

Slow transactions and high gas fees are some of the main weaknesses of the Ethereum network. The Merge aims to address these issues, and the adoption of sharding technology will contribute to providing a better performance of the network.

What will happen to ETH?

Ethereum to be deflationary after the Merge

ETH is likely to become deflationary as token issuance decreases. After the Merge, rewards to miners will cease, and the total ETH issuance is expected to decline by 90%. This is why the Merge is also colloquially termed the “triple halving” — a nod to Bitcoin’s halving cycles.

Ethereum can afford to reduce ETH issuance because PoS is a more efficient way to secure a network compared to PoW. Under PoW, Ethereum needs to issue enough ETH to cover miners’ costs along with a slim margin. Under PoS, Ethereum needs to cover the opportunity cost of capital.

Additionally, the PoS mechanism requires a large amount of ETH to participate in staking, resulting in a portion of the total ETH supply being locked.

ETH demand to increase

Demand for Ether is also expected to increase due to a number of factors. First, staking rewards for validators are likely to increase in no time. Validators will receive transaction tips that are currently earned by PoW miners, potentially boosting percentage-rate rewards. Second, they will also begin to earn MEV (Maximal Extractable Value) due to their ability to reorder transactions. These yields are not sustainable, though, and staking returns are likely to stabilize after the initial phase.

What are the potential vulnerabilities of Ethereum after the Merge?

From a technical point of view, central points of failure carry a certain degree of vulnerability. Approximately 60% of the PoS nodes run on centralized cloud providers, meaning that issues resulting from technical failures on the providers’ end could affect the network.

On the regulatory side, it might be vulnerable to censorship.

Despite this, there is no doubt that the Merge represents the crypto event of the year, and a significant achievement paving the way to a future of improved sustainability and security.

Want to learn more about the Merge? Follow us for part 2 of our series to understand this epochal change in the history of Ethereum.

Learn about how the Merge will temporarily affect the WhaleFin platform here.

About WhaleFin by Amber Group

WhaleFin, powered by Amber Group, is an all-in-one digital asset platform designed to empower you to diversify, manage, and grow your wealth digitally in a secure manner. On WhaleFin, you can buy, sell, trade, and invest in crypto with ease.

Download the app here.

Amber Group is a leading digital asset platform operating globally with a presence in Asia, Europe, and the Americas. We provide a full range of digital asset services spanning investing, financing, trading, and spending, backed by some of the best investors across the world such as Sequoia Capital, Temasek, and Tiger Global Management.

For more on WhaleFin’s announcements and news, please follow us on social media.

For support and assistance, please contact us at service@whalefin.com

This material is strictly for information purposes only, and does not constitute or shall not be considered as, an offer, solicitation, or recommendation, to deal in any products. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of certain personnel and has not been reviewed by any regulators elsewhere, which may be different from, or inconsistent with, the observations and views of Amber Group.

Amber Group assumes no obligation to update or otherwise revise this material, Amber Group does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this material. Contents in any third-party sources (if any) in this material are completely beyond the control of Amber Group. As such, Amber Group shall not be held responsible for the accuracy, completeness and legality of the contents of such third-party contents. Any reference to third-party contents does not imply an endorsement, representation or warranty by Amber Group. No liability will be accepted for any loss or damage arising from or in reliance upon the contents of this material or these independent third-party contents provided here.

This material is not directed to or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Amber Group to any registration or licensing requirement within such jurisdiction.

This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for the convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.