What will the Ethereum Merge actually mean for ETH holders and stakers, and what are the myths and misconceptions surrounding it? Read the second part of our series on the Merge, Ethereum’s transition to the Proof-of-Stake consensus mechanism.
The Merge represents Ethereum’s transition to the Proof-of-Stake consensus mechanism used to secure its network and improve its scalability, sustainability, and security (read part 1 of our series here).
This upgrade, while labeled by many as the most important crypto event of the year, remains widely misunderstood.
In this article, we will help dispel some of the most common myths circulating about what will happen (or not) after the Merge.
1. The Merge will significantly alter Ethereum’s monetary policy and energy expenditure.
True.
With the Merge, Ethereum will transition from the current Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS) — an environmentally friendlier system to achieve agreement, trust, and security across a decentralized computer network.
Under PoW, the network is secured by the so-called miners, entities that use energy-computation equipment to solve complex, arbitrary puzzles and thus validate transactions, resulting in high electricity use and hardware depreciation.
Ethereum’s current energy consumption is on par with the power consumption of Chile; its carbon footprint is similar to that of Hong Kong.
With the introduction of PoS, rewards to miners will cease, resulting in a ~90% reduction in ETH issuance–a transition termed “the triple halving”. To secure the network, validators will stake collateral on the chain instead, and it is estimated that Ethereum’s energy consumption will be reduced by over 99.95%.
2. The Merge will reduce gas fees.
False.
Fees are expected to be only slightly lower or equal to the current fees, as the block production rate will be shortened from ~13 seconds to 12 seconds.
3. After the Merge, staked ETH cannot be withdrawn.
True (until ~ next year).
Withdrawals of staked ETH and new ETH issuance on the Beacon Chain (Ethereum’s new consensus layer) will be enabled after the Shanghai hard fork, which is estimated to activate 6–12 months after the Merge (currently expected to take place in early 2023).
However, rewards such as fees from transaction tips and MEV (Maximal Extractable Value) will be activated immediately after the Merge.
4. The Merge enables on-chain governance.
False.
Some PoS blockchains have on-chain governance where their rules and upgrades are governed using some form of on-chain voting (e.g., Cosmos and Polkadot). Not for the Beacon chain. Similar to Bitcoin and the current/legacy version of Ethereum, protocol changes will remain discussed and decided upon off-chain through the social layer with a wide range of stakeholders.
5. ETH staking is free.
False.
As mentioned, validators will have to stake collateral to effectively secure the network.
A common take is that, by transitioning to PoS where validators have virtually no ongoing costs, stakers can enjoy easy high yields.
But staking is not free.
Validators have opportunity costs on capital (meaning the value lost when choosing from two or more alternatives), both in choosing to invest their money in ETH and in staking their ether in the Beacon Chain compared to other methods of generating yield with ETH.
If staking were free, people would continue to acquire and stake more capital until a similar equilibrium point is reached.
6. The Merge is expected to significantly alter capital flows into and out of the Ethereum ecosystem.
True.
On the supply side, Ethereum is currently incentivizing both miners (under PoW) and validators (under PoS). Seigniorage is paid to miners to produce new blocks at 2ETH per block, and rewards are also being distributed to validators on the Beacon Chain. After the Merge, rewards to miners will cease, reducing ETH’s issuance rate by ~90%. This is why the Merge is also colloquially termed the “triple halving” — a nod to Bitcoin’s halving cycles.
Want to learn more about the Merge? Stay tuned for part 3 of our series to understand this epochal change in the history of Ethereum–and the crypto industry.
Discover how the Merge will temporarily affect transactions on WhaleFin here.
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