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What is the Ethereum merge ? 5 things you need to know

James
4 mn

According to an announcement from an Ethereum Foundation blog post, the highly anticipated Ethereum merge is going to take place between September 10 and 20. The merge centers around the second biggest cryptocurrency platform moving from a Proof of Work to a Proof of Stake consensus mechanism.

The upgrade is intended to reduce the carbon output of the blockchain, lower the ETH supply and potentially have a huge impact on the crypto ecosystem as a whole. This Proof of Stake consensus mechanism that the platform is moving to is currently used by other big blockchain platforms like Avalanche, Cardano, Solana and more.

Below we've gathered all the information that you need to know pertaining to this event and packaged them into five things you need to know.

The basics: what is Ethereum merge, exactly? 

As mentioned above, the merge involves the Ethereum network moving from a Proof of Work to a Proof of Stake consensus model. This means that the process in which transactions are verified and executed will change.

While the Proof of Work model requires miners to compete at the same time to solve a complex cryptographic puzzle, the winner of which is rewarded with verifying the transactions; the Proof of Stake model instead assigns the task to a random validator who will then be responsible for adding a new block to the blockchain. These validators are required to stake funds, in this case, 32 ETH, in the network in order to qualify and show good faith.

The goal of this transition is to reduce the platform's energy usage and create a more sustainable network. A researcher at the Ethereum Foundation, Carl Beekhuizen confirmed this in a detailed article stating that Ethereum's energy usage will decrease by ~99.95%.

In order for the merge to be successfully executed, Ethereum's Mainnet (its existing execution layer) will be merged with the Beacon chain, a Proof of Stake layer launched in December 2020, resulting in one Ethereum PoS chain.

What does this mean for the Ethereum network? 

The merge is a step in the right direction for the Ethereum ecosystem in terms of making it more environmentally friendly. According to Digiconomist, based on the current network, one Ethereum transaction requires the same amount of power that an average U.S. household uses over 6.5 days.

With the platform's total energy usage compared to the power consumption of Chile and the carbon emissions of Hong Kong. In an ongoing effort to make cryptocurrencies integrated into the mainstream, these figures play a large role in hindering that. Making the network faster and cheaper paves the way to making Ethereum more scalable and versatile.

The upgrade will also change the way in which new ETH enters circulation. Moving away from a cap of five million new coins being minted a year, the new issuance rules will be based on a number dependent on the amount of staked ETH.

The new consensus layer is also believed to lower gas fees, making the network more user-friendly. In Ethereum's history, the platform has been notorious for going through bouts of exorbitant gas fees.

Another positive the network could enjoy from a successful integration is an increased market cap. Many are expecting the price of ETH to increase in the coming days, add this to the reduced supply and the market cap could increase. Some analysts (from FSInsight) are even anticipating Ethereum's market cap will overtake that of Bitcoin's in the coming year, which would require it to more than double.

How does this impact the rest of the market?

Making history, of course. If successful, when the merge occurs Ethereum will be the first blockchain to move from a Proof of Work to a Proof of Stake model. In doing so, the whole crypto ecosystem will be watching to see whether they can overcome significant technical obstacles and whether other platforms might be able to follow in their footsteps.

If things don't go according to plan, this could have an impact on the decentralized finance (DeFi) industry. Valued at $141 billion at the beginning of Q2 2022, apps built on the Ethereum blockchain account for $35 billion of this, according to Defi Llama. Should things go smoothly, users will be none the wiser and will soon be able to enjoy faster and cheaper transactions.

When will the Ethereum blockchain merge take place (according to the Ethereum foundation)?

While there is plenty of speculation over when the merge will officially be implemented, various members of the Ethereum Foundation have had their say, all adding in of course that this is subject to change.

Vitalik Buterin, the founder of Ethereum, said in August that the merge is likely to take place around September 15, though this is dependent on the networking power contributed to the network. 

Tim Beiko, a "Non-Executive Employee at Ethereum Foundation", also said when the merge occurs it will likely take place the week of September 19.

What we do know for certain, however, is that the network went through what industry insiders are calling the final dress rehearsal in early August. In it, the platform's test environment network known as “Goerli” successfully completed the merge. Ethereum developers are working around the clock to ensure that this materializes with the mainnet and Beacon chain.

The platform needs to undergo two more phases, “Bellatrix” and “Paris,” which are going to take place on September 6 and then between September 10 - 20, respectively, according to Ethereum developers.

What do you need to do to prepare? 

The beauty of upgrades in the crypto industry is that they take place on the back end and there is no action required from the user. If anything, be vigilant of scams and don't fall for any "coin swap" initiatives telling you that you will lose your ETH if you don't swap them now.

If anything, some traders are incorporating more ETH into their portfolios in anticipation of uupward price movements. According to Blockchain Data, there has been a sharp increase in the number of addresses holding over 100 ETH, 1000 ETH and more than 10,000 ETH.

Final Thoughts

In light of the upcoming event, being educated will serve you well in navigating the next few weeks of trading. As Ethereum embarks on an industry first, the crypto industry will be watching to see whether the first integration from a Proof of Work to a Proof of Stake consensus mechanism can be achieved.