The Merge and Ethereum 2.0 explained

When's the Merge?

ETA 15 September 2022, based on difficulty and hash rate.

What's the Merge?

The Merge is when Ethereum officially becomes proof-of-stake. Like Bitcoin, Ethereum is currently proof-of-work, a less eco-friendly mechanism requiring much computational power and electricity. Moving towards PoS for some years now, Ethereum launched a solution that allows securing the network by staking (hence, proof-of-stake). Now, this solution merges to the Mainnet (until now secured by proof-of-work), thus the Merge.

What's the solution?

It's called the Beacon Chain. It was launched in December 2020 and has been under testing since then. The Beacon Chain hasn't been processing Mainnet transactions like sending ether between wallets. Instead, it was busy reaching a consensus on its own state (validators, their balances etc.).

Why proof-of-stake?

It's a greener, more responsible solution. It's estimated that the Merge will reduce Ethereum's energy consumption by ~99.95%. Keeping in mind that Ethereum is basically the life force for all decentralised finance (DeFi), moving towards PoS is kinder to the environment.

See: Proof-of-Work vs Proof-of-Stake

What will happen to proof-of-work and miners?

Until now, Ethereum has been secured by proof-of-work and maintained by miners. As mining can be highly lucrative, it is a competitive area that favours those possessing more powerful, costly equipment.

Proof-of-stake works differently. Instead of miners, there are validators who 'earn' their right to validate transactions and secure the network by staking 32 ETH*. Though monetary requirements are pretty costly, there's an option for ex-miners to sell their equipment and requalify as validators.

*Not to bear the full cost, miners and validators can also join 'pools'. In this case, they share the costs and rewards for mining/validation with other network participants.

Ethereum has been preparing the miners for a while. A mechanism called a difficulty bomb exponentially increases the difficulty level of mining. This leads to longer block times and hence smaller rewards for ETH miners. In the end, mining should become so tricky that the chain stops producing blocks and freezes, marking the beginning of the Ice Age. Once it happens, the next block on the Ethereum blockchain will be validated (PoS) rather than mined (PoW).

The miners will probably consider other proof-of-work options, starting with Ethereum Classic (see below). In this case, we expect that these alternatives, which now have much lower tech requirements, will become more challenging to mine.

Is Ethereum going to fork (again)?

A fork is a drastic measure when a community cannot agree on how the network should evolve. It happens when a network splits into two – with one of the splits ignoring the upgrade and continuing as before. Both splits retain the same history up to the point of the upgrade.

Ethereum has already forked once, in 2016. Interestingly enough, the ETH we now know is the fork, and the original pre-fork version of the network was renamed Ethereum Classic (ETC). However, in this case, both splits enjoy the support of the founder – Vitalik Buterin. Should a group of disgruntled miners incite a rebellion, they will be on their own.

'A couple of outsiders basically have exchanges and mostly just want to make a quick buck,' says Buterin. 'So I'm not expecting it to have substantial, long-term adoption.'

So, is Ethereum 2.0 a fork?

No, the Merge is not a fork but an upgrade.

What will happen to ETH? How do I prepare?

If we're talking about the coin, nothing. It will continue to exist as is, the only difference being – Ethereum will run on a new proof-of-stake blockchain.

You don't need to prepare for it – no action is required from your side. It's still going to be the same coin.

If there's to be a fork, which, as we know, won't have the support of Buterin, it will naturally mean another coin. But for this potential coin to have any value, it must have a strong community around it. There must be enough miners to continue to mine the chain, which, at this point, is very hard to mine. Otherwise, the coin becomes unusable. Many factors affect the value of an asset, but the community's support is arguably the strongest.

After the Merge

There are a few misconceptions about what exactly will happen after the Merge. The two things everyone is most interested in are whether sending ether will become 1) cheaper and 2) faster.

Will the Merge make sending ETH cheaper?

No, or at least – not straight away. The ETH transaction fees are influenced by Ethereum's throughput, currently set at 15 transactions per second. At times of heightened demand, there's a queue of unprocessed transactions, so fees go higher. Switching to PoS is not directly related to throughput, which will stay the same. PoS Ethereum will, however, make way for scalability improvements, which will make sending ether cheaper.

Will the Merge make sending ETH faster?

Again, no. On PoS, blocks will be produced ~10% more frequently than on PoW, which doesn't make for a significant change.

NB! PoS has introduced a concept of finality, which means that it's impossible to reverse a block once it becomes a part of a finished epoch (each epoch takes approximately 6.5 minutes and can contain 32 blocks). When dealing with PoW, technically, you can reverse any block. It's just the amount of effort and cost would become more and more astronomical the deeper you go down the chain. That's why when you send crypto, your wallet doesn't credit the funds immediately but waits until the transaction has at least a few confirmations.

Finality or waiting for several block confirmations on PoW, it takes approximately the same time, so there's no cutting corners here.

What's the difference between Ethereum 2.0 and the Merge? Are they the same thing?

Not exactly. Ethereum actually abandoned the term Ethereum 2.0 in favour of Ethereum upgrades because they thought it was confusing. There was never supposed to be another Ethereum, but a better already-existing one. So upgrades fit better, and the Merge is just one of these upgrades.

It's not over after the Merge?

No, we're just about halfway there. '60% [done] once the Merge is fully complete,' says Buterin. There are more upgrades to come. The next major one – sharding – should improve scalability, making sending ETH cheaper and faster. Should ship sometime in 2023, too.

Will 3rd gen blockchains become less popular now?

Third gen blockchains are the newest generation of proof-of-stake blockchains, which are often faster, cheaper and easier to build on than Ethereum. For these qualities, they're sometimes referred to as Ethereum killers.

See: 3rd generation blockchains, what are they, and how do they work?

In terms of switching to PoS, Ethereum is merely catching up. It's just beginning to offer something many players on the blockchain market have been offering for a while. Additionally, PoS won't make transferring ETH cheaper or faster, at least not immediately.

But even as it is (more expensive, slower, proof-of-work), Ethereum is the second most popular crypto asset. It dominates the DeFi space, and it's not getting any worse. So probably the better question is – what's more probable? For a more popular option to become cheaper and faster, or for alternatives to become more popular.

Should I invest in ETH (now)?

If you're unsure whether to invest in ETH or any other asset and when to do so, we can recommend finding a professional investment advisor. Doing your own research is always a good practice as well. Switching to PoS definitely feels like a step in the right direction. Still, it's hard to predict how it will influence the markets, especially in the short run.