Intro
In the following months, we *hopefully* are going to see the Merge update on the Ethereum blockchain. The upcoming switch is going to change the whole Ethereum network from reaching consensus via the Proof of Work (PoW) mechanism to the Proof of Stake (PoS).
However, many participants in the crypto space and beyond have false assumptions about the Merge, which might significantly alter their investment decisions.
What are the most significant misconceptions I often see repeated?
Can you tell why the following statements are false?
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Merge frees all the staked ETH at once
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Merge lowers transaction fees
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Merge increases ETH issuance
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You have to manually update the apps you use
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You cannot run a node without staking 32ETH
If you demystified some of the statements — Congratulations!
Now let us verify if you were right and debunk the rest of the misconceptions.
Merge Releases All Staked ETH At Once
Imagine all the staked ETH being released at once after the Merge happens. If you wonder how much ETH is staked, let me illuminate you with numbers — 13,640,408* ETH is currently staked. That’s quite a significant number of ETH. Flooding the market with such a gigantic supply would definitely have a huge impact, and I doubt it will be a positive one.
*The numbers might increase.
Although it might seem like a reasonable financial decision to gradually release all staked ETH, the reason is completely different.
The number of staked ETH is staggering, and processing all the transactions involving the release takes time.
Due to the infrastructure of the Ethereum blockchain and its validators, the staked ETH is not going to be immediately released, nor it is going to be released all at once. Not going too much into technicalities, the release of all staked ETH might take up to a year because of limitations on how much ETH can be released per Epoch, i.e. every 6.4 minutes.
It might be the longest queue you will ever be asked to wait in.
One more point some of you might be missing here.
Do you think everyone is going to sell their unlocked ETH? I highly doubt that.
Some of the released ETH will be definitely sold the moment it becomes unlocked. The rest, however, is not going to leave the staking vaults.
If you don’t remember, your yield is not paid in dollars; it is paid in ETH. Having a long-term vision of the Ethereum ecosystem, you are not going to miss the chance to earn a yield in ETH.
Merge Lowers Transaction Fees
Why does the cost of Ethereum transaction fees vary?
It is because of the number of transactions that can be verified in a given time. The faster you want your transaction to take place, the more you are going to pay for it to skip the queue. It is purely a free market mechanism at its finest.
Okay, so now let me clarify one thing.
The Merge is going to change the consensus mechanism from Proof of Work to Proof of Stake, which is not going to change the throughput of the blockchain, i.e. the number of transactions Ethereum can compute at a given time. Hence the Merge is not going to have any impact on the fees.
The mechanism that is indeed going to lower the transaction fees, although not exactly on the main chain, are the Roll-ups or Layer 2 solutions like Arbitrum or Optimism, which you might have heard about.
Merge Increases ETH Issuance
Are we going to see an increase in the ETH issuance after the Merge? On the contrary, the issuance is going to drop significantly.
The current issuance is about 4.7% annually, mostly due to rewards given to miners in a PoW consensus mechanism. However, once the Merge happens, all the PoW rewards are going to be excluded as we progress to the PoS system.
How much does it cut the issuance rate? It is hard to say, as the numbers might slightly vary, but it will decrease the issuance rate of ETH by about 90%.
Decrease the issuance by about 90%.
Some of you might remember the EIP-1559 update introducing a burning mechanism constantly decreasing the ETH supply. In short, the more transactions we make, the more ETH is burned. That is why some say ETH might become deflationary in the long run.
Check it out for yourself, along with more statistics here.
Also, you can watch the real-time burning of ETH here.
You Have To Manually Update The Apps You Use
It is a common misconception since people perceive the Merge as some kind of a hard-fork on the blockchain where you end up with a totally different chain. Well… not exactly. There were plenty of updates people are not aware of as those were not so “socially hyped”. The Merge is just one of those but significantly more important to the blockchain and the whole ecosystem.
If you don’t know when the Merge happens, you will not even see the difference using different applications or making transactions with your Metamask account.
However, some updates will have to be made, but as long as you are not a node validator, infrastructure provider or individual ETH staker, you won’t have to do anything.
You Cannot Run a Node Without Staking 32ETH
This one is partially true. Why?
Because there are different types of nodes we can run.
You can run a full node in order to be a validator and produce blocks. In such a case, you will have to stake at least 32ETH or its multiples as each 32ETH grants you a validator position on the network, earning yield in ETH.
On the other hand, you might become a validator of a different kind where you do not have to stake any ETH whatsoever. You can run your own node (Light node), validating the blocks produced by validators (also referred to as block builders).
In this way, you are not going to earn any rewards. However, you can install and run a Light node even on your smartphone as it does not require sophisticated hardware or significant processing power. In this case, you are helping to secure the network almost without any costs since the only cost of running a node on your smartphone might be a faster battery drain.
Conclusions
As you see, the Merge might go unnoticed on the surface if you are just an average user of the network. In the long run, however, the Merge is going to be one of the most significant updates taking place in the history of cryptocurrencies.
The second-largest cryptocurrency, by valuation, is going to switch its consensus mechanism from PoW to PoS, decreasing its issuance dramatically. Some claim ETH might become deflationary in the long run, burning more ETH than issuing due to the wider usage of blockchain.
Leaving the future speculations aside, let us hope everything will go smoothly and we will be able to see the further growth of the Ethereum ecosystem.
Till next time!
~M.E.
Originally published here.