Ethereum Merge : Understanding the Merge Made Easy !

https://coingape.com/ethereum-eth-active-addresses-staking-surges-ahead-merge/https://coingape.com/education/what-is-ethereum-shanghai-upgrade-whats-in-and-out/https://coingape.com/drastic-change-in-ethereum-whale-holdings-after-merge-what-it-means/Ethereum completed its long-awaited merge in mid-September last year. The ‘Ethereum Merge’, which was completed in about 15 minutes, helped the network switch its consensus method from one that utilizes proof of work to one that employs proof of stake. The shift also brought dozens of blockchain projects it supports on the new consensus method.

Cryptocurrency brokerage Caleb & Brown’s COO Jake Boyle had weighed that the Merge is the most major Ethereum upgrade and most talked about event in the crypto community since it totally reshapes how Ethereum runs.

He went on to add that the switch considerably lowers energy consumption, provides improved crypto economic security, and makes it easier for anybody to contribute to protecting the Ethereum network.

What is Ethereum Merge? 

The Merge, formerly known as Ethereum 2.0, is the much-anticipated switch from the Proof of Work (PoW) consensus process to the Proof of Stake consensus mechanism for the Ethereum blockchain (PoS). 

PoW and PoS are protocols for adding transaction-containing blocks to the blockchain and for confirming and achieving consensus on the accuracy of the transactions. Currently, the PoW mechanism is used by the two most widely used blockchains: Bitcoin and Ethereum.

Understanding the Merge: 

The Ethereum merge was one of the historic moments in the crypto world. The shift from PoW to PoS essentially changed how new blocks are added and how transactions are recorded onto Ethereum’s blockchain.

• With PoW, miners compete by leveraging their combined computing power to create blocks containing transactions. This calls for specialized computer gear that consumes a lot of energy to solve a challenging mathematical puzzle. The first miner to complete the problem creates a new block and is rewarded with the blockchain’s native currency, in this case, ETH. PoW is less scalable than PoS and requires more energy, which is its main drawback.
• Validators, instead of miners, propose new blocks and validate transactions in a PoS system. Validators must stake a certain quantity of native currencies as collateral to participate in this procedure.
• An algorithm determines which validator gets to propose a new block of transactions instead of competing to create new ones. The blocks of transactions are then added to the blockchain once a specific number of additional validators have confirmed the transactions’ accuracy. After that, native coins are given to the validators. Individuals who fail to validate transactions (for example, by staying offline) or validate fraudulent transactions risk losing the collateral they staked.

Because it will occur when Ethereum developers merge the mainnet of Ethereum, PoW, with the Beacon Chain, the conversion of Ethereum to PoS is known as “The Merge” (a separate PoS blockchain the developers have set up to facilitate the transition).

The Timeline of Ethereum Merge: 

The Merge has been under development for years, gradually advancing through several tests and upgrades while engineers try to address flaws at each stage. Important checkpoints on the path to The Merge include:

• Beacon Chain launched in December 2020
• London hard fork in August 2021
• Altair upgraded in October 2021
• Arrow Glacier was upgraded in December 2021
• Kiln testnet merged in March 2022
• Multiple mainnet shadow forks started in 2022 April
• Ropsten testnet merged in 2022 June
• Gray Glacier upgraded in 2022 June
• Sepolia testnet merge in 2022 July
• Goerli testnet merged in 2022 August
• Ethereum Merger completed in September 2022

How does Ether staking work? 

With the Ethereum Merge, node validators will have to stake 32 ETH into a smart contract as collateral to be eligible for block rewards. This Ether will be locked up till a network update makes withdrawals possible.

Ethereum handles rewards by holding a random lottery to choose who will suggest a new block to be added to the blockchain, in contrast to some PoS blockchains that give a greater chance of rewards to users who stake a more significant amount of cryptocurrency.

According to Ethereum, “when validator withdrawals are enabled, stakers will be incentivized to remove their earnings/rewards (balance over 32 ETH) as these funds are otherwise not contributing to their stake weight (which maxes out at 32).”

Anyone who wants to stake Ether but does not have 32 ether or does not want to run a validator node can join a staking pool. To stake the requisite 32 ETH for an Ethereum validator node, a stake pool pools the deposits of several people. 

The staking pool then receives a percentage of the block rewards from that node based on the amount of ETH initially invested per user account. A variation of this is also available on cryptocurrency exchanges, where users can stake tiny sums in exchange for a set reward.

Why is Ethereum Merge required? 

Prior to the merge, Ethereum was plagued with several problems. The long-pending Ethereum Merge offered solutions to many of these problems as well as several advantages on how the token is created and how transactions are recorded on the Ethereum blockchain.

For improving scalability: 

• Cracking The Blockchain Trilemma is a hypothesis that claims blockchains can only fulfil two of the three goals of security, decentralization, and scalability. Still, not all three are one of the blockchain’s holy grails.
• Scalability problems are now plaguing Ethereum, which is the most crucial aspect of expanding the user base. Transactions have increased due to the growing use of cryptocurrencies and the massive expansion of decentralized applications (Dapps) that use the Ethereum blockchain, such as those connected to DeFi, NFTs, Metaverse, and GameFi.
• Slow transaction speeds have, however, made it difficult for Ethereum’s network to keep up. The resulting network congestion has also caused gas fees (Ethereum transaction fees) to soar, making the blockchain unusable for most individuals.
• The first step towards future upgrades like sharding, which are anticipated to increase significantly transaction speeds and lower gas costs, is the transition to PoS. Therefore, many people expect that The Merge will commence the start of a new chapter in enhancing the scalability of the Ethereum blockchain.

Improving decentralization and security: 

• Advocates of The Merge claim that because PoS has lower entry hurdles for validators than PoW, it will promote the decentralization and security of the blockchain. Because miners must purchase expensive computer hardware (often called mining rigs) and pay significant electricity expenses to compete to be the first miner to create blocks, PoW has high entry barriers.
• A lower access barrier may minimize the possibility of a small number of validators controlling the validation process, which may increase security.
• However, critics point out that validators with higher amounts of ETH staked as collateral may have a higher chance of selection, suggesting that people with access to more ETH reserves may have excessive influence over the validation process.

Affects the supply of ETH, making it Deflationary: 

• The two competing forces of issuing new ETH coins and destroying current ETH coins significantly impact the amount of ETH coins available (the removal of existing ETH coins from circulation).
• Due to the present PoW and PoS implementations on the Ethereum mainnet and beacon chain, new ETH coins are created to compensate miners and validators, respectively. 

But, the necessity for PoW mining rewards will disappear once the Ethereum network switches to PoS. Some commentators think this should lead to a decrease in the overall issuance of new ETH coins, making ETH deflationary or gradually reducing its supply.

Reduces energy consumption: 

• PoS uses less energy than PoW because fewer miners are required to compete with one another using powerful computers, which wastes a lot of energy.
• The Ethereum Foundation claims that switching to PoS will cause the Ethereum blockchain to use about 99.95% less energy.

The significance of the Ethereum Merge: 

The second-most valuable cryptocurrency in the world, Ethereum, recently underwent a significant software upgrade that promises to increase security while purportedly reducing its carbon impact almost entirely.

The redesigned system, dubbed “The Merge,” will do away with the requirement for cryptocurrency miners and massive mining farms, who previously powered the blockchain via a system known as “proof-of-work” (PoW). In its place, a “proof-of-stake” (PoS) mechanism has been adopted, which randomly selects “validators” to approve transactions in exchange for a modest payment.

Ethereum is a decentralized cryptocurrency. Organizations like banks are only required to approve transactions after they take place on their network. Before, transactions were approved using the PoW consensus mechanism, which miners mainly carried out. 

The first miner to complete a complicated mathematical puzzle would be the validator. After that, miners would compete to solve these riddles using a vast infrastructure of cutting-edge computer technology. Crypto farms, enormous warehouses filled with rows of computers that would solve the problems, were essentially the only power source for this method.

There was, however, one major issue: these mining farms were energy hogs. As a result, one of the biggest criticisms of the cryptocurrency industry was that they occasionally consumed more electricity than entire nations, which raised serious questions about their ability to maintain the environment. the switch to the PoS consensus process and “The Merge.” Although the new idea would eliminate the need for miners and mining farms, Ethereum would still be a decentralized platform. 

Instead, an algorithm will choose a validator randomly from a group of individuals who have “staked” (basically, pledged at least 32 Ethereum tokens on the network) their money. As a result, the Ethereum network would no longer require any miners.

Ethereum’s Price Change After Merge 

Ethereum’s price has been fluctuating a lot after the completion of the merge. The token’s price went up slightly after the merge to reach around $1,640 on September 14, 2022. It, however, fell sharply in the next twenty-four hours and was trading at around $1,450.

Ethereum fell further in October and traded at around $1300-$1400 the entire month. While it made a slight recovery towards the end of November, reaching around $1600, it again fell in November to around $1150.

Then came 2023, Ethereum saw a sharp uptick in its price. It possibly witnessed the best rally after the merge. In February 2023, Ethereum’s price reached nearly $2100, which is also its highest price since the merge. 

Since then, Ethereum has seen many fluctuations in its price, but never went below the $1500 mark. It is comfortable trading in the $1700-$1900 region as of now.

However, if you look from a holistic view, the merge didn’t help etherum’s price to skyrocket, as it is trading nearly at the same levels as it was before. Remember that ETH’s all time high is $4,891.70, and it is nowhere near to reaching that spot anytime soon.

Ethereum’s Net Supply Down 

Following the merge,  Ethereum’s net supply down has come down. The decline has come in the backdrop of a higher burn than generation. Since the merge happened, Ethereu has burned 924K ETH while minted only 699K ETH.

This means it has created a gap of 255K ETHS in the past 415 days. The supply has decreased by 0.19% in annualized percentage terms, as per the ethereum analytics dashboard ultrasound.money. 

Ethereum Staking 

After the Ethereum merge, the staked Ethereum has almost doubled. The total number of staked Ethereum stand at a total of 28 million Ethereum, equivalent to nearly $51.5 billion. The growth stands at around 94% in percentage terms.

Conclusion: 

One of the most awaited moments in cryptocurrency is The Merge, the most significant update in Ethereum’s history. The Ethereum blockchain’s fundamentals are expected to undergo significant advancements, with scalability likely the most significant change. So mark your calendars because developers have established a soft target date of September 15, 2022. Delays, meanwhile, could still pose a threat to The Merge.