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Academy > Crypto Insights > What is The Ethereum Merge: A $200 Billion Blockbuster Upgrade >

What is The Ethereum Merge: A $200 Billion Blockbuster Upgrade

2022-08-29 07:06:12

Summary

  • The Merge refers to Ethereum’s software upgrade that has been seven years in the making. It is possibly the biggest crypto event of 2022.
  • By transitioning from a Proof-of-Work to Proof-of-Stake consensus mechanism, the upgrade is expected to cut down Ethereum’s power consumption by 99.95% and enable future scaling upgrades.
  • Phemex’s ETH Swap gives users the opportunity to hold both ETHS (the upgraded Ethereum) as well as ETHW (the pre-Merge Proof-of-Work Ethereum) in the event of a hard fork.
  • Phemex recently surveyed our users on their opinions regarding the Ethereum Merge. Check out what other investors like you think about this mega upgrade.

Ethereum Merge

What Does ETH Merge Mean and Why Is It Important?

The Ethereum (ETH) Merge is the most anticipated upgrade in the history of blockchain, where the world’s second largest crypto with a market cap of $200 billion will essentially reinvent itself from a Proof-of-Work to Proof-of-Stake blockchain.

It is important on three counts:

  1. Ethereum presently houses over 70% of 4,073 DApps, according to State of the DApps. If the Merge fails, it will take the whole system down, or at least cause catastrophic shockwaves.
  2. If successful, it will slash the Ethereum network’s electricity consumption by over 99.95%, making the technology more sustainable.
  3. The Merge will also pave the way for future scaling upgrades, enabling Ethereum to increase its transactions per second (TPS) from 12-25 currently to 100,000 eventually–taking blockchain one step closer to mainstream adoption.

According to the Ethereum Foundation, it represents the joining or “merging” of the existing execution layer of Ethereum with its new proof-of-stake consensus layer, the Beacon Chain.

Ethereum Merge between mainnet and beacon chain

A visual representation of the merging of  two parallel blockchains—one being the consensus layer (responsible for the validating staking nodes) and the other being the execution layer (where transactions are currently executed). (Source: Ethereum.org)

In order to understand the magnitude of the transition, here is an analogy used by the Ethereum Foundation.

“Imagine Ethereum is a spaceship that isn’t quite ready for an interstellar voyage. With the Beacon Chain, the community has built a new engine and a hardened hull. After significant testing, it’s almost time to hot-swap the new engine for the old mid-flight. This will merge the new, more efficient engine into the existing ship, ready to put in some serious lightyears and take on the universe,” says the Foundation.

And in case you need a visualization:

Ethereum as a spaceship

Image by Christopher Keough from Pixabay

In short, the Merge is where Ethereum will change how new blocks are produced. Instead of making power-hungry ASIC mining computers spend huge amounts of electricity to solve hard cryptographic puzzles in order to validate transactions (the way Bitcoin does it, miners–now called validators–just need to deposit a bunch of ether tokens with the network (32 ETH to be exact) in order to stand a chance to be called to verify the next block and earn rewards (Proof-of-Stake).

How does Proof-of-Work differ from Proof of Stake?

What Will Happen After Ethereum Merge?

The ultimate Ethereum vision is greater scalability, security, and sustainability. Here are the biggest changes that will take place after the Merge:

  • Reduced Ethereum’s energy consumption by about 99.95%. After the Ethereum Merge, or ETH Merge, there will no longer be a need for power-intensive mining. Instead, the Ethereum network will be secured using staked ETH.
  • Ethereum developers will continue working on a series of upgrades, of which the Merge is the first (followed by the Surge, Verge, Purge, and Splurge). Co-founder Vitalik Buterin has claimed that these will allow Ethereum to reach 100,000 transactions per second (TPS) and reduce gas fees. The second phase, the “Surge,” aims to implement scaling solutions such as Layer-2 and sharding and is scheduled for 2023.
  • Increased decentralization. While many critics insist that PoS will increase centralization, the other view is that PoS will in fact be more decentralized, as node validators will be chosen at random, whereas with PoW, those who own powerful ASIC mining machines dominate the market.
  • Deflationary token. Post-Merge, there will be a 90% drop in annual creation of ETH coins added to the existing circulation of about 122 million ETH as of Q2 2022.

comparison of Ethereum reduction in energy consumption with the Merge

A visual comparison of Ethereum’s reduction in energy consumption thanks to The Merge. (Source: blog.ethereum.org)

When Is The Ethereum Merge?

The ETH Merge is a project that has been seven years in the making, and is slated to take place on 15 September 2022. Here is the timeline:

  1. On 6 September the Beacon Chain will be prepared for the merging process via the initial Bellatrix upgrade (named after a star, not the Harry Potter character).
  2. Following this, a certain Terminal Total Difficulty (TTD) must be hit, which means the last block mined on the Ethereum blockchain must hit this TTD before it can trigger the completion of the upgrade.
  3. Once this TTD is hit, the final Paris upgrade will be activated, whereupon the next block created will be added to the Beacon Chain. This will thus finalize the merger with blocks being added via the PoS consensus protocol running on the consensus layer (the Beacon Chain) of the new merged Ethereum. At this point, Ethereum will fully transform into a PoS blockchain.

How Will ETH Merge Affect Price?

While the price of ETH has gone up by more than 50%–from about $1,200 in July to around $2,000 in mid August, it has dipped to around $1,500 just two weeks away from the big event. For price to appreciate, the new PoS Ethereum needs to attract more demand.

Three facts to keep in mind when assessing any price predictions:

  1. The Merge will not reduce gas fees. The change in consensus mechanism from PoW to PoS will not expand network capacity, and will thus not result in lower gas fees.
  2. The Merge will not increase transaction speeds. On PoS, blocks will be produced about 10% faster than PoW, but the change will be insignificant at least from the user’s point of view.
  3. The PoS Ethereum will become a deflationary token, due to its perpetual burn mechanism; this may improve its potential to be a store of value.

Most of all, post Merge ETH price performance will depend heavily on two key factors: macro outlook (which unfortunately is looking gloomier by the day), and industry response i.e. how companies building their DApps on Ethereum and Layer 2’s supplementing its ecosystem adapt to the changes.

In other words, it may be more meaningful to keep a closer eye on how key projects are integrating with the upgraded Ethereum than to focus on price predictions from analysts because at the end of the day, these are just opinions.

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What Happens to My Ethereum after The Merge?

Nothing. If you are an ETH holder, you do not need to do anything. This is because the entire history of Ethereum since genesis will be replicated to the new proof-of-stake environment, and your coins will be automatically transferred over.

During the Merge, however, you want to be vigilant–scammers and bad actors will be out in full force to capitalize on this event, so here are a few things to NOT do:

  • Do not click on any unexpected email (a very convincing MetaMask phishing campaign has been going around).
  • Never open an attachment or a link from an email address you don’t recognize.
  • Do not respond to any ETH airdrops (the Ethereum Foundation has confirmed this). Fake airdrops are among the most common scams; when you try to claim a fake airdrop, scammers can gain control of your keys.
  • Do not respond to invitations to invest, stake or buy an ETH2 token–there is no such thing (especially through unsolicited messages via Telegram, email, etc.)

ETH vs ETHS vs ETHW: What Should ETH Holders Do If There Is A Fork?

Having said this, some exchanges are offering both ETHS (representing the token for the new Proof-of-Stake chain) and ETHW (representing the token for the Proof-of-Work chain that will potentially continue to exist). This is to cater to the possibility of a hard fork.

A hard fork happens when a blockchain community disagrees about a particular change to take–in this case, a switch from PoW to PoS–and will essentially become two separate blockchains that are incompatible with one another.

The most well-known example of a hard fork was when Bitcoin split into two separate chains: Bitcoin (BTC), and a new one, Bitcoin Cash (BCH). While BTC has since gone on to chart new highs, BCH is still active with a significant market cap of about $2 billion.

This is why some established crypto exchanges including Phemex have launched trading for both ETHW and ETHS on their trading platforms as representations of the forked tokens, to give ETH holders a choice between:

  • Holding just ETHS (which will be subsumed under the the name ETH),
  • Holding just ETHW (the forked version) or,
  • Holding a bit of both.

For Phemex, this will be done through what is called an ETH Swap. Note: The keyword here is “established crypto exchange.” Be extra vigilant against scams as explained above. Click here for step-by-step instructions as well as further details and terms on performing the Phemex ETH Swap.

ETH Swap to ETHS and ETHW

ETH Swap to ETHS and ETHW on Phemex

Conclusion

The Ethereum Merge is such an important event that it would not be an exaggeration to call it a make-or-break moment  for the DeFi sector especially, given how many DApps are built on it and how much money is locked up in the entire network. With the level of coverage and anticipation surrounding it as the Ethereum Merge date is getting closer, one thing’s for sure–this is not your typical crypto winter.


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