RV Blog Myths and Facts About the Ethereum Merge

Myths and Facts About the Ethereum Merge

The Merge - Myths and Facts

Ethereum’s switch from Proof-of-Work (PoW) to Proof-of-Stake (PoS) is one of the most significant events in the crypto space this year. The community has been eagerly waiting for the Merge to take place, and many lines have been written about it already. Nevertheless, there are some myths and half-truths about this update that persist in the wider crypto space, which have led to wrong ideas about the Merge and the changes it will introduce. Below we take a look at the most common facts, myths, and misconceptions surrounding the Merge.

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The Ethereum blockchain will become 99.95% more energy efficient

✅ True. If successful, Ethereum’s energy consumption could reduced by approximately 99.95%. The switch from the Proof-of-Work to the Proof-of-Stake consensus mechanism makes miners obsolete and replaces them with validators. The solving of cryptographic puzzles with the use of energy-intensive computing power is no longer required under Proof-of-Stake. Instead, the task of proposing and adding new blocks is now the responsibility of validators. They are chosen at random and according to the amount of ether they have staked. Hence, because ultimately capital and not energy is the crucial factor, this process consumes only a tiny fraction of the energy that is required by PoW.

The Merge will reduce Gas Fees

False. The Merge does neither expand Ethereum’s network capacity nor its transaction throughput. It is only a change in the blockchain’s consensus mechanism. Gas fees depend on the demand for block space relative to the capacity of the network. The Merge does not significantly influence block space or network capacity. As a result, post-Merge gas fees are expected to stay in the same range as they were before the Merge.

Note: Ethereum published a rollup-centric roadmap describing its plan to scale the Ethereum network. The roadmap focuses mainly on Layer 2 solutions, which will increase network capacity and offer cheaper gas fees. The Merge is a critical precursor to realize this roadmap.

Ethereum transactions will be faster after the Merge

False. Though the Merge introduces some slight changes to block times, transaction speed will remain similar. Historically (pre-Merge) new Ethereum blocks have been added to the blockchain approximately every 13.3 seconds. After the Merge, the block time is reduced to 12 seconds. Thus, post-merge on PoS, Ethereum transactions will be processed 10% faster on average. This is a rather insignificant change and won’t be noticed by most users.

Note: The Merge introduces transaction finality for the Ethereum network. Before the Merge, Ethereum only knew probabilistic finality. This means that changing a block becomes exponentially more difficult over time but is never impossible. Post-Merge, Ethereum now offers deterministic finality. After every 32 blocks (6.4 minutes), validators vote on this ‘epoch.’ Once agreed upon, this epoch and the respective blocks cannot be changed anymore. Only exception: Should an actor own one-third of the total staked ETH, he or she can change justified blocks despite transaction finality.

The Merge will result in downtime of the Ethereum blockchain

False. The Merge is designed to transition from PoW to PoS with zero downtime. It will be triggered by a metric called terminal total difficulty (TTD). Once this metric surpasses a certain height, Ethereum will switch from building blocks using PoW to building blocks with PoS without interruption. All this is assuming that the transition works according to plan and with no unexpected interruptions.

Note: Even though the Ethereum blockchain won’t have any downtime during the Merge, most crypto exchanges will halt deposits and withdrawals of ether during the time of the Merge.

Staked ether can be withdrawn after the Merge

⏸️ It depends. Ether that has been staked directly on the Ethereum Beacon Chain cannot be withdrawn after the Merge. Only after the release of the Shanghai update, which is scheduled to take place a few months after the Merge (early 2023), will stakers be able to withdraw their staked ETH.

Nevertheless, there exists the possibility to trade some of the staked Ether coins. Lido Staked Ether, short stETH, is a derivative cryptocurrency token that represents Ether (ETH) that is staked (locked) on the Ethereum Beacon Chain. Lido is a decentralized staking Protocol that allows investors to pool their ether. This allows users to stake ether without having to come up with the 32 ether required to run a personal validator node. stETH can be traded against “unstaked” Ether (ETH) and against other cryptocurrencies on decentralized exchanges (DEXs). Usually, stETH is trading at a discount of 1-5% against ETH.

Note: Investors staking their ether through centralized exchanges (CEXs) might be subject to different withdrawal conditions and can potentially withdraw their staked ether earlier, depending on the exchange.

Ether’s inflation rate will drop to 0.5% per year

✅ True. Pre-Merge, Ethereum’s inflation has been 4.62% annually. After the transition to PoS, ether’s annual inflation rate will drop to 0.49% and potentially even lower. Pre-Merge, the Ethereum network had to pay its miners for their energy-intensive and costly work. For this, the network issued approximately 13,000 additional ETH per day. As miners are no longer needed post-Merge, the daily ether issuance will drop to 1,600 ETH per day, which adds up to a yearly inflation rate of approximately 0.5% per year.

Additionally, the Ethereum network has introduced a burning mechanism, which burns (destroys) a fraction of all gas fees. This mechanism further reduces Ethereum’s inflation. Depending on the average network usage, Ethereum could even become a deflationary currency in the future.

Running a node requires staking 32 ETH

False. Everyone can run a node in the Ethereum network. No ether (ETH) is required to participate in the Ethereum network and sync a personal self-verified copy of the Ethereum blockchain. Only network participants wanting to take part in building and validating new blocks are required to stake 32 Ether.

ETH staking yield (APR) will triple after the Merge

False. After the Merge, staking rewards are estimated to increase by approximately 50%. Pre-Merge, staking ether has yielded an annual percentage return (APR) of 4-5%. Post-Merge, parts of the rewards that previously have been paid to miners are now redirected to validators (stakers). At the same time the Ethereum network is drastically reducing its issuance (inflation). Thus, after the Merge, staking APR is expected to be around 7-9%.