It’s an exciting time for the cryptocurrency space – Ethereum’s ($ETH.X) The Merge! It’s right around the corner, but some confusion remains about what The Merge will and won’t do. We’re going to highlight some of those today.
What is Proof-of-Stake?
The Merge is a switch from Ethereum going from Proof-of-Work to Proof-of-Stake. A Proof-of-Work cryptocurrency, like Bitcoin, validates (mines) the transactions by doing Star Trek sci-fi-style cryptography puzzles.
But here’s the problem: Proof-of-Work requires a metric crap ton of energy and money. Like, warehouses filled with video cards or ASIC miners generating enough heat to make Mercury feel like a cool day. The more power you have to mine, the more Bitcoin as a reward you get. Proof-of-Stake is different.
Proof-of-Stake validates (mines) differently. Instead of a warehouse full of processors working to maintain the network, you, the Ethereum hodler do it. But you need skin in the game. You need to prove you’ve got a stake by depositing your ETH to support it and get rewarded for helping to maintain it.
Validators need a minimum of 32 ETH to be eligible to mine and get rewards. The validators are randomly selected to mine the block. But instead of how many warehouses of video cards you have, the size of your stake is what determines the chances of you being selected to mine. The more skin in the game you have, the higher your chances of getting rewards for maintaining the network you will have.
You might be saying to yourself, “Good God, man, I don’t have $51,000ish lying around to mine Ethereum for that tasty passive income!”
No worries – there are staking pools out there where you can pool your ETH together. The easiest way is done on exchanges like Kraken, Binance, and Coinbase, where it’s often as simple as hitting a ‘stake’ button and then inputting how much of your ETH you want to stake then hitting ok. We’ll talk about that more at a later date.
Does that cover everything? Not at all, but it sets us up nicely to get a little bit more clarity over what the Merge is and is not.
What The Merge Doesn’t Do
Lower Gas Fees? Not Gonna Happen
There was a lot of hope that The Merge would reduce the high usage fees on the network, but it won’t – Proof-of-Stake changes consensus, not the size of the network. So if you were hoping for lower gas fees, it looks like we’ll be waiting longer.
The Merge Won’t Make Ethereum’s Network Crazy Fast
We’ll keep it simple without all the blockchain techno mumbo jumbo. Technically, The Merge should increase the network’s speed by around 10% – but that’s about it. The Merge won’t make the network super fast, but the switch to Proof-of-Stake will allow the network to do things that were impossible or were exceedingly difficult on the prior Proof-of-Work network.
You Won’t Be Able To Unstake Right Away
With the crazy (yet normal) whipsaws in price action, there are understandably many Ethereum ($ETH.X) hodlers who staked to help the Merge happen. Many are anxious and want to GTFO at the earliest opportunity. But that isn’t going to happen when The Merge is complete.
You won’t be able to remove staked ETH until after the Shanghai upgrade, roughly 6 to 12 months after The Merge. Unfortunately, the news gets a little worse if you’re one of those hodlers who wants/needs to get out soon.
After Shanghai, there’s a hard limit on how many validators can exit per epoch. Of course, this might be over-generalizing, but there’s a mechanism in place to prevent a bank run. Currently, around 42,000 ETH is the daily limit that can be removed.
The APR Won’t Triple Or Quadruple
The APR for staking is dynamic, and according to ethereum.org, the estimated APR right after The Merge is around 7% – roughly 50% higher than what it currently is. No 500% higher APRs folks, sorry.
What The Merge Does
Keeps Climate People Happy
With the US and EU picking on the smallest kid in the energy playground, Proof-of-Work is under scrutiny. Bitcoin ($BTC.X) requires the yearly energy usage of entire countries, while Proof-of-Stake requires the annual use of your neighborhood’s refrigerators.
Proof-of-Stake eliminates the massive energy consumption that has generated so many environmental critics. But by how much? The Merge is expected to reduce the energy use of the network between 95% to 99.95%. Not too shabby.
Creates Better Opportunities For Efficiency
We touched a little bit on the issue of scalability, gas costs, and how they don’t get fixed right away with the Merge, but one great effect of The Merge is it creates a foundation for making the network more efficient and scalable.
Are There Risks? Oh Hell Ya
Proposers Are Known
There is a real threat that any network proposer could be the target of a DoS attack because, currently, network proposers are known ahead of time. That means someone could attack the proposer’s node and effectively lose its spot – or, hypothetically, take over the transactions. As a result, there are some anticipated proposals to make proposers anonymous.
The Unknown Unknowns
Ethereum has had its issues in the past with prior upgrades/updates. The first, of course, is the hard fork from the original Ethereum blockchain, Ethereum Classic ($ETC.X). That’s right – what we know as Ethereum is the hard fork from the original Ethereum, known as Ethereum Classic.
Many risks will probably not be known or fully realized until a good amount of time has passed.
The Litepaper will keep you updated as this story progresses.