Ethereum developers get harassed with this question. The Merge, often postponed but now seemingly really close, is expected to happen in the second half of 2022. The Ethereum network will switch from a proof-of-work security model to proof-of-stake. What will be the consequences for perception and price of Ethereum?
The Ethereum Merge refers to the merging of the current Ethereum blockchain and the chain that is now running in parallel and being tested: the Beacon chain. This Beacon chain, which is based on Proof-of-stake (PoS), will after the Merge become the main chain. It will, as it were, swallow the old chain, including its entire history. The miners can then switch off their equipment and Ethereum will use more than 99% less energy. Users won’t notice a thing – hopefully! But for the price, this might be a big thing.
Here are the key things to think about for Ethereum’s merge with the Beacon chain.
What is Proof-of-Stake
Proof-of-stake (PoS) is a way of securing the network by allowing (in this case) Ether (ETH) owners to stake a certain amount of their holdings as collateral to validate transactions. And get paid out for doing so. View it as a dividend for their trouble. Malicious validators who don’t play by the rules risk having their collateral “slashed”, or taken offline.
Compare it to Ethereum’s current consensus mechanism (proof-of-work), which incentivizes miners to stay honest by putting in computational work in exchange for their rewards in Ether. After the Ethereum Merge, participants can only be paid out in Ether for staking (locking up) their ETH as block proposers/validators. The amount of ETH at stake is what ensures a PoS network’s economic security.
Lower Gas Fees? Not Yet
The Merge will be a milestone on Ethereum’s roadmap. But because it’s an upgrade under the hood, it won’t matter for usability. For example, lower gas fees are not to be expected after the Merge. Only when the next step of Ethereum’s roadmap will be implemented (sharding), will the amount of block space/ network capacity improve dramatically and allow for lower fees.
Read Erik’s article on Ethereum’s Roadmap for the coming years here.
Staking Yields Going Up
So how high will the percentage for staking post-Merge be? This is a hotly contested debate (and fun passtime). Currently, stakers are only earning the Beacon chain validator rewards. However, once the Merge of Ethereum is complete, staking rewards are a sum of not just block rewards but also tips and Miner Extractable Value. Crucially, the staking rewards will depend on the amount of ETH being staked. The higher this is, the lower the yield. We can’t all get rich, after all!
Based on the current amount of ETH staked, ETH staking yields post-Merge are estimated to be around 10% – that’s at least a figure that pops up most often across analysts. BUT. It is likely that after a successful Ethereum Merge, more Ether holders will stake their coins, which will lead to lower staking rewards. In the long-run they are projected to settle around 4-5%. Still pretty sweet!
Interesting Read: How to Stake Ethereum | A Complete Guide on Staking ETH
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Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
