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What you need to know about the Ethereum Merge

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PDAX

September 09, 2022

6 min read

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The Ethereum blockchain is about to undergo a major change this September. 

As the dominant platform for smart contracts and decentralized applications (dApps)–and being the second largest blockchain in terms of market capitalization next only to Bitcoin–this shift represents the most significant technological update to occur yet within the blockchain industry.

Read on to find out more about why the Merge matters and how it may affect crypto users.

TL;DR

  • The Merge is Ethereum’s transition from Proof-of-Work to a Proof-of-Stake consensus protocol which will reduce the network’s carbon footprint. 
  • The Merge is the first step toward more future updates that could eventually increase network speeds and lower gas fees. 
  • During the Merge, deposits and withdrawals on PDAX will be suspended for Ethereum (ETH) and other ERC-20 tokens. 

What is the Merge?

The Merge is a long-awaited major update for Ethereum, which will see the blockchain transition from a Proof-of-Work (PoW) consensus protocol to Proof-of-Stake (PoS)

Transitioning from PoW to PoS involves completely changing the means by which the network’s transactions are validated and secured. As a decentralized network, Ethereum has long relied on miners to do the “work” of processing and validating all of its network transactions, in a process involving hundreds of thousands of nodes from all around the world supplying processing power to solve complex algorithmic hashes to maintain the immutability of the blockchain’s ledger.

In transitioning to a PoS model–mining will be phased out, drastically reducing the network's computational demand and energy requirements. In place of mining, the Ethereum node operators will only be required to have a financial stake or a “collateral” to participate in validating transactions and ensuring their compliance with network protocols. 

To put it in simpler terms–it’s like changing the very engine that keeps a car running. In this case, Ethereum is getting an engine overhaul and upgrading to a faster and more efficient one.   

To facilitate this transition, Ethereum has set up two parallel systems: the original Ethereum Mainnet, which runs on PoW; and the Beacon chain, which has been rigorously testing PoS for the past two years. These two networks are scheduled to be “merged” this September into what will become the next version of the Ethereum blockchain running completely on PoS.

Why is Ethereum transitioning to Proof-of-Stake? 

Proof-of-Work blockchains such as Bitcoin and Ethereum have long been criticized for their huge carbon footprint, whose annual energy consumption is even greater than most small countries. Transitioning to PoS is expected to reduce the network’s energy requirements by approximately 99.95%

The Merge is also a step towards addressing the scalability issues on Ethereum that has led to network congestion as the blockchain gained in popularity throughout the years. Currently, it takes anywhere between five seconds to five minutes to process transactions, depending on the amount of gas fee that a user is willing to pay. At its peak in previous years, transactions sometimes even took longer which is why scaling solutions have been the focus of other succeeding blockchains meant to compete with Ethereum.   

Ethereum itself is only able to process about 15 to 30 transactions per second (TPS). This is the drawback of the PoW model, which due to the heavy processing power required for the nodes to arrive at a consensus, also generates heavy bandwidth traffic as the network grows, slowing down the entire blockchain.

On the other hand, once Ethereum transitions to PoS, it will be that much closer to achieving faster speeds as it will no longer be dependent on computationally heavy mining–allowing more of the network’s resources to be allocated for validating transactions themselves instead of solving algorithmic puzzles. 

The Merge is only the first step towards a faster Ethereum

The Merge will pave the way for other future updates in Ethereum’s roadmap. Contrary to common public perception, a successful Merge will not immediately result in faster transaction speeds. But the transition to PoS will allow for the next major phase–the Verge–which will introduce two other technological features called “sharding” and “rollups” sometime in 2023.  

In simpler terms, sharding allows the network to be broken up into more manageable components or “shards,” which will further reduce the computational demands on the network. On the other hand, rollup technology will allow for transactions to be processed and validated in “bundles” instead of individually. Together, these features are expected to exponentially increase Ethereum’s network speed by as much as 100,000 TPS.  

What about Ethereum’s gas fees?

Network congestion on Ethereum has been correlated with higher gas fees, as Ethereum miners prioritize those transactions that are willing to pay extra for gas. Once the Merge is completed however, network fees are not yet expected to get lower right away, as this will only come about as a result of sharding once the Verge takes place.

How will the Merge affect ETH tokenomics?

Ethereum has a current circulating supply of 122 million with no maximum supply. The unlimited  supply is primarily due to the PoW protocol, as new ETH are constantly minted to reward miners, which translates to an average 4.5% annual inflation rate.

As the Merge will change Ethereum’s network dynamics and may allow for more staking options for ordinary users, the circulating supply is expected by many analysts to be reduced as more ETH gets locked or staked within validator nodes, potentially making the post-Merge ETH token deflationary

Ethereum forked assets

Upon completion of the Merge, there will also be a possibility for forked Ethereum tokens to be airdropped to ETH holders, as other user communities may prefer to maintain the previous PoW blockchain. However, PDAX will only support the newer Ethereum PoS chain, and users who want to receive forked assets are advised to withdraw their ETH to a private wallet before the Merge takes place. 

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.   

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