Ethereum Merge, everything you need to know

The Merge Is Here, So Where We At?

Disclaimer This article is for general information purposes only and isn’t intended to be financial product advice. You should always obtain your own independent advice before making any financial decisions. The Chainsaw and its contributors aren’t liable for any decisions based on this content.

Ethereum’s long-awaited Merge upgrade is now just a few days away, with current predictions scheduling the network’s transition to a Proof-of-Stake consensus mechanism for approximately 2:30am on the 15th of September.

With the Merge just around the corner, both news media and Crypto Twitter have been inundated with Merge-related info — some of it factual, some of it … not so much.

Before the upgrade goes through it’s important to take stock of where the market stands and go through some of the most frequently asked questions, as well as clear up some of the common misconceptions.

What is the Merge?

The Merge refers to the moment the current Proof-of-Work Ethereum network ‘merges’ with the Proof-of-Stake Beacon Chain. This new consensus method will work to increase transaction speeds, decrease fees and massively reduce energy consumption by doing away with miners.

When is the Merge actually happening?

The most recent estimates predict that the Merge will occur on September 15.

The reason that there’s no exact date for the Merge is because it’s based on a series of technical factors that change with the amount of network activity on the Ethereum blockchain.

Following the recent Bellatrix upgrade, the final stage of the Merge will occur in what is called the Paris event, which will be triggered when the cumulative difficulty of all mined Ethereum blocks reaches a certain value. This is called the Terminal Total Difficulty (TTD) and Ethereum’s core developers set the TTD to 58,750,000,000,000,000,000,000.

For those looking to stay up to date with the exact time of the Merge, Google has added in a Merge countdown-timer for anyone that types in the phrase ‘ethereum merge’ into Google.

Can the Merge fail?

Technically yes. Swan Bitcoin CEO Cory Klippsten warned the Wall Street Journal that the Merge is extremely risky, likening it to “trying to fix an airplane in mid-flight.”

While the fallout from a Merge failure could be genuinely catastrophic, the likelihood of such an event is extremely low, owing to the sheer number of the successful testnet deployments that have preceded it.

Is the Merge really deflationary?

There is a popular theory that the Merge will make Ethereum’s native token Ether (ETH) a “hyper-deflationary” token, driving its price skyward. The deflation idea has been spread widely by key crypto personalities such as former-BitMex CEO Arthur Hayes and Dan Morehead, CEO of Pantera Capital.

Notably, Hayes predicted a $5000 ETH price by May 2023 following a successful Merge because of the token’s new deflationary properties. However, a recent report from Singapore-based trading firm, QCP Capital noted the opposite:

“The uber-bullish thesis that ETH 2.0 will immediately herald a new era of deflationary supply for ETH … is not entirely true. For now, at least.”

The QCP report additionally noted that because of Ethereum’s relatively low network usage the bullish effects of deflation may not be realised for some time.

“Where the bullish kicker will come is in the burn rate – which in the midst of winter is not looking so bullish right now.”

The burn rate refers to the number of ether tokens taken out of circulation due to the Ethereum protocol burning of a portion of transaction fees paid in ETH. Basically, the more the network is used, the more ETH is taken out of circulation. QCP are essentially saying that the “up only” price action that comes with deflation may be delayed until the Ethereum network sees greater amounts of activity.

Will the Merge decrease gas fees and increase transaction speeds?

No. The Merge simply marks the completion of phase two of a three-phase transition process. While a successful Merge signals a major technological breakthrough for the cryptocurrency industry, the majority of key benefits including cheaper gas fees and faster transaction times will arrive with the completion of the third phase. This is known as the Shanghai upgrade.

Another common misconception is that when the Merge goes through in mid-September, the blockchain will be upgraded to handle 100,000 transactions per second (TPS) and its energy consumption will plummet 99.95%.

While the Merge will massively reduce energy consumption due to elimination of power guzzling mining rigs, it’s important to note the often-quoted ‘100,000 TPS’ figure put forward by Vitalik is still a long way away.

Speaking to The Chainsaw, Ethereum developer Marius Van Der Wijden said that the 100,000 TPS goal will only be reached with the help of Layer 2 solutions such as Polygon, Optimism and Arbitrum.

“The Ethereum base layer will most likely never reach 100.000 TPS, these amounts of TPS can only be achieved with Rollups and Layer 2s.”

“EIP-4844 (Proto-Danksharding) will greatly improve the amount of space that rollups can use thus improving their TPS and lowering fees. EIP-4844 is being prototyped right now, it will most likely be implemented in the fork following the Shanghai upgrade.”

What happens to Ethereum’s Miners?

For the most part, Ethereum miners have already sold their mining equipment or repurposed it for mining other Proof-of-Work tokens like Ethereum Classic (ETC). However, there are a few renegade miners organising under the banner of Chandler Guo who plan to keep mining the Ethereum network post-Merge.

This will essentially create an identical copy of the Ethereum blockchain that still runs using miners. In an exclusive interview with The Chainsaw, Chandler Guo laid bare his plans for the PoW Ethereum fork that he intends to call ETHW.

If ETHW actually works, what happens with the new PoW Tokens?

For starters, if there is a clone Ethereum network there could suddenly be a duplicate of pre-existing assets on the Ethereum chain. This would include things like ETHW Bored Apes ETHW Pudgy Penguins, and anyone holding any sum of ETH could technically claim their newly, copy-pasted ETHW holdings.

According to Finder, exchanges like Poloniex, and Gate.io have already listed an IOU version of the ETHW token, which will be redeemable following a successful PoW fork. Unfortunately the price of this IOU token has plummeted over 76% since its inception, further highlighting the risk that comes with such an uncertain strategy.

CoinGecko founder Bobby Ong outlined a roadmap for how to access these tokens, following a successful PoW fork. Many of the steps further outlined the potential issues that may arise from such a fork.

What are the risks of investing in PoW ETH (ETHW)?

Apart from Guo’s hazy concerns with decentralisation and continuing a source of income for miners, the ETHW chain doesn’t seem to solve many major problems with PoS Ethereum. If anything, the hotbed of speculation and uncertainty that would arise from duplicate ETH assets would pose more risks.

Ethereum co-founder Vitalik Buterin says that anyone supporting the ETHW hard fork are simply “trying to make a quick buck”.

Without a vibrant ecosystem of miners and developers on the new network, the functionality of oracles, protocols and assets would not be sufficiently maintained. A failure to preserve these mechanisms could see the ETHW chain fail at any moment.

This concern is magnified by the problem of the ‘difficulty bomb’ scheduled for October which will make the ETHW chain impossibly difficult to mine, slowing all transactions to a crawl.

While many exchanges have expressed that they would review the ETHW token for listing following a successful hard fork, they remain committed to supporting the OG PoS ETH.

Casting further doubt on the long-term functionality of ETHW, the most sizable projects like Tether (USDT), Aave, Oracle network and Chainlink (LINK) have announced they will exclusively support PoS ETH.

Ultimately, the most likely scenario following a successful ETHW fork is that the majority of the crypto industry won’t honour the duplicated assets and all value on ETHW will be entirely speculative.

What happens to the price of Ethereum?

One of the most commonly asked questions about the Merge is concerned with price. Namely, is it a ‘buy the rumour, sell the news’ event or is it purely a case of ‘up only’ following a successful Merge?

The short answer here is, no one knows for sure. The long answer is that experts in the crypto industry have a wide array of different theories about what could happen to ETH post-Merge.

While hot takes and wild predictions run rampant across Crypto Twitter, The Chainsaw spoke with Richard Fetyko, founder and CEO of crypto analytics platform altFINS, for some balanced analysis on the price of ETH leading up to the Merge.

Fetyko thinks that while ‘sell the news’ thesis may be tempting for some to entertain, there’s simply too much macro-evidence that points to continued buying and upwards price action.

“When we assess the near-term drivers of demand and supply for ETH, we find overwhelming reasons to think that after The Merge, demand from buyers will outstrip the supply from sellers,” Fetyko explains.

“Demand, particularly from institutional investors, will be driven by increased staking yield, a lower carbon footprint (greener) from the PoS mechanism, and a growing number of staking platforms offering ETH staking post-Merge. Also, ETH will have de-risked after successful migration to PoS,” he said.

By contrast, CEO Patrick Tan of digital asset management firm Novum Alpha told The Chainsaw that the market is majorly over-excited when it comes to ETH’s price action.

“Right now the market is probably a little too excited about the Merge. If the vast majority of the market is ‘long’, it causes significant asymmetries between further upside value vs downside risks due to exogenous shocks,” Tan said.

“There doesn’t even have to be a technical issue for investors to start selling, they may just want to start taking money off the table.”

Ray Brown, the Head of Marketing at Australia-based crypto exchange CoinSpot told The Chainsaw that retail investors shouldn’t let the Merge wildly transform any of their long-term investment decisions.

“For the average retail investor, the ETH Merge doesn’t really affect them a whole lot; aside from some potentially increased price volatility, investors should not worry about a change to their assets,” he said.

We may potentially see other cryptocurrencies like Bitcoin also experience some price volatility. However as always, nothing is guaranteed and no one can truly predict what will happen price wise,” Brown concludes.

Is PoS decentralised enough?

Instead of a distributed network of miners ensuring the security of the network, PoS replaces miners with validators who stake the native token of the network to ensure security. While this reduces energy consumption massively, by removing the need for mining rigs, PoW advocates claim it inherently reduces decentralisation.

One such critic is well-known Bitcoin advocate Samson Mow took to Twitter to flag his concern for what he considered to be a fault in the Merge, taking specific issue with what actually “triggers” the Merge.

This received a reply from Ethereum co-founder, Vitalik Buterin who claimed that while the TTD itself is based in network activity, the Merge itself can be halted by manual intervention by developers on the network, much like developers on the Bitcoin network can halt a fork if they so choose.

Do ETH holders need to do anything before or after the Merge?

No. ETH holders don’t need to do anything in the lead up to the Merge and any ETH balance will remain exactly the same after the Merge. Following the upgrade they’ll be able to resume using the network as if nothing has changed.

If they are actively interacting with the network at a development or staking level they will need to update their software to ensure they are communicating with the latest version of the network.