What Will Happen After the Ethereum Merge?

The Merge, Ethereum’s switch from proof of work to proof of stake, is one of the most anticipated events in the history of crypto. There are lots of rumors about what this will mean for the protocol, and some even say that it will make Ethereum capable of reaching 100,000 transactions per second and a price of $10,000. Let’s clarify the rumors and see what this milestone actually means for the king of smart contracts.

Since its release in 2015, Ethereum has been a proof of work blockchain. This means that transactions are validated and consensus is reached by using lots of powerful computing hardware. Even though this consensus mechanism is time-tested and secure, it is also incredibly energy inefficient. Tens of thousands of computers, all running at full power, are environmentally unfriendly and have been criticized relentlessly by politicians and companies alike.

Proof of stake is a solution to all of proof of work’s issues. Instead of using powerful hardware, proof of stake requires validators to use their Ethereum as collateral. For example, a validator “stakes” 32 Ethereum, meaning it is locked up while they are validating. If they act honestly and approve all valid transactions and deny all illegitimate ones, they will receive a share of the transaction fees. However, if they act maliciously, their stake will be slashed, and some of their Ethereum will be burnt and not returned. This method is estimated to be 99.95% more energy-efficient than proof of work, a 2,000x improvement. 

Ethereum has had a proof of stake blockchain, known as the Beacon Chain, running since December 2020 to ensure that proof of stake is viable and to find any issues before Ethereum fully switched to the new consensus mechanism. Validators have been able to stake batches of 32 ETH before then, and are unable to withdraw until some point in time after the Merge. 

The Merge is the term used for the event that will happen when the main Ethereum chain merges with the proof of stake chain, and proof of work becomes fully deprecated. When this happens, mining will become obsolete, which may lead to a few unintended consequences. Other proof of work cryptocurrencies that use similar algorithms to Ethereum may become much more popular as miners switch to mining those coins. Additionally, the demand for hardware, like graphics cards, will decrease, and there will be a lot of pre-used cards available for sale. 

Since proof of stake is so much more efficient than proof of work, the Ethereum protocol will be able to significantly lower their block reward and still properly incentivize validators. Currently, around 13,000 ETH are minted daily. With proof of stake, that number will drop to around 2,000. This lower issuance, along with the burning of some transaction fees thanks to EIP-1559, means that Ethereum could become a deflationary currency. When supply decreases while demand stays constant or increases, price increases accordingly. 

Furthermore, the staking reward rate will almost double from current levels to somewhere between 9-12% at the time of the Merge. This will give Ethereum stakers the opportunity to earn a massive yield on a non-stable asset. Even if more people start staking, it will increase demand and decrease supply for ETH, leading to a price increase regardless.

Contrary to popular belief, the Merge itself will not cause a drastic improvement in transactions per second or transaction fees. Initially, the sharding scaling solution was planned to release at the same time as the Merge, but it was decided to push that back due to the number of available layer 2 rollup solutions available. 

The Merge will likely be the biggest cryptocurrency-related event of the year, as it will finally allow ESG-conscious companies and organizations to get involved with Ethereum. Ethereum becoming deflationary will also lead to massive price potential, and a possible price higher than $10,000. 

By Lincoln Murr

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