Why Is Ethereum’s Merger The Most Important Event In Crypto This Year?

Ethereum is changing.

The world’s most popular blockchain platform is about to undergo a radical change that will make it greener and pave the way for many optimizations. It is hugely important for the nascent areas of decentralized finance and NFTs; On the flip side, its immediate effects on Ethereum’s speed, scalability, and fees are often exaggerated. Let’s dive in.

What is the merger?

First is a technical definition, mostly lifted from Ethereum.org: Merge is an upgrade to the Ethereum platform that will merge the Ethereum mainnet with the Beacon Chain, marking a transition from Proof-of-Work to Proof-of stake.

If you’re not heavy into blockchain and crypto, that probably made little sense, so here’s a simpler definition: the merger is an Ethereum upgrade that ditches traditional mining – meaning powerful computers solve math puzzles to run the network and create new coins – and switches to a system where owners of the underlying currency, ether or ETH, can stake it (hence proof-of-stake) to power the network.

In even simpler terms, computers that use tons of electricity to run Ethereum are being replaced by computers that use dramatically less electricity.

This has huge consequences for Ethereum’s power consumption. After the merger, Ethereum should become much greener, leaving Bitcoin as the only major blockchain that still relies on proof. According to the Ethereum Foundation, Ethereum’s energy consumption will be reduced by 99.95% after the merger. Anything that talks about NFTs not being green will be obsolete.

The merge is also the first of many important upgrades that should make Ethereum more scalable and cheaper to use.

When does the merger take place?

There is no firm date for the merger, but the transition has already been made on the Ethereum Testnets. Each of these TestNet merges can be thought of as dress rehearsals for the real thing. Now that those rehearsals went well, the merge can be activated on Ethereum’s mainnet. Ethereum developers have confirmed that this will happen very soon, probably on September 15 or 16, 2022. The exact time and date will become clearer as we get closer to the event.

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What do I need to do before the merger?

If you own any Ethereum or an ERC-20 token (that’s the cryptocurrency that runs on Ethereum’s platform), be it in a software wallet, hardware wallet or an exchange, you don’t need to do anything. If all goes well, the transition will just happen and Ethereum should continue ticking along as before, with no downtime.

If you are using an Ethereum node, this text is not for you, but you can go here to find information about what you need to do.

Is the merger risky?

The braiding is an important upgrade of an extremely complex system. It can go wrong. Ethereum could run slowly for a while or even stop altogether. There may be other unforeseen errors or problems. The chances of any of this happening are slim, given all the testing that went into this event, but they are not zero.

The merge also changes how the entire Ethereum network is secured. In a proof-of-work system, it is difficult to cheat the system because it would require a lot of computational power to do so. In a proof-of-stake system, cheating the system would require amassing a huge amount of ETH. Ethereum’s developers claim proof-of-stake is secure, and it has been used in several other major blockchains, including Solana and Avalanche, but there is a degree of risk involved.

Finally, Ethereum is a decentralized network, which means that not all the power is in the hands of the developers. The community, probably led by miners who are not too happy that Ethereum is leaving mining, could decide to create a so-called fork of Ethereum that keeps mining intact (such a fork already exists and it is called Ethereum Classic). There is a chance that this fork could end up being more popular than Ethereum itself. However, if you own ETH or an ERC-20 token on Ethereum, you will (probably) own them in any Ethereum fork, as those forks are essentially copies of the network. It is up to each user to decide which fork they want to continue supporting and what they want to do with their assets.

Will gas get cheaper while Ethereum gets faster?

Some of the common misconceptions about the merger are ideas that all of Ethereum’s problems – mainly, high gas fees and network speed – will be solved by the merger. This is not true. The merging is a multi-step process, and this part just paves the way for optimizations down the road.

In particular, gas will not become cheaper after the merger. Similarly, the transaction speed will “largely remain the same” after the merger, according to the Ethereum Foundation.

Finally, people who have staked ETH before the merge will not be able to withdraw it yet. This will be made possible after an Ethereum upgrade called Shanghai, which will happen further (6-12 months according to current plans) in the future.

What are these L2s I’ve heard about?

L2s, or layer 2 networks, are already here; Two of the more active ones are arbitrage and optimism. A layer 2 is a separate blockchain that uses Ethereum for security guarantees, but takes the load off Ethereum’s main network. Ethereum’s current plan for long-term growth is for even more user activity to move to L2s, while Ethereum’s mainnet is optimized to serve these L2s. The braiding is an important step towards this goal.

One cool thing about L2s is that you can use them right now. For example, Uniswap, a popular decentralized exchange on Ethereum, also works on arbitrage and optimism, allowing users to trade ERC-20 tokens for each other faster and cheaper than they can on Ethereum. To do that, users have to send their tokens from Ethereum to these L2 networks (in Crypto Lingo this is called bridging), and for this they have to pay a fee on Ethereum. Another disadvantage is that these networks are still largely experimental. Finally, not all apps that live on Ethereum are available on every L2. The merge won’t automatically fix these problems, but it should help solve them.

Will Ethereum surge in price due to the merger?

Predicting prices of cryptocurrencies, including Ethereum, is difficult as they depend on a number of factors. There are some aspects of the merger that pave the way for an Ethereum price rise. For example, with traditional mining out the door, less ETH will be given as a reward to the computers running the network, meaning the total supply of Ethereum will increase very slowly. Since some ETH is destroyed (“burned” in crypto-lingo) by certain processes in the network, this will make ethereum deflationary, meaning the total supply of ETH will slowly decrease over time.

You may have seen something along these lines cited as an indication that the price of Ethereum’s native token, ETH, is about to go up. But there are other things to consider. The merger has been planned for a long time, and it is a public event. It is quite possible that any changes brought about by the merger will be baked into ETH’s current price. The price of ETH can also go up or down due to unrelated factors, such as changes in the macroeconomic environment.

What’s Ahead for Ethereum?

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With cryptocurrency being an extremely dynamic space, it is difficult even for Ethereum’s leaders to predict the network’s long-term future. However, Ethereum co-founder Vitalik Buterin recently provided an overview of the five stages of Ethereum development, starting with the merger.

For a detailed overview, check this out graphically Shared by Buterin on Twitter. Here’s a quick overview: After the merger comes the wave, which should provide “massive scalability” which means faster operation, thanks to L2s and a technical development called sharding.

Things get a little more esoteric from there. Verge uses technology called “Verkle Trees” which, among other benefits, should bring optimization to data storage in the network which in turn makes Ethereum more scalable. Then there’s the cleanup, which involves getting rid of “historical data and technical debt” and reducing the hard drive space needed for validators to run. And finally, the splash part should provide further optimizations.

Buterin has made predictions for Ethereum before it hasn’t always panned out as he planned, but the short version of the above is that while the merger is an extremely important step forward, there is a lot of technical work (we’re talking years) ahead to make Ethereum to a truly scalable and cheap network for decentralized apps.