Since April 2022, Ethereum has been running two parallel blockchains. One of them is the existing execution layer of Ethereum, which is the mainnet we currently use and operates using proof-of-work. The other is the consensus layer, the new Beacon Chain, which uses proof-of-stake. The Merge will combine these layers into one unified blockchain. The estimated Merge date is the 19th of September 2022, according to ‘Consensus layer Call 91 #566’.
The Merge is expected to make the Ethereum network more efficient, sustainable and scalable.
How does this affect ETH?
Decentralisation:
ETH Supply
ETH Supply = Current Circulating S upply + Issuance of ETH - Burned ETH
* The amount of burned ETH will also depend on the volume of activity. When there is a significant increase in transaction volume, ETH may become even more deflationary and vice versa.
Staked ETH is increasing 7% on average each month.
According to Ethereum's official website, staking APR is expected to grow 50% from the current 4.2% to ~7%.
This is a result of the reallocation of transaction fees that begins going to validators instead of miners. However, the final staking APR is expected to be lower than 7% due to:
After the Merge, all validators will be incentivised to withdraw their staking balances above 32 ETH as it will not generate extra yield. However, this does not directly infer that there will be sizeable unstaking pressure primarily because;
The figure below also displays that the demand for stETH is increasing by monitoring its price. The price of stETH relative to ETH increased from 0.94 in June to 0.97 toward the end of July. (Currently, there is 4.13 million ETH staked with Lido, comprising 31% of the market share)
The figure below displays that most stakers on Lido are likely to be retail investors since the median deposited value is between $2048 & $4095. Approximately 84% of deposits are below $32,000 in value.
Gas Fees
Gas fees are a product of network demand relative to the network’s capacity.
The Merge will not result in an expansion of network capacity or activity. Therefore, the Merge will not directly result in higher or lower gas fees.
Transactions per second (TPS)
Under PoW, the target was to create a new block every 13.3 seconds.
Under PoS, slots occur every 12 seconds (each slot is an opportunity for a validator to publish a block).
The improvement in speed is less than 10% which is unlikely to be noticed by users.
Risks
Since the Merge is the change of Ethereum’s consensus mechanism, it may cause the supporters of PoW to leave Ethereum.
PoS may make Ethereum more centralised, and Lido Finance is already responsible for 32% of the staked ETH.
The Merge could get delayed again.
To conclude, the Ethereum Merge will change the way its ecosystem & larger crypto markets develop moving forward. Whether it's worth compromising the idea of decentralisation for scalability will be answered in due time.
References
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