It’s done. The Merge was activated at 6:43 AM UTC time.
The long-awaited upgrade to Ethereum occurred at block height 58,750,000,000,000,000,000,000, unifying the Proof of Stake, ‘Eth2’ Beacon Chain consensus layer with the Proof of Work mainnet and execution layer.
Translation: The largest upgrade in Ethereum’s history went off without a hitch, realizing years of toil and testing from the project’s devs and setting the stage for the network to become the settlement layer of the internet.
“This is the first step in Ethereum’s big journey towards being a very mature system,” said Vitalik Buterin, the co-founder and chief scientist of Ethereum, in a live-stream call Thursday morning. “And there are still steps to go – we still have to scale, we still have to fix privacy…, and we all need to work hard and do our part to make those other things happen as well. For me, the merge symbolized the difference between early-stage ethereum and the ethereum we’ve always wanted Ethereum to become.”
The Ethereum Foundation announced finalization of the process shortly after The Merge. A representative of Ultra Sound Money noted that Ethereum’s supply dropped by 34 ETH, meaning the network has already produced deflationary blocks under Proof of Stake.
The move to Proof of Stake ushers in two major benefits for Ethereum — new emissions of Ether will drop 87.5% in a potential boon for investors. And the network’s electricity usage was expected to fall an astonishing 99.9% by booting miners from the network. Shortly after The Merge, the Ethereum Foundation said energy consumption had declined 99.8%.
That means miners will no longer exert significant selling pressure on ETH to cover operational expenses, and the number of new coins entering the supply should drop. Despite the improvements to the network’s energy consumption and ETH issuance, devs have worked hard to ensure that end-users will not notice any changes when transacting on the network after it moves to Proof of Stake.
Still, The Merge will not speed up Ethereum’s ability to process transactions — at 15 per second, the network is far slower than Solana’s 3,277, let alone the Visa payment system. Nor will Proof of Stake address gas fees, which skyrocketed last year and made Ethereum a pricey prospect for DeFi projects and users alike.
Yet the shift’s impact on power consumption is a huge development and is the first step in an upgrade process designed to eventually improve efficiency and deepen Ethereum’s capabilities.
Expectations are soaring the upgrade will finally deliver on the promise of the technology and further differentiate Ethereum from Bitcoin. It’s a story the mainstream media have showcased with blanket coverage of the runup to The Merge and one that may burnish Ethereum’s appeal to investors.
Ethereum was previously secured by Proof of Work, the consensus mechanism pioneered by Bitcoin. Under PoW, miners compete to solve complex mathematical problems using specialized hardware, expending enormous sums of electricity in the process. Bitcoin alone is consuming as much power annually as Pakistan, according to the Cambridge Bitcoin Electricity Consumption Index.
Ethereum miners used between 0.1% and 0.3% of global electricity production under PoW, according to Justin Drake, a researcher at the Ethereum Foundation. “After the move to Proof of Stake, that’s essentially going to almost zero,” he said in a recent appearance on The Defiant Podcast.
Array of Functions
The Merge may make enterprises more comfortable using Ethereum for an array of functions, said Jonathan Victor, the ecosystem lead for NFTs and gaming at Protocol Labs, the team behind Filecoin.
“Most industries are targeting net zero by 2050, and with The Merge, ETH will get substantially closer to this goal… allowing organizations to make verifiable statements of sustainability,” he told The Defiant. “It will also have a big impact on NFTs: There’s been an incredible amount of misinformation about the energy consumption of NFTs, but this migration will put even the most vocal critic’s concerns to rest.“
Rate of Issuance to Decrease
Tweaking Ether’s supply will also change the way investors approach the cryptocurrency. Annual Ether inflation was also 4.3% under PoW, with 13,500 new ETH issued daily to miners for securing the network.
Under Proof of Stake, Ethereum’s inflation will equal 166 times the square root of the number of staked Ether, meaning that the rate of new issuance will steadily decrease as more stakers onboard the network. If 1M ETH is staked, 166,000 Ether will be issued to validators annually, whereas if 100M ETH is staked, new Ether issuance will only increase to 1.66M.
Exiting Proof of Work
With 13,665,708 ETH currently staked, 1,681.2 ETH will be issued to stakers daily, resulting in annual inflation of roughly 0.5%.
Buterin said issuance of ETH should fall to 600,000 coins from 5B every year. “I am absolutely excited to be exiting the Proof of Work era,” he said.
But that figure does not take into account the sum of ETH destroyed through the burning of base transaction fees. An average of 1,392.5 ETH were destroyed daily over the past week, according to Ultra Sound Money, suggesting that new Ether inflation will be less than 0.09% based on current network activity.
Should on-chain activity pick up and gas fees stay above 15 gwei, Ethereum will become deflationary, meaning that more ETH is destroyed than is created as new supply.
Speaking to The Defiant, Kieran Warwick, the co-founder of web3 game Illuvium, emphasized that Ethereum’s issuance will be locked in the Beacon Chain until the Shanghai hard forks enable withdrawals next year. With less issuance, the laws of supply and demand should kick in and provide a tailwind for Ether. “This is exceptionally bullish,” he said.
Daniel Dizon, the CEO and co-founder of liquid staking provider, Swell Network, expects ETH to hold strong against the broader market decline. “We expect this decoupling move to continue in the near term as investors digest the long-term implications of the Merge such as improved energy efficiency, the rise of the staking economy, and ETH becoming potentially deflationary,” Dizon told The Defiant.
Looking forward, Ethereum’s next major upgrade, dubbed “The Surge”, is designed to bolster the network’s scalability by introducing proto-danksharding via EIP-4844.
Proto-danksharding will replace transaction calldata with “blobs” of data, which are much smaller and thus cheaper for the network to process than calldata. Diederik Loerakker, a researcher at Ethereum Foundation and OP Labs, tweeted that “data blobs are the first milestone towards full Ethereum sharding, enabling rollups… to grow 100x in capacity.”
Speaking at a conference in Paris in July, Buterin predicted that rollup transactions will be “up to 10 times cheaper” after proto-danksharding is implemented. The 28-year-old technologist said The Merge would be followed by at least four more phases of upgrading and expansion: the Surge, the Verge, the Purge, and the Splurge. Buterin said Ethereum would get to a point where it could process 100,000 transactions per second. “At the end of this roadmap, Ethereum will be a much more scalable system,” he said.
Tim Beiko, the protocol development coordinator at Ethereum Foundation, told The Defiant that proto-danksharding is expected to go live between six and nine months after The Merge. However, Beiko stressed that “upgrade timelines are notoriously hard to predict” and that EIP-4844 must pass through governance before being implemented.
Full sharding is next on Ethereum’s roadmap after EIP-4844. Sharding will split Ethereum’s computational load across an ecosystem of small chains working in parallel, with Layer 2 chains expected to become the network’s shards in the future. Full sharding is expected to go live in roughly three years.
“The Merge is the result of coordination of countless independent teams, including client developers, infrastructure providers, apps, researchers, and the whole of the Ethereum community,” Ben Jones of the Optimism Foundation told The Defiant. “There are a bunch of wonderful technical results here, but equally impressive is the large-scale upgrade Ethereum governance was able to coordinate, given the global scale it’s already reached.”