Ethereum 2.0 Merge
In this blog post, I will be reviewing what you need to know about the Ethereum 2.0 merge and share my thoughts and opinions along the way. There is a ton of technical information about the merge that is interesting but is too complex for this featured article. I’ll do my best to cover the most important points. To help you get the most out of this article, here’s an outline of what I’ll be covering.
- Why is the Ethereum merge happening? Reduce fees, Increase speed, Scalability
- When is the Merge happening? In 2 stages. 1rst Sept 6 and 2nd Sept 14th
- What is happening in the merge? Ethereum switches from PoW to PoS
- Will Ethereum fees go down after the merge? Probably not until 2023
- Will Ethereum transaction speeds increase? A little at first, more later
- Will the price of ETH go up after the merge? I don’t know, keep reading
- Can I stake my Ether and earn rewards? Yes. You need 32 ETH to stake
- What should I do to prepare? Supposedly, nothing
- What is Kelly doing to prepare? Keep reading
Why Ethereum 2.0?
The Ethereum 2.0 upgrade, which is often called Serenity, promises several improvements, namely:
- Reduced transaction fees
- Improved transaction speeds
- Better scalability
On the technical side of things, a key feature of Ethereum 2.0 is SHARDING. All you need to know about sharding is that it will split up the workload in such a way that transaction processing time should decrease, which means transaction speed should increase. The bottom line is after the merge and after sharding is implemented, you shouldn’t have to wait very long for your transaction to process.
Keep in mind that sharding updates are not expected to occur until 2023 or later.
When Ethereum 2.0?
Believe it or not, the Ethereum POS blockchain has been running in parallel with Ethereum Mainnet since Dec 2020. Since 2020 developers have been fine-tuning the code and doing their best to eliminate all bugs.
Now in 2022, the Ethereum merge takes place in 2 stages. The first stage was codenamed Bellatrix and occurred on September 6. The second stage, codenamed Paris, is scheduled for September 14. Once the second stage is complete, the merge will be final. If all goes well, it will seem like nothing has happened.
What is Ethereum 2.0?
In order for the Ethereum blockchain to accommodate lots more new users and lots more transactions, the Ethereum Foundation decided to switch from Proof-of-work (PoW) to Proof-of-stake (PoS). The developers believe PoS will allow the blockchain to expand greatly.
PoW and PoS differ in how they decide who has the right to record the next “block” of transactions on the blockchain. This is called the “Consensus Mechanism”.
In today’s PoW system, Ethereum miners compete to publish blocks by racing to solve cryptographic puzzles, similar to Bitcoin. This process uses lots of computing power which equates to using lots of electricity.
After merging with the PoS system, validators will be randomly selected to create blocks. To become a validator, one must stake or lock up at least 32 ETH. The more ETH a validator stakes, the more likely he will be selected for adding the next block. Rather than needing lots of computers and electricity to validate transactions, whoever has the most money will get to validate transactions.
Ethereum 2.0 Transaction Fees
Ethereum transaction fees are paid in Ether and is called GAS. Most developers do not expect the price of gas to decrease due to the Merge, at least not until additional upgrades occur. Future network updates, like danksharding and proto-danksharding, may help to decrease Ethereum’s high network fees, but these updates are not expected until 2023 at the earliest. I guess we’ll have to wait awhile before lower gas fees are a reality.
Ethereum 2.0 Transaction Speeds
Currently, Ethereum’s POW blockchain produces blocks once every 13-14 seconds. After the merge, POS blocks will be issued once every 12 seconds. This slight improvement will not be noticed by most users.
Once all the sharding upgrades are complete, these numbers are expected to change dramatically. For example, currently, the Ethereum network can only handle 15 transactions per second. Once all the upgrades are fully implemented, the transaction speed is expected to increase exponentially to 150,000 trx per second. If this happens, Ethereum will be the fastest blockchain in existence. But this may be a big IF.
Ethereum 2.0 – ETH Price
There is much to consider before trying to ascertain whether the price of ETH will increase or decrease after the merge. My non-technical theory is to buy the rumor and sell the news. This means the price is likely to increase until the merge occurs, then it will probably decrease. In fact, in the last 6 days, the price of ETH has increased by 15%. Let’s wait and see what happens afterward.
On a more technical note, according to Glassnode data, ETH 1.0 issuance is inflationary, meaning more ETH gets added to the system than is removed. Glassnode also predicts ETH 2.0 is expected to be deflationary, meaning less ETH gets added to the system than is added due to the EIP 1559 burning mechanism.
Based on supply and demand, my non-technical thinking says, if there’s less of something and lots of people want it, the price will go up.
According to Glassnode data, Ethereum’s deflationary or inflationary price will vastly depend on the number of new validators added to the network. The more validators that lock -up ETH the less that’s available to the network. This would be deflationary.
What Kelly is doing before Ethereum 2.0
Major network changes always make me nervous, and Ethereum’s switch from PoW to PoS is VERY major!
I ask myself, what could go wrong? My answer is nothing or everything. Because of my computer science background and coding experience, I know how easy things can go wrong. With complex code like Ethereum developers must create elegant code that is not easy to hack and has been cleaned of bugs.
One point that helps calm my nerves about this merge is the fact that the PoS Beacon chain has been running parallel with Mainnet since 2020. Therefore, I’m hoping this final stage of the merge is just a formality.
However, just to be safe, before Sept 14th, I will close all my Yieldfarming positions that have ETH or some version of wrapped ETH and move it all back to Ethereum mainnet and store it on my hardware wallet. I recommend not having any ETH on centralized exchanges as they will likely pause deposits and withdrawals until the dust settles.
Ethereum is switching from proof of work to proof of stake whether we like it or not. You better start learning about the new platform, because it’s very different from the old one.
I hope you learned something about the Ethereum 2.0 merge in this featured article.
Enjoy the rest of your Monday, and I’ll see you next week. Oh, by the way, I’ll be doing a Special Edition crypto training for six weeks starting next Thursday. Stay tuned for more information. Bye for now.