An overview of what you need to know about the Ethereum merger

By @JackNiewold

Source: Twitter

Here's what you need to know about ETH mergers.

Part 1: Understanding The Merge

• what will happen with the merger

• Why merge

• How it works

The merger refers to Ethereum transitioning from Proof of Work (PoW) to Proof of Stake (PoS).

PoS: Blockchain consensus comes from those who lock up Ethereum (stakers).

PoW: Blockchain consensus comes from those who secure the network with computing power (miners).

Why merge?

Ethereum has many problems and aims to solve the blockchain's trilemma:

•safety

• Decentralization

• Scalability

So far, blockchains have had to compromise on at least one of these characteristics.

While this doesn't make Ethereum perfect, it helps.

How does merging help?

• Decentralization/Security: Consolidation requires a minimum number of nodes and makes it easier to run one

• Sustainability: The energy consumption of PoS is about 99% lower than that of PoW

• Scalability: opens the door to sharding, and one day the throughput may reach 100k TPS

To run a node, you need to pledge 32 ETH, and it must be locked until the ETH is merged before it can be used.

After the merger, rewards will no longer go to miners, but to stakers.

But this pledge mechanism also brings some problems.

Part Two: How to Benefit from Consolidation

Pledge ETH

However, regarding staking:

1. Need 32 ETH

2. You need to lock ETH

Fee-based providers have emerged to address these issues.

These protocols are very simple:

• You deposit ETH

• The protocol helps you stake ETH to a validator

• You will receive a liquid (sellable) wrapper representing rights to the staked ETH

• The pledged ETH will generate interest

You can use this liquid wrapper on DeFi

RocketPool, Lido, StaFi, etc. all let you do this with Ethereum, albeit with slightly different mechanics/decentralization/composability.

They let you earn interest on liquid ETH token wrappers.

You can also invest in the governance token of the protocol itself.

Part III: Why is it bullish?

How did ETH become deflationary?

The EIP-1559 upgrade started burning some of the transaction fees paid to miners. This puts a small deflationary pressure on ETH.

With the merger, rewards paid to validators will be reduced by about 90%.

Now:

Burned ETH > Issued ETH

What is Sharding?

Sharding plans won't start until 2023, but they will make ethereum faster and less computationally intensive.

Also bullish.

New Supply Dynamics:

In a nutshell: stakers hold, miners sell

When will it be merged?

Ethereum has a “testnet” as a testing ground for the merger, and the Sepolia testnet was merged about a week ago.

Before the mainnet is merged, there is only one testnet left.