The Ethereum Merge (ETH 2.0) explained
Everything you need to know about the biggest upgrade in crypto history.
By Corey Barchat
The Ethereum Merge has finally happened. After years of hard work by developers, much speculation by the ETH community, and great interest worldwide, the biggest milestone in crypto history was reached on September 15th.
Ethereum (ETH), the second-largest blockchain network, has distinguished itself from altcoin competitors by being the first to enable decentralized applications (dApps). ETH users can implement smart contracts, buy NFTs, and interact with thousands of DApps, all within the Ethereum ecosystem.
While these use cases have caused Ethereum to explode in market cap, there have been several concerns regarding energy consumption and high gas fees associated with elevated network activity.
The solution to address some of these shortcomings has rolled out in what is known as “the Merge”. Formerly known as ETH2 or ETH 2.0, this event transitioned Ethereum from the mining-intensive Proof-of-Work (PoW) consensus mechanism to the more energy-efficient Proof-of-Stake (PoS).
This article explains what the Merge is, outlines its features and roadmap, and details why it matters for the future of crypto.
What Is Ethereum 2.0?
Ethereum 2.0 (also called ETH2 or ETH 2.0) is the name previously used to describe the Ethereum Merge.
The Ethereum 2.0 moniker was done away with to prevent confusion among users who may have mistakenly thought that post-Merge Ethereum would gain a new ETH2 ticker. It hasn't.
Another reason for the titular switch away from ETH 2.0 is to prevent users from getting tricked into swapping to fictitious ETH2 tokens from scammers.
Ethereum vs Ethereum 2.0: What will change?
The average Ethereum user initially didn't experience a significant change.
ETH holders didn't need to do anything to convert their existing tokens, and they will still be able to send and receive Ethereum as they did pre-Merge. And until sharding (more on that below) is implemented, users can still expect to pay higher gas fees during periods of network congestion.
For network validators—and the planet itself—however, the difference is night and day. Instead of creating new ETH tokens and validating transactions via the energy-intensive Proof-of-Work consensus mechanism, this process will now be done through the much more efficient Proof-of-Stake model.
Proof-of-Work blockchain networks consist of miners competing to solve a cryptographic hash function by using increasing levels of computing power in order to earn block rewards. With Proof-of-Stake blockchains, however, the network is secured via validators that “stake” a certain amount of their cryptocurrency holdings
What is the Ethereum Merge?
The Ethereum Merge is the transition to a new Proof-of-Stake network from the old Proof-of-Work mainnet.
In order to safely transition the current Ethereum blockchain network, the plans for the Merge have been rolling out in phases. Some of these phases have already been completed in the past few years, while others are subject to change. The ultimate goal was to complete The Merge by September 15th, which was successful.
The three principal upgrades are the Proof-of-Stake Beacon Chain, the Merge itself, and the scalability-enablement called sharding.
The Beacon Chain
The Beacon Chain is the first phase of rollout and one that formally brings Proof-of-Stake to Ethereum. On December 1, 2020, an initial threshold was reached of 16,000 validators to deposit the required 32 ETH to stake. Since this date, the Proof-of-Stake Beacon Chain has been running parallel to Ethereum’s Proof-of-Work consensus layer.
The Beacon Chain boosts the security of the network by randomly assigning validators in order to prevent dishonest actors from attacking the system. In addition, malicious validators are punished for harmful actions by having their staked ETH slashed.
The Merge itself refers to the joining of the current Ethereum mainnet with the Beacon Chain. In preparation for the Merge, several testnets were merged with the Ethereum mainnet. The purpose of these testnets are for developers to safely test features of the Proof-of-Stake network without the risk of losing real funds.
Ropsten, the oldest such Ethereum test network that dates back to 2016, completed its transition to the Beacon Chain and Proof-of-Stake in June. This was followed by the successful Merge of the Sepolia testnet in July, which was completed ahead of schedule. The final test Merge occurred in August, when the Goerli testnet joined Prater, its counterpart on the Beacon Chain.
While the initial Merge won’t do much to lower gas fees, sharding will help in this regard.
Broadly speaking, sharding is when an entire dataset is split into portions that represent the whole. With the Merge, the current Ethereum chain becomes a shard of the whole, in a chain of 64 parallel shard chains.
Sharding will serve to greatly improve the scalability of the network, since each sharded chain will spread out the data storage functionality of the current Ethereum chain, simultaneously spreading out the data processing burden across the nodes.
Although it was originally planned for 2022, the current estimate is for sharding to be rolled out in 2023-24. When it is released, sharding will be able to accommodate Layer 2 rollups like zkSync and Immutable X that can process bulk Ethereum transactions off-chain at higher speeds and lower costs.
What are the impacts of the Ethereum Merge?
These phased steps, along with the principal change from a Proof-of-Work to a Proof-of-Stake model aims to address the three main shortcomings of the current Ethereum network: security, scalability, and sustainability.
The Merge will bring added measures against malicious actors that try to attack the Ethereum network. Slashing is a new penalty system that will punish malicious validators and would-be attackers by inflicting penalties such as docking coins.
Slashing penalties can vary, though rule violators may be fined up to 18 staked ETH and even face removal from the network. With Proof-of-Stake, validators are encouraged to perform honest validations, and through validator shuffling, the chances of a successful attack are minimized.
So even if someone is able to successfully execute an attack, slashing ensures that they will instantly lose their stolen ETH.
Through sharding and Proof-of-Stake, Ethereum will be able to process anywhere from 20,000 to 100,000 transactions per second. Though this may take a few years to reach the maximum capacity, this represents a speed increase of up to 999,900% from the current rate of 10-20 transactions per second. These exponential increases in speed will help clear up network congestion and keep gas fees low.
On the previous Proof-of-Work Ethereum network, between 15 and 30 transactions could be processed per second. To give an idea of how this compares to traditional finance networks, Visa claims they can handle up to 24,000 transactions per second at max capacity.
As network activity increased on pre-Merge Ethereum, users reported waiting longer for transactions to be confirmed and paying higher fees while doing so. Additionally, under heavy usage, some users lost their gas fees despite the transaction failing to execute.
The balance here lies in exponentially increasing the processing capacity of the network while still incentivizing validators to carry on validating. With Proof-of-Stake, validators will continue to receive the block rewards and transaction fees under the current system, depending on the amount of ETH staked by the individual.
The transition away from Proof-of-Work will go a long way to solve the cryptocurrency energy problem by massively cutting costs and reducing the environmental impact associated with validating the Ethereum network.
While still requiring significantly lower energy levels than Bitcoin, Ethereum hasn’t escaped scrutiny for the high energy costs under its current Proof-of-Work model.
In a Proof-of-Work consensus model, blocks of Ethereum or Bitcoin are validated through a process that secures the network by miners physically proving the computational work done to validate the chain. This process uses a significant amount of energy, which can lead to high costs for those who wish to serve as miners or validators.
The good news is that the Merge will drastically reduce the energy consumption of the current network. According to Carl Beekhuizen, a researcher at the Ethereum Foundation, the Merge is expected to reduce Ethereum’s energy expenditure by 99.95%.
If true, such a large reduction in energy will certainly make Ethereum more attractive to institutional investors that may have previously been dissuaded by the environmental impact of the Ethereum network.
Unfortunately (but not surprisingly), an increase in Ethereum’s adoption and transaction volume, has also led to higher fees. Transaction costs on the Ethereum network, also known as gas fees, are paid using Ethereum’s native token, Ether. Gas is the fuel that powers everything on the Ethereum blockchain, from validating transactions to activating smart contracts.
Since transaction completion time depends on network congestion levels, this presents an issue: as the number of ETH holders continues to grow, gas fees rise as well. When miners select transactions to validate, they will naturally pick the ones with the highest transaction fees to include in blocks.
This is because the rewards for Ethereum mining come in the form of transaction fees, so when there is more traffic, miners will select blocks that pay higher returns for the same amount of work. In especially high-traffic situations, users looking to pay lower gas fees may be stuck waiting for their transactions to be validated.
When did the Ethereum update take place?
The final completion date for the Ethereum Merge was originally set for September 19th. With all the moving parts that a massive undertaking like the Merge encompasses, the expected completion date was delayed a few times.
So it was quite the achievement when the Merge was actually completed a few days sooner than expected, on the 15th.
What are the next steps for Ethereum?
As Ethereum co-founder Vitalik Buterin points out, there are additional upgrades happening concurrently with the Merge.
These are the Surge, which will enhance scalability via sharding; the Verge, which introduces Verkle trees as an upgrade to Merkle Proofs; the Purge, which will improve network congestion by reducing the hard drive space needed by validators; and the Splurge, which will include additional enhancements to maintain network performance.
Since the Merge was successfully completed by its September deadline, the subsequent roadmap will remain the same. Namely, the next major milestone will be the introduction of sharding at some point in 2023.
The latest major development, called the Shanghai and Capella (Shapella) upgrades, was activated on April 12. This long-awaited upgrade allows users to withdraw staked ETH and staking rewards that were previously locked up during the transition.
A post-Merge Ethereum world will also have important consequences for those who have been involved with network consensus on the old mainnet. What will ETH miners do? Ethereum mining has historically been a multi-billion dollar industry so there are significant monetary incentives at play.
Prior to the Merge, mining revenue fell hard from its $2.5 billion peak in May 2021, though Ethereum miners still took home close to half a billion dollars in June of this year.
Will Ethereum Proof-of-Work miners take their ETH tokens and become network validators post-Merge via staking? Or will they instead take the sunk cost investment of their expensive mining computers and start mining the Proof-of-Work Ethereum fork token, ETH Classic (ETC)?
This uncertainty has led to a doubling of the price of ETC since June, bringing the token to a single-day increase of 29% in late July. This will play a role in influencing specific miners to take their ASIC hardware and start mining the potentially lucrative ETH Classic.
Frequently Asked Questions (FAQ)
Did ETH holders need to do anything with their Ethereum to prepare for the Merge?
No, ETH holders did not need to do anything. Their stored or staked Ether was automatically converted from ETH to ETH2 post-Merge. ETH will also maintain the same ticker symbol.
What will happen to staked ETH?
Stakers will be unable to make withdrawals on their staked ETH 6-12 months after the Merge. In what will be known as the Shanghai upgrade, users will be able to withdraw staked ETH, with a daily withdrawal limit of 40,000 ETH per day (out of ~13 million staked).
Validators, however, will be able to receive liquid ETH rewards from network validation. Although they will still be unable to withdraw until the Shanghai upgrade, validators will be issued a unique address that contains their staked ETH and network rewards verified by the Beacon Chain.
Will Ethereum staking rewards go up or down?
With transaction fee rewards now going to stakers, staking rewards should initially be high. Some experts even predict rates as high as 10-15% APY at the start. Of course, the attractive rates will lure more stakers in and subsequent APY will likely go back down afterwards.
What can ETH investors expect financially?
Staking intrinsically provides an incentive for users to hold and not to sell. If you’re staking, you’re putting a portion of your portfolio towards the network’s consensus algorithm. In Proof-of-Work, on the other hand, miners have a greater incentive to instantly cash in and sell their block rewards.
With the 6-12 month lock-up period after the Merge, there will be a significant buffer before mass selling by validators can begin. Until then it is impossible to predict what markets will look like this far into the future and what individuals will decide to do with their staked ETH. Will they restake? Sell? Buy more to stake? We’ll find out soon enough.
Why stake ETH?
By staking ETH, you can earn rewards from validating transactions. This is made possible without energy-intensive equipment required for Proof-of-Work mining.
You can stake ETH using a smartphone or home computer to start participating in the Ethereum Proof-of-Stake network. As more users stake their ETH, the more secure the network becomes, making it more difficult for attackers to control the majority of validators.
Buy Ethereum via MoonPay
You can still participate in the Ethereum blockchain without acquiring the necessary 32 ETH to become a network validator.
MoonPay makes it easy to buy Ethereum (ETH) and Ethereum Classic (ETC) instantly with a credit or debit card, bank transfer, Apple Pay, Google Pay, and more.