The Ethereum Merge And Misconceptions Explained

There’s a lot of misconceptions about the ETH Merge. Let’s talk about them and share exactly what has changed and what the future holds.

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This is a great resource for everything about the Ethereum Merge: https://ethereum.org/en/upgrades/merge/.

Ethereum switched from proof of work to proof of stake. Not a lot else has changed yet, but it has set a lot in motion. Namely the stakers are now running the network instead of the miners, however there is no notable changes for end users. ETH will stay the same in terms of the ticker and you don’t have to do anything in your wallets to switch over. Another major change is that by switching from proof of work to proof of stake will reduce the energy consumption of Ethereum by ~99.95% which is huge given a major criticism of proof of work blockchains is that they are energy intensive and not environmentally friendly.

For simplicity, we are now calling Eth1 the execution layer where transactions are handles and Eth2 the proof of stake consensus for validators. This doesn’t change anything other than the naming so we can better discuss and explain Ethereum.

Misconceptions
A major misconception is that gas fees will automatically be improved when actually they won’t be affected until the first phase called the “Surge” is complete. We’ll dive into the phases later. So Ethereum didn’t fail to lower gas fees, they just haven’t been affected yet.

Another misconception with the merge is that ETH staking requires 32 ETH. This isn’t entirely accurate as you can stake with exchanges and services in a pool or even rune your own node, however running your own node without any ETH staked means you won’t earn rewards. You can learn more about that here: https://ethereum.org/en/run-a-node/. The issue with using exchanges and services that offer ETH staking is that they are heavily consolidating ETH which is bad for centralization and also creates a lot of risk if they were ever hacked or something else happened. It’s also important to note that withdrawals haven’t been added yet so even after the 2 year lock up period has ended if for some reason this isn’t added, you will not be able to get your ETH back. This isn’t really an issue as it will developed by then, but it’s important to understand this risk when you stake. However, validators will still receive fees and MEV available immediately, they just won’t get their stake until withdrawals are enabled.

When withdrawals are enabled there is concern that everyone will exit at once, but there are limitations on how many validators can exit with only six exiting per epoch which is every 6.4 minutes. That amounts to 1350 epochs per day or about 43,200 ETH per day out of the more than 14 million staked ETH. That means it would take close to a year for all validators to exit assuming that was their intention so ideally things will balance out during this time because the APR is also dynamic and will encourage more people to stake if validators do exit.

Centralization
According to https://ethereum.org/en/staking/ there are 432,570 validators staking 14,631,732 ETH as of writing this. Lido is the largest staker with 4,195,212 ETH staked making up 30% of all the staked ETH according to https://dune.com/LidoAnalytical/Lido-Finance-Extended. Dune says they only have 84,011 unique depositors but https://lido.fi/ says they have 189,341 stakers. Either way, it makes up way too much of the ETH that is staked. While it’s easier to stake with them since you don’t need 32 and they’ll do everything for you including giving you a higher APY, it’s clearly too good to be true. Giving them your ETH for 2 years is extremely risky and effectively centralizing Ethereum more by doing so. It was previously much higher than 30%, so it’s trending in the right direction at least.
Binance, Lido, Coinbase, and Kraken make up about 55% of all the staked ETH currently. We do have a real threat of too much centralization via these staking pools, but this is something we can all work together on improving.

The Next 4 Phases Of Ethereum
Let’s talk about the major updates that are coming now that we have merged. They are rolling out the changes post merge in 4 phases called the Surge, Verge, Purge, and Splurge.

The Surge is the most important upgrade shipping in 2023 that will introduce sharding which Vitalik claims will massively scale Ethereum to allow for 100,000 transactions per second and could bring gas fees down to as low as $0.005-0.05 which he shared at the Futurist Conference in Toronto that I attended in August.

What sharding does is allow Ethereum to run sidechains or mini blockchains called shards where it could run its transactions in bundles which it could then compress into one transaction on the main chain. They aim to create a sharded system of 64 linked databases. So given Ethereum currently can run 15 transactions per second. We could now run 960 transactions per second with those 64 databases. On top of that, we can run many transactions in each transaction sent back to the main chain so that can scale nearly 100 more times getting us close to the 100,000 transaction per second goal. This means that on one sidechain we would log about 100 transactions and then send that back as 1 transaction to the main chain.
That was a very long winded way of saying we be compressing and bundling all the transactions to make Ethereum over 6000 times faster. It will also introduce rollups which perform transactions outside of Ethereum’s base layer and then post data to the main layer. So the Surge phase mainly tackles gas fees and scaling.

The next phase is Verge which also tackles scalability through their proofs by switching from Merkle proofs to Verkle trees. This will optimize storage and reduce node sizes. It’s fairly technical so we don’t have to get too deep into it.

The purge phase focuses on reducing unnecessary data to clean up the blockchain and help to minimize network congestion. By the end of this phase, Ethereum should be processing 100,000 transaction per second.

The final phase called Splurge will be for implementing the “fun stuff.” This will mainly focus on working other network updates and updates to previous sections that won’t cause any issues.

Coindesk has a great breakdown that is much more indepth which I used to understand a lot about the phases here: https://www.coindesk.com/tech/2022/08/01/ethereum-after-the-merge-what-comes-next/.

That’s it. The merge was a bit overhyped, even by me. However, it marks the start of a major shift for Ethereum where it will be ahead of most of it competitors that popped up and marketed themselves purely on the basis of doing more transactions at a lower gas fee while Ethereum aims to crush these chains. In the next year I expect many competitors to fall off. Only those with useful applications like Cosmos may stand a chance.

What do you think about Ethereum 2.0? Are you staking? Is this better or worse for Ethereum in the long run? What phase are you anticipating the most? Let me know what you think about this in the comments below and don’t forget to subscribe!

Disclaimer: This is not financial advice and is purely for entertainment purposes. What you see, hear, or read is my personal opinion, and any statements made are based on my views and should not be misconstrued as fact. My crypto portfolio may or may not be simulated

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