What is the Ethereum Merge?

Token Takeaways ✍️

✨ The Merge refers to Ethereum's upgrade from Proof-of-Work to Proof-of-Stake, which happened in September 2022.

✨ The Merge significantly improved Ethereum's energy efficiency and reduced ETH token issuance.

✨ Its successful launch was hailed as an historic moment for the token ecosystem.

In September 2022, Ethereum completed the most significant update in its history. The world’s most used blockchain implemented “The Merge” from Proof-of-Work to Proof-of-Stake, an important update that had been in discussion since 2014. Ethereum’s transition to Proof-of-Stake marked a new stage in the blockchain’s lifetime and is expected to have a significant impact on the broader ecosystem for many years to come. In this guide, we explain how it works and why it’s such an important update.

Proof-of-Work vs. Proof-of-Stake ⛏️🥩

Ethereum launched in 2015 with a Proof-of-Work consensus mechanism similar to the one Bitcoin uses to verify transactions. Under Proof-of-Work, Ethereum miners were responsible for solving computational problems and adding new transactions to blocks. Miners received ETH rewards for securing the network.

Although Proof-of-Work worked for Ethereum over the past seven years, it had some disadvantages compared to Proof-of-Stake. Crucially, energy consumption for Proof-of-Work mining rigs is very high, and the expense of mining hardware excludes people from participating.

After the transition to Proof-of-Stake, Ethereum now relies on validators who stake tokens to verify transactions and add new blocks to the chain. Ethereum stakers must deposit 32 ETH to the Beacon Chain, otherwise known as the consensus layer, to run a validator node — or they can deposit a smaller amount of ETH to staking pools such as Rocket Pool or Lido. There are currently 26.2 million ETH worth $49 billion staked, making the amount of funds securing Ethereum larger than the overall market cap of most of its competitors.

Energy-Efficient Ethereum 🟢

One key benefit of The Merge is that it reduced Ethereum’s energy usage. According to estimates from the Ethereum Foundation, Proof-of-Stake Ethereum is 99.95% more energy-efficient than Proof-of-Work. Rather than relying on heavyweight ASIC mining rigs, Ethereum is validated by stakers who can run a node from devices as small as a Raspberry Pi.

Ethereum’s energy consumption (Source: Ethereum)

Besides reducing Ethereum’s energy consumption, Proof-of-Stake should also change the narrative surrounding the network. In recent years, Bitcoin has come under fire for its reliance on energy-intensive mining, leading to criticisms of Ethereum and specifically NFTs. With a shift to Proof-of-Stake, the fast-rising technology should see more acceptance and position Ethereum as a hub for technological innovation.

As many newer blockchains use Proof-of-Stake and consume less energy than Ethereum, the move to become more energy efficient had been a long time coming.

Reducing ETH issuance 📉

Ethereum previously paid ETH rewards to miners to incentivize miners to secure the blockchain. As a result, the ETH supply increased by approximately 3.5% annually.

With Proof-of-Stake, emissions are closer to 0%. Ethereum validators can currently expect to earn approximately 4.5% APR in exchange for committing their ETH to secure the chain. But as EIP-1559 burns the base fee in every Ethereum transaction, the overall emissions come in at closer to 0%.

The ETH supply peaked at roughly 120.5 million in 2022 (Source: ultrasound.money)

Researchers have calculated that with enough activity on the network, ETH could become a deflationary asset. Such a development would benefit ETH holders and could theoretically increase the price as it becomes more scarce. This would make the network more secure as it becomes more expensive to carry out an attack.

The future of Proof-of-Stake Ethereum 🔮

While Ethereum immediately benefited from The Merge, the update also sets the blockchain up for longer-term success. This is because it allows for sharding when Ethereum will add 64 new chains to help distribute the traffic on Ethereum mainnet. Sharding is the next major update following Proof-of-Stake. With the help of Layer 2 scaling solutions such as ZK-Rollups, sharding is expected to help increase the availability of Ethereum block space and ultimately move Ethereum closer to mass adoption by making the blockchain more scalable. If you feel updated on The Merge, make sure to check out The Ethereum Ecosystem to expand your knowledge of the top smart contract network and its core parts.

Please note: Investing in cryptoassets is risky. Due to the volatile nature of the cryptocurrency market, investors run the risk of losing their funds when they make an investment. Returns from cryptoasset investing are not guaranteed, therefore users should always be aware of the risks.