Ethereum Merge

What Is the Ethereum Merge?

The Ethereum Merge is the joining of Ethereum’s proof-of-stake (PoS) Beacon Chain with the Ethereum Mainnet to transition the Ethereum blockchain off the legacy proof-of-work (PoW) system.

With the completion of the merge on Sept. 15, 2022, Ethereum made the switch to a PoS model. That gave birth to Ethereum 2.0, a new version of Ethereum. The move was expected to result in a 99.95% reduction in Ethereum’s energy consumption and the ability to further scale the Ethereum ecosystem.

The switch moved the entire blockchain over to new PoS validator nodes that require staking or locking up 32 Ether (ETH) to join. Ether tokens will remain exactly the same for investors, and there should be no change to the operations of Ethereum-based applications.

Understanding the Ethereum Merge

Since its inception, Ethereum has been secured with a PoW consensus mechanism, requiring hardware processing power to solve complicated math equations in a competitive process to mine the next block in the Ethereum blockchain.

The transition to PoS removed the need for mining nodes to compete for block rewards; instead, it requires node operators to stake 32 Ether (ETH) as collateral to become network validators to earn rewards.

There were driving factors behind the move to a PoS consensus mechanism, including:

• More decentralization by lowering the hardware requirements for node operators
• Faster transaction confirmations (though overall speed is about the same)
• 99%+ reduction in energy consumption by node validators
• Ability to add more scaling solutions (such as sharding)
• Increased security through client diversity
• Making ETH a more deflationary asset

The issuance of Ethereum as block rewards also will be significantly reduced. Currently, there are about 13,000 Ether mined per day. After the merge, that number will drop to about 1,600 Ether rewarded per day. This is a 90% reduction in Ether issues, slowing the inflationary growth of Ether.

After years of delays, the Ethereum Merge went live on Sept. 15, 2022.

How Does Ether Staking Work?

To be eligible for block rewards after the Ethereum Merge, node validators need to stake (or lock up) 32 ETH into a smart contract as collateral. This Ether will be locked up until a future upgrade to the network enables withdrawals.

While some PoS blockchains give a greater chance of rewards to users who stake a larger amount of crypto, Ethereum handles rewards with a random lottery to select who will propose a new block to be added to the blockchain.

In fact, Ethereum has stated that “when validator withdrawals are enabled, stakers will be incentivized to remove their earnings/rewards (balance over 32 ETH) as these funds are otherwise not contributing to their stake weight (which maxes as 32).”

Those who don’t own 32 Ether or don’t wish to run a validator node but wish to stake Ether can still do so by joining a staking pool. A staking pool combines the deposits of multiple individuals to stake the required 32 ETH for an Ethereum validator node. The block rewards from that node are then shared with the staking pool in proportion to the deposited ETH per individual account.

Crypto exchanges also offer a version of this, allowing users to stake small amounts in return for a fixed rewards amount.

Risks of the Ethereum Merge

There are several risks with the Ethereum Merge, as it is the biggest update to any cryptocurrency blockchain network to date. Here are a few of the risks:

Denial-of-Service (DoS) Attack Vulnerability

With the move to PoS, network proposers are known ahead of time, making them vulnerable to a denial-of-service (DoS) attack. For example, if a potential attacker is in line to propose one of the next blocks in the blockchain, they can attempt a DoS (a sophisticated networking attack) of the current proposer’s node, causing them to lose their slot, and the transactions in that slot can be picked up by the attacker. There are solutions being worked on to make the proposer selection anonymous, but this is currently still a risk.

Centralization of Staked ETH

Staking pools have become very popular, as most investors don’t have the required 32 Ether to stake but can join a group of others to raise the funds needed to become a validator. This could end up concentrating the number of validator nodes under the influence of centralized entities, which introduces the risk of censorship or governance takeover.

Scams

Many crypto applications refer to the merged and upgraded network as “ETH 2.” This led to confusion about whether there will be a newly formed cryptocurrency called ETH 2 (there is not), and it makes ETH holders susceptible to scams. Scammers may try to take advantage of the confusion and try to get users to swap out their current ETH for “ETH 2,” but in reality, they would be stealing the user’s Ether.

ETH Price Drop

If there are setbacks following the merge, it could cause a drop in Ether price, as well as the prices of many of the top cryptocurrencies that built their platforms on top of the Ethereum blockchain.

The Bottom Line

Here's the biggest thing to know about ETH2: There is no ETH2 cryptocurrency. There's just ETH.

ETH2 was a major update to the Ethereum network that was intended to make it faster and more efficient.