Post-Merge: 5 Facts You Need to Know
In this article, we'll look at the 5 facts you need to know about Ethereum Post-Merge. We received a lot of information especially via the announcements that were made by Vitalik during the last Ethereum convention (EthCC). Overall we have a lot of information about the impact that The Merge can have on the whole ecosystem. First of all, The Merge, what is it? If you don't know what The Merge is, we invite you to read our article on this subject.
Gas fees will not cost less.
It needs the updates with sharding/rollup solutions after that to adjust the gas fees. The EIP-1559 standard published last year allows for gas charges to be adjusted in an efficient way that makes people fight to be included in the blocks and pay very high gas charges depending on the urgency of the validation.
The Merge is a change of consensus mechanism, not an expansion of network capacity, and will not result in lower gas fees. Gas fees are a product of network demand relative to the capacity of the network. The Merge deprecates the use of proof-of-work, transitioning to proof-of-stake for consensus, but does not significantly change any parameters that directly influence network capacity or throughput.
With a rollup-centric roadmap, efforts are being focused on scaling user activity at layer 2, while enabling layer 1 Mainnet as a secure decentralized settlement layer optimized for rollup data storage to help make rollup transactions exponentially cheaper. The transition to proof-of-stake is a critical precursor to realizing this. Read more on gas and fees here.
Ethereum facilitates the speed of its network and layers 2.
As Ethereum needs the updates for reducing gas fees, it also needs these solutions to be faster.
So rollup, ZKP, the whole Zero Knowledge Rollups thing, may seem a little complex to some. We're obviously not going to explain all these concepts in this article but here's a reminder of what Layer 2 is and why it's so important to focus on developing this kind of solution right now.
A layer 2 is a scaling solution for a blockchain. Layer 1s are blockchains that have their own token, their own consensus and their own technology. So for example Ethereum Bitcoin are two layer 1's. All these layer 1's manage all three topics which are:
1 - consensus, which means that the network members agree on the state of the system;
2 - the availability of the data, in the case of Ethereum;
3 - calculation and verification of calculations
A layer 2 is a blockchain that has "understood" that it was possible for a blockchain to dissociate these 3 functions. Thus, a “layer 2” is a blockchain that "is deprived of the right to manage the consensus" and will base itself on the consensus of layer 1 on which it "works" directly.
So for example an Ethereum layer 2 in fact doesn't have in a way its own notion of consensus. Its consensus is the Ethereum consensus and so for everything to work there are proof checks called "Fraud Proof" or "Validity Proof" from an L1 point of view. So from Ethereum's point of view, what happens on the L2 is just a simple smart-contract like Uniswap.
To summarize, in the case of Ethereum, a layer 2 (L2) is a blockchain that exists as a smart-contract on Ethereum, which is the layer. We can take the example of StarkWare, which increases the transaction capacities without compromising the security of Ethereum and constitutes a central dynamic in 2022 to guarantee the supremacy of Ethereum via the ZK Rollup.
The Merge won't result in downtime of the Ethereum blockchain.
Among the goals of The Merge is also to improve the number of transactions per second of ethers. Ethereum boss Vitalik Buterin recently said at the Ethereum Community Conference (EthCC) that he hopes to get the Ethereum blockchain to 100,000 transactions per second, up from just over 15 at the moment. So it is not immediately that we will see a downtime of the Ethereum blockchain but the Ethereum team is working hard on this. 100,000 transactions per second is a colossal figure, but we must be aware that even 100,000 transactions per second will never be enough to absorb all of the world's transactions, because these are not just financial transactions but data transfers. When you browse the internet for example, you will register a multitude of transactions by opening your browser, then indicating a URL before your site appears. If we want to absorb a large number of these transactions through blockchain technology, necessarily 100,000 transactions per second is not enough. Here we are talking about the goal, but The Merge will not increase the number of transactions per second or decrease fees, but rather allow the various layers 2 to do so in order to benefit from better data validation.
The validators cannot withdraw the staked ETH tokens right after the Merge.
As we explained in our article "Things you need to know about the Ethereum Merge": Vitalik who has planned everything and has set up a mechanism to avoid this selling pressure. Here is a link to an article summarizing this idea. Only 4 validators will be able to unstaked their 32 ETH every 6.4 minutes (all eras). This represents about 900 validators per day. On average, this would mean that there are 28800 ETH that can be unstaked per day. Today, the trading volume of ETH is about 10 000 000 ETH/day and the maximum supply is about 116 million ETH. The number of ETH that can be unstaked per day represents 0.29% of the daily trading volume and 0.02% of the total supply. This is very small because these figures assume that validators will sell 100% of the ETHs they unstaked. This is not the most preferred scenario since among these validators, firstly, there may indeed be some who will want to exit but they may not want to sell 100% of the ETHs in their possession and secondly, this would mean that there are only exits and no entrants. So the stakers will have to wait for the Shanghai update that is expected within 6-12 months after The Merge. However, the validators will be able to withdraw their rewards.
ETH's inflation rate will drop
This brings us to tokenomics, the economy around tokens and how to create economic systems that will be coherent and align interests so that networks are autonomous and decentralized, which was the goal of Bitcoin by its system of rewards via miners and by the way in which the monetary issue of the protocol was designed, which in the case of Bitcoin is closer to gold than a commodity.
Indeed, the monetary policy of Ethereum will change. For the moment, Ethereum issues ETH at each block creation even if this emission has been decreasing with time. The new monetary policy includes a constant inflation for the miners but which will adjust according to the number of miners of the network. The more ETH that will be staked, thus blocked and mobilized to secure the chain, the more inflation will decrease. Indeed, the aim of this economic theory is to make the blocking of ETH attractive in order to secure the chain as much as possible because the more ETH there are, the more miners there are and the harder it is to compromise it. To validate transactions and make a smart-contract work, it is necessary to have gas and this gas is composed of Ethereum. Gas is the technical unit defined to validate transactions. Periods of strong growth in Ethereum may eventually make Ethereum deflationary. This is a big change because there will be destruction of Ethereum (burns). In fact, the destruction of Ethereum via the burn mechanism will be able to exceed inflation. This is a huge change because we are going from an asset that is constantly inflationary to an asset that will experience periods of inflation and periods of deflation depending on its use. This changes just about everything, especially in terms of valuation because you have an asset that can reprice, which was impossible before.
The term “ultrasound money” has been a long-running meme held in Ethereum-based communities, which mocks Bitcoiners who describe Bitcoin (BTC) as “sound money” due to its capped supply of 21 million. This is often the argument used to tout the advantages of Bitcoin: "Bitcoin is rare"; "It's digital gold"... Now, with this move to Proof-of-Stake, Ethereum will take on some of the scarcity properties of Bitcoin. There are many Ethereum aficionados who claim that Ethereum will become a better currency than Bitcoin because Bitcoin will become deflationary.
So this can change everything and what is particularly interesting is that it is correlated to usage so it is coherent in terms of monetary policy and it can stop speculation in a way, well, maybe not stop it completely but make it more rational in its economic calculations. Another thing that is interesting is that the Proof-of-Stake will create a constant inflation for those who stall their ETH and block them in order to be validators and therefore a significant return on investment via inflation. Ethereum will therefore potentially turn into the "treasury bonds" of cyberspace and therefore holding Ethereum would be a way to bet on the complete technical ecosystem that will be built on Ethereum with a nominal recurring return in ETH. Especially now that there are many derivatives, it would be very easy to make a product where finally the user will hedge his rewards and keep the exposure to Ethereum as a validator.
The Merge is not an endpoint but rather, to use a human metaphor, Ethereum learning how to put one foot in front of the other. Next will come The Surge, then The Verge, then The Purge, then The Splurge:
Source: Miles Deutscher
The Merge is therefore a transformation that will allow the following ones and that totally develops the ecosystem, the use-cases, the technology itself of the blockchain and therefore will potentially increase its use. It is therefore very strong.
Disclaimer: This article is for educational purposes only and is not intended as investment advice. Qualified professionals should be consulted prior to making financial decisions.
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